Australian Debt & Hybrid Securities Research

Transcription

1 Australian Debt & Hybrid Securities Research Monthly Review February 2014 Nicholas Yaxley Credit Analyst

2 Contents News and Outlook 1 Government Bond & Money Markets Credit Deposits & Official Cash Rate Technical International Markets Recommendation Changes Since Last Month New Issues, Maturities and Resets Chart Pack 4 Appendix A: Security Recommendations as at 03/03/14 9 Appendix B: Exchange Traded Australian Government Bonds as at 28/02/14 10 Appendix C: Exchange-traded Treasury Indexed Bonds ( etib ) as at 28/02/14 11 Glossary 12

3 1 News and Outlook Nicholas Yaxley Credit Analyst Government Bond & Money Markets Government bonds yields have resumed their upward trajectory following a month of consolidation in January. The 10-year bond reached a low of 3.95% on 3 Februay as a result of turmoil in emerging markets. It appears that this was a bump in the road for long-term growth expectations as the 10-year bond has recovered to sit at about 4.10% to 4.20%. This range is where expectations have hit a barrier, after a big leg up from May to September We expect another leg up in late 2015, but continue to believe that the long-term monetary policy neutral rate is 4.5% to 5.0% and therefore we would feel more comfortable with investors taking long duration positions (i.e. buying the 10-year bond) once the market reaches the high end of this range. The front end of the curve continues to be tightly linked to monetary policy and during the course of the past month futures markets have attached a fairly low probability to any further policy stimulus (rate cuts). We would suggest that although the economic data releases have been soft in recent months the market is already pricing in a slight deterioration in the labour market, but a swift recovery in This means the front end of the yiled curve is anchored and we expect that the curve will continue to steepen, albeit at a slower pace. business. The result also contained some elements that appear less sustainable, such as lower impairment costs (again) and a strong trading performance from the market business. Capital remains robust despite lack of clarity surrounding future targets. Liquidity is in place as we await the incoming liquidity coverage ratio and the group is flexing its funding options in terms of customer and wholesale mix. The dividend payout ratio was at the low end of guidance. This result presented no issues from a credit perspective. National Australia Bank reported first-quarter cash earnings of AUD 1.55 billion, up 7% on the previous corresponding period. Asset quality remained a strong contributor (AUD 324 million charge for bad and doubtful debts, down 23%) as we have seen across all bank releases in recent weeks, while revenue growth was again muted, up 1% which the bank said reflected higher lending balances offset by lower margins. The group s core tier 1 capital ratio was 8.21%, down just 28 basis points from the full-year result post the payment of the final dividend. This sees National Australia Bank move clear of ANZ Bank (7.9%) and closer to being in line with other major bank peers (Westpac 8.3% post Lloyds and Commonwealth Bank of Australia 8.5%, although this is for the half year and therefore elevated pre-dividend). Credit Earnings season kicked off this month with results for a mutitude of issuers in the listed interest-rate securities market. We review a sample most relevant to investors. Australia & New Zealand Banking Group, or ANZ Bank, performed strongly, with cash profit of AUD 1.73 billion for first-quarter The update was in line with our expectations, with solid revenue growth, modest expense growth and lower bad debts again. Customer deposits growth (4%) outpaced net loans and advances (3%), group net interest margin was slightly lower and the provision charge was low at AUD 191 million. The common equity tier- 1 ratio dipped to 7.9% but has since recovered. Insurance Australia Group's first-half cash profit of AUD 653 million is broadly in line with guidance issued in late January, and is a modest improvement on the strong first-half fiscal 2013 result. The quality of the result impresses, with strong operational performances from all divisions, delivering a 7% boost in underlying insurance profit. Growth is a culmination of a 4.2% increase in gross written premium, or GWP, and a 13.7% insurance margin. The dividend is based on a conservative 47% payout ratio. Insurance Australia Group reaffirmed full-year guidance of 3% to 5% growth in GWP and expects a reported insurance margin in the 14.5% to 16.5% range. Our full-year dividend forecast increases in line with a 66% payout ratio, which is at the top end of the 50% to 70% dividend target range. Commonwealth Bank of Australia reported cash earnings of AUD 4.27 billion which was 14% up on the previous corresponding period and ahead of estimates. This was a clean result, with sound growth at the revenue line given the relatively muted credit growth environment; continued cost control despite ongoing investment and software amortisation; and strong growth in the wealth management Suncorp Group - Despite reporting lower-than-expected first-half earnings, Suncorp continues to make excellent progress as it recovers from several years of restructuring and the disposal of the non-core bank. First-half fiscal 2014 cash earnings declined 5% to AUD 587 million compared with a very strong first-half 2013 but, importantly, earnings are up significantly on the adjusted second-half 2013 profit

4 2 of AUD 452 million. Including losses associated with the exit of the troublesome non-core bank, Suncorp reported a AUD 19 million loss in second-half fiscal Lower-thanexpected profits in banking and the life/wealth businesses detracted from a strong general insurance result. Our investment thesis for no-moat Suncorp is intact. We do not yet see sufficient sustainable competitive advantages to warrant an economic moat given Suncorp's position outside of the dominant major bank oligopoly and inconsistent insurance underwriting track record. Goodman Group announced operating profit of AUD 296 million up 11% and gearing of 19.5% slightly up from June The project development business increased its work-in-progress and continues to take on only a small amount of capital risk in development projects. The key highlight of the result was the AUD 2.1 billion, or 11.6% growth in, third-party assets under management, or AUM. We continue to forecast strong AUM growth during the coming five years, supported by substantial undrawn equity which, at December 2013, stood at AUD 4.1 billion. We forecast the strong growth in capital commitments to continue in the medium term. Goodman Group and its managed funds have total cash commitments of AUD 1.47 billion in relation to the development portfolio (split AUD 170 million Goodman Group and AUD 1.3 billion Goodman Group managed funds). However, there is AUD 5.2 billion of undrawn debt and equity funding at both the headstock and managed fund levels, which provides substantial funding flexibility. Look-through gearing of 32.9% against statutory gearing of 19.5%. This remains at the low end of the Australian REIT sector. Ramsay Health Care announced another set of strong results with group earnings before interest and tax up 14.3% to AUD 284 million, cash conversion in excess of 100%, and the maintenance of the conservative dividend policy of 40% to 45%. On 9 December 2013, the group amended its syndicated facility agreement by extending the maturity dates on each tranche by two years with improved pricing. The syndicated facility limits remain the same, giving Ramsay Health Care access to sufficient liquidity to proceed with planned brownfield developments. Overall Ramsay Health Care is an efficient business with its solid credit profile maintained. Origin Energy announced a net profit after tax of AUD 322 million for the first half which was down 39%. Energy markets earnings were the primary driver of underperformance, with earnings before interest, tax, depreciation and amortisation down 23.5% as a result of lower mass-market sales volumes because of warmer winter weather. On a positive note, cash conversion within the energy markets business was strong. APLNG development remains on track with sufficient funding and liquidity to complete the capital cost of the project. However, this is at the expense of Origin Energy Subordinated Note holders. The reality is that the terms of the notes were changed because Origin would likely breach the initial leverage covenants before APLNG is complete. The project is proceeding well but only about 60% complete. Origin Energy still has contributions of AUD 2.8 billion for project completion (assuming it arrives on time and on budget). If we conservatively assume that 80% of this is debt-funded then all covenants are at risk of being breached. Crown Resorts announced lower-than-expected underlying earnings for the first half of fiscal 2014 but, from a credit perspective, this was offset by strong cash flow. On 25 February 2014, Melco Crown announced a special dividend and a new dividend policy. The new policy is in line with expectations of setting dividends on a quarterly basis at 30% of Melco s net profit after tax. This is a credit positive for Crown Resorts. Crown's balance sheet debt increased by 7% to AUD 1.75 billion and had more than sufficient liquidity to cover AUD 240 million of debt maturing in the short term. Deposits & Official Cash Rate On 5th Febraury 2014 the RBA decided to leave the official cash rate unchanged at 2.50%. The board took the opportunity to upgrade its GDP growth forecasts to 2.75% in 2014 (from 2.50% previously) and 3.50% in 2015 (previously 3.25%). Ironically, after citing the lower exchange rate as a key reason for the more positive outlook the AUD rallied. Technical Technicals continue to be driven by the market's expectation of a gradual removal of quantitative easing during the next 9 to 12 months. This has been most evident with trumoil in emerging markets in recent monhs. The withdrawl of capital flows associated with emerging market carry trades have caused volaility in interest rates and currencies across these countries. Although this has not had a direct impact on Australian markets, we are considered by some a a quasiemerging-market liquid currency and hence it is something we are watching. Many credit securities are now back near 2007 spread levels which arguably underestimates the potential for increased interest-rate volatility. As we have said before the listed interest-rate security maket has an asymmetric return profile, but we consider it a reasonable place to be in the current environment (short duration and storng bank credit quality).

5 3 International Markets We continue to believe that from a fundamental, long-term perspective, corporate credit spreads are fairly valued based on our outlook for gross domestic product to rise between 2.0% and 2.5% this year. Across our US coverage universe, our credit analysts generally have the view that corporate credit risk will either remain stable or improve slightly, but that the tightening in credit spreads will probably be offset by an increase in idiosyncratic risk (debt-funded mergers and acquisitions, increased shareholder activism, and so on). While the flight to safety has recently pushed the yield down on the 10-year Treasury bond to 2.75% from 3.00% at the end of 2013, we still expect interest rates will rise in the long term as the Federal Reserve tapers its asset-purchase program. With less market intervention from the Federal Reserve, interest rates should normalise towards historical averages compared with inflation, inflation expectations, and the steepness of the yield curve. Recommendation Changes Since Last Month 33On 21 January 2014, we updated our recommendaiton on CNGHA. Our analysis suggests that there is material uncertainty surrounding Colonial Subordinated Notes and it is possible the deal will be redeemed early for regulatory reasons at a price below market. Therefore, we move our recommendation from Accumulate to Hold. 33On 24 January 2014, we updated our recommendation on MBLHB. Over the past year the performance of Macquarie Income Securities has been strong during the with a total return exceeding 24%. This has primarily as a result of the market pricing in a greater probability a regulatory call over the next 10 years. It is our view that these securities will at some point during the next nine years become ineffective capital and it will be called and therefore we assume an effective call date in We maintain our recommendation at Accumulate. New Issues, Maturities and Resets 3 3 On 28 February 2014 Bendigo & Adelaide Bank announced that Bendigo & Adelaide Bank Retail Bonds (ASX Code: BENHA) would be suspended from trading pending the maturity on 14 March On 18 February 2014, ANZ Banking Group announced it had completed the bookbuild for ANZ Capital Notes 2 (ASX:ANZPE) setting the margin at the low end of the offered range (3.25%). The final deal size will depend on the overall amount of applications received, but it will be at least AUD 1.3 billion. K

6 4 Chart Pack Figure 1: 90-Day Bank Bills vs Official Cash Rate Official Cash Rate 90 Day BBSW Aug-90 Feb-92 Aug-93 Feb-95 Aug-96 Feb-98 Aug-99 Feb-01 Aug-02 Feb-04 Aug-05 Feb-07 Aug-08 Feb-10 Aug-11 Feb-13 Rate (%) Source: Morningstar, Reserve Bank of Australia Figure 2: Interest Rate Futures Implied Cash Rate Implied Yield % 2.72% % 2.67% % 2.62% % % % 2.50% 2.49% 2.48% 2.46% 2.45% 2.43% 2.43% 2.43% 2.43% 2.44% 2.57% 2.55% 2.54% 2.47% 2.48% % % % % % Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Source: ASX

7 5 Chart Pack Figure 3: Money Market Curve (Interest Rate Swaps) 28/02/ % 4.000% 3.000% 2.000% 1.000% 0.000% Source: AFMA Figure 4: Term Deposit Average Special Rate (All Terms) Term Deposit Average Special Rate (All Terms) Term Deposit Average Rate (All Terms) Rate (%) Feb-02 Oct-02 Jun-03 Feb-04 Oct-04 Jun-05 Feb-06 Oct-06 Jun-07 Feb-08 Oct-08 Jun-09 Feb-10 Oct-10 Jun-11 Feb-12 Oct-12 Jun-13 Source: Reserve Bank of Australia

8 6 Chart Pack Figure 5: Bank Capital Securities Trading Margins (change on month) as at 3 March 2014 Average WCTPA WBCPD WBCPC WBCPB WBCHB WBCHA PCAPA NABPA NABHB CBAPC CBAPA BOQPD BENPD BENPC BENPB ANZPD ANZPC ANZPB ANZPA -0.92% -0.09% -0.38% -0.20% -0.41% -0.06% -0.25% -0.35% -0.09% -0.18% -0.34% -0.10% -0.15% -0.19% -0.04% -0.15% ANZHA -0.15% 0.03% 0.06% 0.53% 1.60% Source: Morningstar Figure 6: Floating Rate Securities Trading Margins (change on month) as at 3 March 2014 Average WOWHC % TTSHA % TPAPA TAHHB % SVWPA % SUNPD % SUNPC % RHCPA % PRYHA % ORGHA MYBG % MXUPA MQGPA % IANG % IAGPC GMPPA % CWNHA % CTXHA % CNGHA % AYUHA % AQHHA % AGKHA % AAZPB % 0.060% 0.080% 0.090% 0.250% 0.410% % % % % % 0.000% 0.200% 0.400% 0.600% Source: Morningstar

9 7 Chart Pack Figure 7: Australian Bank Capital Components Total Capital Tier 1 Capital 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Source: APRA Figure 8: Market Issuance by Issuer Risk Bucket Corporate Financial $35bn $30bn $25bn $20bn $15bn $10bn $5bn $0bn Lower Medium Upper Medium High Extreme Source: Morningstar

10 8 Chart Pack Figure 9: New Issuer Monitor Corporate Financial Insurance Millions Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 Qtr Source: Morningstar

11 9 Appendix A: Security Recommendations as at 03/03/14 Issue Size Years To Trading Running Yield Yield to Reset Dist Code Recommendation Price (AUD) Issuer (AUD m) Maturity Margin inc Fr ex Fr inc Fr ex Fr (AUD) Ex Date AGKHA Hold AGK % 6.23% 6.23% 5.26% 5.26% /5/2014 AMPHA Hold AMP % 5.28% 5.28% 4.89% 4.89% /03/2014 ANZHA Accumulate ANZ % 5.34% 5.34% 4.50% 4.50% /03/2014 ANZPA Accumulate ANZ % 5.75% 4.02% 5.02% 3.29% /2/2014 ANZPB Accumulate ANZ % 5.23% 3.66% 4.34% 2.93% /2/2014 ANZPC Accumulate ANZ % 5.79% 4.05% 5.41% 3.65% /2/2014 ANZPD Hold ANZ % 6.05% 4.23% 5.82% 3.98% /2/2014 AQHHA Hold APA % 6.95% 6.95% 5.73% 5.73% /03/2014 CBAHA Hold CBA % 3.75% 3.75% 3.94% 3.94% /04/2014 CBAPA Accumulate CBA % 6.09% 4.27% 4.00% 1.93% /04/2014 CBAPC Hold CBA % 6.36% 4.46% 5.69% 3.75% /06/2014 CNGHA Hold CBA % 5.87% 5.87% 5.11% 5.11% /03/2014 CTXHA Hold CTX % 6.89% 6.89% 5.26% 5.26% /03/2014 CWNHA Hold CWN % 7.33% 7.33% 5.94% 5.94% /05/2014 GMPPA Hold GMG % 6.75% 6.75% 6.90% 6.90% /03/2014 IAGPC Hold IAG % 6.51% 4.56% 5.24% 3.04% /04/2014 IANG Hold IAG % 6.49% 4.54% 5.77% 3.78% /03/2014 MBLHB Accumulate MQG % 5.36% 5.36% /03/2014 MQGPA Hold MQG % 6.67% 4.67% 6.27% 4.12% /05/2014 NABHA Accumulate NAB % 5.22% 5.22% /04/2014 NABHB Accumulate NAB % 5.31% 5.31% 4.33% 4.33% /03/2014 NABPA Accumulate NAB % 5.91% 4.14% 5.72% 3.93% /05/2014 NABPB Hold NAB % 5.97% 4.18% 5.82% 4.01% /05/2014 ORGHA Hold ORG % 6.63% 6.63% 5.72% 5.72% /03/2014 PCAPA Accumulate CBA % 3.89% 2.72% 5.88% 4.61% /03/2014 RHCPA Hold RHC % 7.43% 5.20% /03/2014 SUNPC Hold SUN % 7.16% 5.01% 6.06% 3.87% /03/2014 SUNPD Hold SUN % 5.49% 5.49% 5.13% 5.13% /05/2014 SVWPA Hold SVW % 8.77% 6.14% /05/2014 TAHHA Accumulate TAH % 7.06% 7.06% 4.88% 4.88% /04/2014 TAHHB Hold TAH % 6.59% 6.59% 5.59% 5.59% /03/2014 TTSHA Hold TTS % 5.65% 5.65% 5.05% 5.05% /03/2014 WBCHA Accumulate WBC % 5.31% 5.31% 4.40% 4.40% /05/2014 WBCHB Hold WBC % 4.99% 4.99% 4.82% 4.82% /05/2014 WBCPB Accumulate WBC % 6.49% 4.54% 3.57% 1.04% /03/2014 WBCPC Accumulate WBC % 5.94% 4.16% 5.64% 3.64% /03/2014 WBCPD Hold WBC % 5.89% 4.12% 5.65% 3.86% /05/2014 WCTPA Accumulate WBC % 3.85% 2.70% 5.74% 4.49% /03/2014 WOWHC Hold WOW % 5.76% 5.76% 4.30% 4.30% /05/2014

12 10 Appendix B: Exchange Traded Australian Government Bonds as at 28/02/14 ASX Code Price Coupon Ex-date Payment Date Running Yield YTM Maturity GSBK % 4-Jun Jun % 2.234% 15-Jun-14 GSBS % 9-Apr Apr % 2.268% 15-Oct-14 GSBG % 3-Arp Apr % 2.281% 15-Arp-15 GSBS % 9-Apr Apr % 2.425% 21-Oct-15 GSBK % 4-Jun Jun % 2.585% 15-Jun-16 GSBC % 5-Aug Aug % 2.735% 15-Feb-17 GSBM % 9-Jul Jul % 2.882% 21-Jul-17 GSBA % 9-Jul Jul % 2.996% 21-Jan-18 GSBS % 9-Apr Apr % 3.149% 21-Oct-18 GSBE % 5-Mar Mar % 3.191% 15-Mar-19 GSBG % 3-Apr May % 3.427% 15-Apr-20 GSBI % 5-May May % 3.609% 15-May-21 GSBM % 3-Jul Jul % 3.771% 15-Jul-22 GSBG % 9-Apr Apr % 3.852% 21-Apr-23 GSBG % 9-Apr Apr % 3.94% 21-Apr-24 GSBG % 9-Apr Apr % 4.048% 21-Apr-25 GSBG % 9-Apr Apr % 4.212% 21-Apr-27 GSBG % 9-Apr Apr % 4.351% 21-Apr-29 GSBG % 9-Apr Apr % 4.525% 21-Apr-33 Figure 11: Exchange Traded Government Bond Yield Curve 5.00% 4.50% 4.00% 3.50% 3.00% Yield to Maturity 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Term to Maturity Source: ASX, Morningstar

13 11 Appendix C: Exchange-traded Treasury Indexed Bonds ( etib ) as at 28/02/14 ASX Code Price Coupon Ex-date Payment Date Running Yield YTM Maturity GSIO % 8-May May % 0.262% 20-Aug-15 GSIO % 8-May May % 1.070% 20-Aug-20 GSIO % 9-May May % 1.337% 21-Feb-22 GSIQ % 7-Mar Mar % 1.465% 20-Sep-25 GSIQ % 7-Mar Mar % 1.743% 20-Sep-30 GSIO % 9-May May % 1.942% 21-Aug-35 Figure 12: Exchange Traded Government Bond Real Yield Curve 2.50% 2.00% Yield to Maturity 1.50% 1.00% 0.50% 0.00% Term to Maturity Source: ASX, Morningstar

14 12 Glossary BBSW Conversion Conversion Discount Conversion Number The Bank Bill Swap Rate (BBSW) is the average mid rate for Australian dollar bills of exchange accepted by an approved bank, having a tenor with a designated maturity that appears on an approved information vendor's service (e.g., Reuters Screen BBSW page). Under certain circumstances, the hybrid security may be converted into a number of ordinary shares of the underlying stock at a specified conversion number, subject to terms, conditions and corporate events, including conversion discount, conversion date and triggers. A discount in percentage applied to the underlying stock price into which the hybrid security may be converted. Also referred to as exchange discount. The number of ordinary shares of the underlying stock into which the hybrid security may be able to convert. For certain hybrid securities, there may be a minimum and/or a maximum conversion number applied. The conversion number is generally calculated based on a formula: Conversion Number = Face Value / [VWAP х (1 Conversion Discount)] Convexity Cumulative Dividend Yield Duration Exchange Face Value Gross Margin Market Rate Mandatory Conversion Net Reference Rate A measure for bonds used in conjunction with modified duration in order to measure how the bond's price will change as interest rates change. It is equal to the opposite of the second derivative of the bond's price relative to its yield, divided by its price. For example, since a non-callable bond's duration usually increases as interest rates decrease, its convexity is positive. Depending on the hybrid security, the dividend, distribution or coupon paid may or may not be cumulative. If the dividend, distribution or coupon is cumulative and if the issuer defers the payment of the dividend, distribution or coupon on any payment date, then additional dividend, distribution or coupon will accrue at the prevailing distribution rate. Expressed as a percentage, dividend yield is the company's annual dividend payments divided by its market cap, or the dividend per share divided by price per share. The change in the value of a fixed-income security that will result from a 1% change in interest rates. Duration is stated in years. For example, a five-year duration means the bond will decrease in value by 5% if interest rates rise 1% and will increase in value by 5% if interest rates fall 1%. Duration is a weighted measure of the length of time the bond will pay out. Exchange means the conversion, redemption, buy-back or cancellation of the hybrid security. The face value of the security is the issue price typically being AUD 100 per security. Yield expressed, inclusive of any available franking credits or tax-deferred benefits. Expressed as a percentage per annum, the margin offered by the hybrid security over a reference rate. The initial margin is typically determined by a bidding process within a prescribed margin range known as bookbuild. For certain hybrid securities, the margin may be increased (refer to Step-up) at a predetermined date. See Reference Rate. Some securities include a mandatory conversion condition, which forces conversion if the underlying stock price is above some threshold level and the issuer chooses not to redeem the security for face value. Yield expressed, exclusive of any available franking credits or tax-deferred benefits. Typically a floating reference rate (e.g., 90-day BBSW) used to reference the periodic coupon payment of a hybrid security. The reference rate is generally applied at the beginning of a distribution period for the upcoming distribution. Also referred to as the market rate.

15 13 Reset For certain hybrid securities, on a reset date, the issuer may reset certain terms including the next reset date, the dividend/ distribution rate, the conversion discount and the timing of frequency of dividend/distribution payments. Resets may mean significant change to the terms of the hybrid security and as a result investors may or may not accept such new terms. Further, the issuer may elect to redeem or to exchange the hybrid security. As such, Morningstar has a conservative approach to treating resets and considers it as a probable maturity. In tables and abbreviations, we use "Reset" to refer to any step-up, mandatory conversion, call or other pseudo-maturity event. Running Yield Step-up Tax Deferred Time to Maturity/Reset Trading Margin VWAP Volatility Yield to Reset/Maturity (YTR/ YTM) The hybrid's annual coupon payments expressed as a percentage of the market value of the security. For certain hybrid securities, the margin above the reference rate may be increased or stepped-up at a predetermined date upon the occurrence or non-occurrence of a certain event (e.g., non-conversion at a specified date). The distribution of certain hybrid securities may have a tax-deferred component (may be less than 100%), which allows the distributions to be tax deferred over a certain period. The tax-deferred distributions are not assessable to Australian income tax upon receipt for most investors, but instead reduce the cost base of the security for capital gains tax purposes and as a result defer tax until the disposal of the security. Securities offering a tax-deferred component may give rise to tax benefits. Changes to tax legislation may have the effect of reducing the tax-deferred component of distributions. Investors should seek professional taxation advice in relation to dealing in these securities and their individual situation. The time expressed in number of years from now to a reset date, conversion date, step-up date and/or maturity date, where on such date, either the terms of the security may change or the security may be repurchased, redeemed, exchanged or converted. In simple terms if an issuer already had securities on issue, they could expect any new securities with $100 face value to trade close to the trading margin. The Trading Margin of a security s is the effective margin at which s trades; it is the margin which a new security n with face value of AUD 100 would need so the sum of the discounted cash flows of n equal the discounted cash flows of s assuming redemption of both s and n at the pseudo-maturity date of s. The calculation is grossed up for franking where appropriate. The average of the daily volume weighted average sale price of ordinary shares sold on ASX during the relevant period subject to specific terms and adjustments of the relevant hybrid security offer. The degree to which the price of a security tends to fluctuate. The hybrid's internal rate of return to reset, step-up or other pseudo-maturity event.

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