Queensland Treasury Corporation

QTC - 45

Queensland Treasury Corporation ROLE Founded in 1988, Queensland Treasury Corporation (QTC) is a corporation sole, constituted by the Under Treasurer in accordance with the Queensland Treasury Corporation Act 1988. QTC has responsibility for the State of Queensland s debt funding and financial risk management. In its funding role, QTC borrows funds in the domestic and international markets by issuing a variety of debt instruments. QTC s whole-of-state focus means it is able to capture significant economies of scale and scope in the issuance, management and administration of the State s debt. Refer to Appendix A for further details GUARANTEES Queensland State Government Guarantee The Treasurer of Queensland, on behalf of the Queensland State Government, guarantees: all of QTC s obligations under all debt securities issued by QTC from time to time, and QTC s payment obligations to counterparties under derivative transactions governed by ISDA agreements. All QTC debt obligations carry the same credit rating as the Queensland Government (AA+/Aa1). Refer to Appendix B for further details Australian Government Guarantee In addition to the Queensland State Government Guarantee, selected* domestic and global AUD denominated bond lines, issued by QTC, are guaranteed by the Australian Government and carry a AAA/Aaa credit rating by Standard & Poor s and Moody s Investors Service respectively. *Refer to Appendix C for further details QTC - 46

Overview OPERATIONAL FRAMEWORK Queensland Treasury s role is to: provide core economic and fiscal advice to the State Government of Queensland assist Government with the management of its finances prepare an annual State Budget collect and administer State revenue, and conduct economic and statistical research. Queensland Treasury Corporation s role is to: source and manage the debt funding for the State in the most cost effective manner provide financial risk management advice, and invest the State s short to medium-term cash surpluses to maximise returns to clients. QTC - 47

CONSOLIDATED BALANCE SHEET (MARKET VALUE UNAUDITED, AS AT 30 JUNE 2016) Capital markets operations Long term assets # QTC consolidated AUD bn^ AUD bn^ AUD bn Loan to clients 91.6-91.6 Liquidity/management reserves* 8.8-8.8 Sub-total 100.4-100.4 Assets under management-client deposits 7.7-7.7 Other managed investments # - 31.1 31.1 Total 108.1 31.1 139.2 ^Amounts stated at market value. * Excludes any QTC bonds held as assets. # The Queensland Government transferred to QTC the States long-term assets which are held to meet the future superannuation and other long-term obligations of the State. These assets are managed by QIC Limited. Clients Principally Queensland s public sector (also entities guaranteed, supported or approved by the State). 158 borrowing clients (government-owned corporations, government departments, local governments and statutory bodies). 200 investors in QTC s Capital Guaranteed Cash Fund (government-owned corporations, government departments, local governments and statutory bodies). Cost recovery business model As the State s central financing authority, QTC operates on a cost recovery basis. QTC - 48

LOAN TO CLIENTS (UNAUDITED) Figure 30: Loans to clients 1 (market value) AUD92 billion Since 1988, QTC has funded the State of Queensland s public sector capital works programs. 1 Figures are rounded. * Includes Queensland water entities, universities, grammar schools and water boards. ** Includes other bodies within the public accounts. QTC - 49

GOVERNANCE AND RISK MANAGEMENT PRACTICES All types of financial risk, including interest rate, foreign exchange and counterparty risk, are strictly managed within QTC s Board approved risk parameters. Risk management processes are independent to operational activities. Risk provisions are in line with industry best practice and Basel Committee recommendations. Diversified funding facilities and regular issuance programs are used to mitigate funding and refinancing risks. A portfolio of diverse, liquid financial securities is held to meet the State s liquidity requirements. Market credit exposure is restricted to dealings with counterparties rated BBB+ or higher and managed under a strict credit risk framework. Risk is managed within an enterprise-wide framework. Figure 31: QTC s credit exposures 91 per cent of QTC s counterparty credit exposures are rated AA- or higher as at 30 June 2016. QTC - 50

Credit ratings QTC s credit rating reviews, by Standard & Poor s and Moody s, are typically conducted between July and October each year. QTC s credit ratings (as at 30 June 2016) Local currency LONG-TERM SHORT-TERM OUTLOOK Moody s Aa1 P-1 Negative Standard & Poor s AA+ A-1+ Stable Foreign currency Moody s Aa1 P-1 Negative Standard & Poor s AA+ A-1+ Stable Australian Government Guaranteed Moody s Aaa N/A Stable Standard & Poor s AAA N/A Stable *Refer to Appendix C for further details Selected* AUD domestic and global denominated bond lines, issued by QTC, are guaranteed by the Australian Commonwealth Government and carry a AAA/Aaa credit rating by Standard & Poor s and Moody s Investors Service, respectively. On 7 February 2010, the Australian Government announced the withdrawal of its guarantee on any state and territory Australian dollar denominated term debt issued after 31 December 2010. The selected QTC bonds lines, covered by the Australian Government Guarantee, continue to be guaranteed until maturity or retirement. QTC - 51

Funding KEY FUNDING PRINCIPLES CONSERVATIVE Balanced debt maturity profile supported by liquid reserves PRUDENT Disciplined approach to financial risk management TRANSPARENT Comprehensive, regular market updates COMMITTED Valued long-term investor and intermediary relationships QTC - 52

FUNDING FACILITIES QTC has a diverse range of funding facilities in a variety of markets and currencies. The majority of QTC s funding is sourced through long-term debt facilities, with QTC s AUD benchmark bonds being the principal source of funding. QTC continues to issue into existing benchmark bond lines using a variety of methods. Funding is undertaken to meet clients borrowing requirements. Overview as at 30 June 2016 Size $M Maturities available Currencies Short-term Domestic T-Note Unlimited 7-365 days AUD Euro CP USD10,000 1-364 days Multi-currency US CP USD10,000 1-270 days USD Long-term AUD Bond Unlimited 12 benchmark lines: 2017-2026, 2028, 2033 AUD Global AUD Bond Euro MTN AUD20,000 USD10,000 3 floating rate notes: 2016, 2017 & 2018 3 AGG* lines: 2017-2021 AUD 1 capital indexed bond: 2030 AGG* line: 2017 (transferable to domestic bonds) Any maturity subject to market regulations AUD AUD Multi-currency US MTN USD10,000 9 months-30 years Multi-currency # AGG Australian Government Guaranteed QTC - 53

FUNDING SOURCES QTC maintains a diversified global focus in meeting its funding requirements. Figure 32: QTC funding sources by facility (face value) AUD89.3 billion Figure 33: QTC funding sources by investor location QTC s domestic and global investors include central banks and other sovereign investors, multinational finance, superannuation and investment corporations, and major domestic and international banks. Approximately 40 per cent of QTC s funding is currently sourced from offshore based investors. * AGG - Australian Government Guaranteed. ** Estimate. Note: May not add to 100 per cent due to rounding. QTC - 54

AUD BENCHMARK BONDS Figure 34: QTC AUD benchmark bonds, outstandings by maturity QTC has 12 benchmark bond lines with an average of approximately AUD6 billion outstanding in each line. New bond lines issued under the domestic program may be offered in the US to qualified institutional buyers pursuant to Rule 144A. * 144A capability QTC - 55

AUD benchmark bonds: Key characteristics 1. On 16 December 2010, the Basel Committee on Banking Supervision (Basel Committee) announced its global framework for promoting stronger liquidity buffers at internationally active banking institutions. Government Guaranteed Liquidity support Choice of maturities Acceptability Tax status All of QTC s obligations under all debt securities are unconditionally guaranteed by the Queensland Government. All secondary market activity is supported by 12 dedicated distribution group members (see next page). Issuance via tap, tender, reverse enquiry and syndication. Well established domestic bond market. Principal source of funding. Established lines with choice of 12 benchmark bond maturities ranging from 2017 to 2026, 2028 and 2033. In implementing the Basel Committee 1 global liquidity standard, Australian Prudential Regulation Authority (APRA) has determined QTC s AUD bonds as level 1, highest-quality liquid assets (HQLA1). Eligible asset for outright investment by Reserve Bank of Australia (RBA). Eligible collateral for repurchase agreements with RBA. APRA applies a zero per cent risk weighting to QTC as part of the Basel II standardised approach to assessing credit risk. Australia is an OECD member country. New bond lines under the domestic program may be offered in the US to qualified institutional buyers pursuant to Rule 144A. Exempt from Australian interest withholding tax. QTC - 56

AUD Benchmark Bond Distribution Group* QTC s Fixed Income Distribution Group of 12 banks is committed to providing investors with two way pricing in the secondary market, as well as supporting primary issuance activity. ANZ Banking Group Limited Deutsche Bank RBC Capital Markets Bank of America Merrill Lynch JP Morgan TD Securities Citi National Australia Bank Limited UBS Investment Bank Commonwealth Bank of Australia Nomura International plc Westpac Banking Corporation * Actual dealer entities may vary depending on the facility and location of the dealer. QTC - 57

AUD NON-BENCHMARK BONDS Figure 35: QTC AUD non-benchmark bonds, outstandings by maturity QTC has several non-benchmark AUD bonds that were issued under its domestic AUD bond program. To supplement its 12 liquid AUD benchmark bond lines, QTC monitors the market to issue other instruments using this program, taking into account investor demand and client funding requirements. Through market intermediaries, QTC will consider switching its Australian Government Guaranteed AUD bonds (AAA/Aaa) into equivalent AUD benchmark bonds (AA+/Aa1). * AGG Australian Government Guaranteed. Global lines are transferable into domestic lines. More information on QTC s global AUD bonds can be found in Appendix F. **144A capability The 20 Aug 30 Capital Index Bond outstandings do not include indexation of $196.6 million. QTC - 58

QTC AUD BOND OUTSTANDINGS Figure 36: QTC AUD bonds, outstandings over time QTC s AUD bond outstandings have traditionally increased over time adding to the depth and liquidity of individual lines. Global bond outstandings have continued to decline since domestic bonds became eligible for exemption from Australian interest withholding tax in December 2008. QTC - 59

AUSTRALIAN FIXED INCOME MARKET Figure 37: AUD bond outstandings* of Australian Government issuers (FV) In the Australian market, QTC bond outstandings are second only to those of the Australian Government (Australian Government Bonds AGB). * Includes AGG Bonds Data source: Bloomberg Composite Bond Index QTC - 60

Figure 38: AUD denominated bonds on issue It is widely expected that under current fiscal estimates, the volume of semi-government benchmark bonds on issue will continue to increase. Note: The change to Bloomberg Composite Index has resulted in changes to the credit and supra/sovereign data. Data source: Bloomberg Composite Bond Index QTC - 61

Figure 39: Australian semi-government bonds, respective spreads to Australian Government curve Semi-government bond yields relative to Australian government bonds are contracting back towards their historically normal levels after widening significantly from 2007-2012 in response to the global financial crisis and European sovereign debt crisis. The spread to Australian government bonds have benefited from increased demand by Australian authorised deposit-taking institutions who buy semi s to meet regulatory requirements and reduced net supply of semis as proceeds from State government asset sales are being used to retire debt. Average duration adjusted for maturities longer than two years. * Australian Government Guaranteed. See Appendix C for more information. QTC - 62

MEDIUM-TERM NOTE (MTN) PROGRAMS Queensland State Government guaranteed Australian interest withholding tax exempt Multi-currency Euro and US programs Structured to meet investor requirements (currency, coupon, maturity etc.) Reverse enquiry placement through MTN Distribution Group Reverse enquiry placement through non-distribution Group members ( Dealer for a Day ) MTN Distribution Group* Euro MTN US MTN ANZ Banking Group Limited National Australia Bank Limited ANZ Banking Group Limited Deutsche Bank Securities BofA Merrill Lynch Nomura International BofA Merrill Lynch HSBC BNP Paribas RBC Capital Markets BNP Paribas Securities Corp JP Morgan Securities LLC Citi TD Securities Citi National Australia Bank Limited Commonwealth Bank of Australia UBS Investment Bank Commonwealth Bank of Australia RBC Capital Markets Deutsche Bank Westpac Banking Corporation Daiwa Capital Markets TD Securities JP Morgan Securities plc UBS Investment Bank *Actual dealer entities may vary depending on the facility and location of the dealer. QTC - 63

TREASURY NOTE (T-NOTE) AND COMMERCIAL PAPER (CP) PROGRAMS Queensland State Government Guaranteed Australian, Euro and US programs AUD and multi-currency Reverse enquiry placement through dealer panels T-Note, Euro and US CP programs are Australian interest withholding tax exempt T-Note and CP Dealer Panels* Domestic T-Note Euro CP US CP ANZ Banking Group Limited Barclays BofA Merrill Lynch Commonwealth Bank of Australia BofA Merrill Lynch Citi Deutsche Bank Citi UBS Securities National Australia Bank Limited National Australia Bank Limited Westpac Banking Corporation UBS Investment Bank *Actual dealer entities may vary depending on the facility and location of the dealer. QTC - 64

Figure 40: QTC Treasury Note and Commercial Paper, outstandings over time QTC s Treasury Note and Commercial Paper programs allow for continued access to short-term funding. QTC - 65

Figure 41: Commercial Paper and Treasury Note programs, tenor of issuance (2015 financial year) Figure 42: Euro Commercial Paper program, currency of issuance 1 (2015 financial year) 1 May not add to 100 per cent due to rounding. QTC - 66

QTC s Borrowing Program Figure 43: 2016-17 indicative term debt borrowing program In addition to the total term debt requirement, QTC expects to maintain short-term debt outstandings of approximately $5 billion. Requirements 2016-17 Budget AUD m* State 1,200 Local Government and other entities # 700 Total new money 1,900 Net term debt refinancing 5,400 Total term debt requirement 7,300 * Numbers are rounded to the nearest $100 million. # Other entities include: universities, grammar schools, retail water entities and water boards. Note: Funding activity may vary depending upon actual client requirements, the State s fiscal position and financial market conditions. QTC - 67

Figure 44: QTC s annual term debt borrowing programs (actual and forecast)* QTC s borrowing requirements over the forward estimates are primarily expected to reflect term debt refinancings. *Does not include short-term debt of approximately $5 billion each year. ** Other clients include: local governments, retail water entities, universities, grammar schools and water boards. QTC - 68

Summary of key points Queensland Treasury Corporation: funds the Queensland Government public sector is 100 per cent government-owned has all debt security and derivative obligations fully guaranteed by the State of Queensland issues debt that carries the following credit rating (identical to the State of Queensland) Moody s: Aa1/Negative/P-1 Standard & Poor s: AA+/Stable/A-1+ has 12 AUD benchmark bond lines on issue has selected AUD domestic and global bonds that also carry the guarantee* of the Australian Government and are rated AAA/Aaa by Standard & Poor s and Moody s respectively has a term debt borrowing program of $7.3 billion for 2016-17 employs a conservative and transparent funding strategy, and has more than 25 years experience in global debt capital markets. * Refer to Appendix C for further details. QTC - 69