CHANGES IN THE FUNDING ENVIRONMENT - A CORPORATE VIEW RAIMO LIND CFO AND SENIOR EXECUTIVE VICE PRESIDENT WÄRTSILÄ CORPORATION 21 MAY 2013

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1 CHANGES IN THE FUNDING ENVIRONMENT - A CORPORATE VIEW RAIMO LIND CFO AND SENIOR EXECUTIVE VICE PRESIDENT WÄRTSILÄ CORPORATION 21 MAY 2013

2 Corporate funding - different points of view Wärtsilä Elisa LYNK Sato

3 One core product, two segments

4 Profitable growth by focusing on three areas Smart Power Generation Gas as a fuel Environmental solutions The transition to sustainable and modern energy systems drives the demand for smart power generation. Economic and environmental reasons increase the growth of gas solutions in marine and power plant markets. Environmental regulation and increased focus on improved efficiency create demand in the marine industry. 4 Wärtsilä 22 May 2013 Wärtsilä Corporation

5 Financial highlights MEUR Net sales Operating result 1) % of net sales 1) Order intake Interest bearing liabilities Solvency 2) Gearing 3) ) Figures exclude non-recurring restructuring items and selling profits 2) SShaaaaaahooooooooooss eeeeeeeeeeee bbaaaaaaaaaaaa ssheeeeee tttttttttt aaaaaaaaaaaaaaaa rrrrrrrrrrrrrrrr 100 3). IIIIIIIIIIIIIIII bbbbbbbbbbbbbb llllllllllllllllllllll ccaaaah aaaaaa bbbbbbbb bbbbbbbbbbbbbbbb SShaaaaaahooooooooooss eeeeeeeeeeee 5 Wärtsilä 22 May 2013 Wärtsilä Corporation

6 Net sales by market area MEUR Asia Europe Americas Other 6 Wärtsilä 22 May 2013 Wärtsilä Corporation

7 Changes in funding environment - major trends

8 Bank regulation Basel III Higher equity requirements Higher liquidity buffer More matched funding Higher margin for bank financing Shorter maturities

9 Credit ratings Relatively few companies have rating in Finland, expected to increase Pros Broader investor base Larger amounts Lower price Challenges Cost of rating Communications with agencies, additional work

10 Suomalaiset jvk:t jälkimarkkinamarginaalit prosentin sadasosia Lähde SEB

11 Rating effect Lähde: Nordea

12 Investors Search for yield How to achieve that in current environment Longer maturities Higher risk Investment in lower credit rating instruments More covenants than in investment grade papers

13 Cost of funding development during the last 5 years 900 European industrial A, BBB and BB 5 year bond spreads BB Industrial 5Y Spread BBB Industrial 5Y Spread A Industrial 5Y Spread The indices are constructed with an optimization model that solves simultaneously for all maturity points. All of the bonds with a specific rating regardless of the maturity are taken into account for each tenor point with the bonds closest to the 5 year point being more heavily weighted in the calculation. The bonds in the indices are updated daily and are excluded from the indices upon maturity. (source: Bloomberg) 13 Wärtsilä 22 May 2013 Wärtsilä Corporation Difference between cost of funding for good credits and not so good credits has widening clearly since 2007

14 Multiple funding sources Banks incl. Supranational lenders NIB, EIB, ERBD, KfW Bonds Public bonds Private placements Covered bonds Commercial Papers Securitisation

15 Main funding sources for Finnish corporates Maturity Instrument Source Availability Observation 2007 vs 2013 Short Uncommitted short term bank facilities Banks less/same Regulatory change for bank capital Short Commercial Paper Investors same Market activity at good level Short Sale of Receivables Banks better More focus from banks, as short & uncommitted Short Supply Chain finance Banks better More focus from banks, as short & uncommitted Medium Term loans Banks less Regulatory change for bank capital Medium Revolving Credit Facilities Banks less Regulatory change for bank capital Medium Finnvera domestic lending Finnvera better/same Volumes up 19% (2012 vs 2007) Long Domestic bonds Investors better Funds from sovereigns to good corporate credits Long Euro bonds Investors better Funds from sovereigns to good corporate credits Long Private placements (Europe) Investors better Funds from sovereigns to good corporate credits Long Pension funds (TyEL) Pension companies same Availability based on legislation Long NIB term loans NIB same Conservative approach has not led to increased volumes Long EIB term loans EIB same R&D activities funded as before Very long Private placements (US) Investors better Low yields has led to longer maturities to meet min. thresholds The availability of funding is there for good corporates, but the sources may not be the same as in Wärtsilä 22 May 2013 Wärtsilä Corporation

16 How is Wärtsilä funded today? Long-term interest-bearing debt sourced mainly from the following sources; European Investment Bank Nordic Investment bank Pension loans (TyEl set-up) Short-term interest-bearing debt sourced from the Commercial Paper market There is no drawn commercial bank debt in the balance sheet Back-up lines are Revolving Credit Facilities with commercial banks; Bilateral set-up, each banking partner must support us with their balance sheet to get other banking business Good mix of maturities, there is a at least one renewal every 6 months Internal target to retain 10-15% RCFs of sales No public rating or public bonds Considered a BBB+ / A- rating by most financial institutions 16 Wärtsilä 22 May 2013 Wärtsilä Corporation

17 What has changed for Wärtsilä in the market place? Requirement of a minimum counterparty rating of A- has led to a reduction of banks in the banking portfolio The continuous pressure by Nordic banks to hike prices and restrict availability of balance sheet exposure has led to an increase of banking business with other European banks and Asian banks Pressure by customers on payment terms has led to an increased focus on working capital items. Recent working capital initiatives by Wärtsilä; Automated systematic selling of receivables to a financing company with credit insurance (some 450 customers included) Supply chain financing program will launch during 2013 More efficiency sought in Cash Management to utilise better existing cash; Total European cash management split into two real-time multicurrency cash pools, one Nordic and the other including the rest of Europe Limited funding needs and attractive long-maturities from existing non-commercial lending institutions has kept Wärtsilä out of the public market. However long maturity private placements considered to diversify funding base 17 Wärtsilä 22 May 2013 Wärtsilä Corporation

18 Where do Wärtsilä see the funding market developing? The major divide between those companies who have attractive funding available and those who do not is likely to remain Higher competition for good credit will increase leading to better terms for investment grade companies Some best in class banks will lose market shares to the more pragmatic European and Asian rivals Competition will ensure that the cost of stricter regulatory requirements will not be passed to investment grade corporates in full. The higher cost of capital will be covered to a large extent from improvements in bank efficiency (lowering costs) and from lower returns of equity for banks A good credit will always get funded 18 Wärtsilä 22 May 2013 Wärtsilä Corporation

19 Need for a small-ticket bond market in Finland? Smaller corporates that do not have strong balance sheets face more difficulties to fund themselves as commercial banks has less appetite to fund companies with low ancillary business In some cases it is a pricing issue New ways of funding are becoming increasingly relevant for smaller companies, such as; Participating in Supply Chain Financing programs arranged by larger customers Systematic selling of receivables A market for smaller bonds could also fill a gap in the Finnish funding market; Light documentation under Finnish law or copy from Sweden/Norway Low threshold to participate by retail and smaller investors low ticket size Some liquidity would be required in the secondary market market making by OMX/Banks Recent hybrid bonds done in Finland are done based on a Finnish standard could include some same elements? Secured bonds Sato, secured by residential properties Tornator, secured by forest properties 19 Wärtsilä 22 May 2013 Wärtsilä Corporation