Merril Lynch on Hybrid Bonds

8/9/2019 Merril Lynch on Hybrid Bonds

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The CFO Summit 2006Innovative Financing Hybrid Capital

Laura KohDirector Asia Capital Markets & Financing

SG000L1V


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2SG000L1V

What Is Hybrid Capital?

Traditional View o CapitalTraditional View o Capital Current View o CapitalCurrent View o Capital

!ebt

Coupon

Maturity

Senior claim

"#uity

Dividends

Permanent

Voting rights

Residual claim

!ebt

"#uity

Hybrid

Capital

Deferrale Coupon

Cumulative or !on Cumulative

Perpetual or Long"dated

Suordinated

!o voting rights

Partial e#uity credit from ratingagencies

Possile e#uity treatment onalance sheet


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3SG000L1V

!ri$ers o %rowth In Hybrid Capital

&atin' ('en)ies

Moody$s and S%P revised or clarified their methodologies for a&arding partiale#uity credit on 'yrid Capital

(mportant for companies &hich are facing ratings do&ngrade pressure ut areun&illing or unale to issue additional e#uity to olster the alance sheet

(uditors

)hen certain conditions are met* the 'yrid Capital may e treated as +#uity

in the financial statements under (,RS

Particularly useful in the computation of -ey financial ratios* such as GearingRatio

*ar+ets

)ith .SD and / rates at historically lo& levels* investors have to search harder

for yield returns Demonstrated a &illingness to go do&n the capital structure to achieve more

yield


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4SG000L1V

Features o Hybrid Capital Se)urities

*aturity Most 'yrid Capital securities are perpetual* ut they can e issued &ith a long"datedmaturity e2g2* 30"45 years6

Coupon &ate

'yrid Capital securities typically have a stated coupon2 7he coupon can e8

a fi9ed rate per annum for the life of the instrument*

a floating rate per annum for the life of the instrument* or

a fi9ed rate per annum for a certain numer of years* then s&itching to a floating rate

thereafter i2e2* ,i9ed Rate:d;ustale Rate Preferred* or


5/22 5SG000L1V

Features o Hybrid Capital Se)urities

Coupon

())umulation

Coupons can e cumulative or non"cumulative

Cumulative:(f coupons are deferredsuspended* they &ill accrue and ille an oligation ofthe company to e paid in the future

Non-cumulative: (f coupons are deferredsuspended* no coupons &ill e paid for that periodand the missed coupons ill notecome an oligation of the company to e paid in thefuture

!i$idend Stopper Precludes dividend payments on securities that ran- ;unior to the 'yrid Capital securities if

interest is not paid on the 'yrid Capital securities

&an+ 'yrid Capital securities typically ran- ;unior to all indetedness of the (ssuer* and senior to the

(ssuer$s common stoc-

,i#uidation

-reeren)e

'yrid Capital securities have a stated li#uidation preference per security* &hich is the dollaramount that a holder of such a security is entitled to receive out of availale funds upon li#uidation*dissolution or &inding up* after creditors have een paid* ut efore common shareholders are paid

Call &i'hts 'yrid Capital securities typically can e called y the issuer a6 after the passage of a certain

numer of years e2g2* ? or 106* or 6 upon the occurrence of certain events e2g2* certain changesin la& that occur after the hyrid capital securities are issued6

&epla)ement

,an'ua'e

Language that evidences a commitment y an (ssuer that it &ill only call an outstanding security&ith the proceeds from an issuance of a security &ith similar or greater e#uity"li-e characteristics


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!&"#s Approach to $%uity Credit

Hybrid Capital .pdate

/ew )ate'ory*inimal "#uity Content Intermediate "#uity Content Very Hi'h "#uity Content

Old )ate'ory01 201 01 301 401 601 501 01 701

*aturity -erpetual

Step8.p /o Step8.p

!eerability

Optional

!eerability9

!i$ Stopper

Only

Subordinated

&an+ as

-reerred:

Subordinated

Ta;Treatment

!edu)tible

";amples Perpetual !C* step"upPerpetual !C* optional deferral

replacement language if step"up6

Perpetual !C* Mandatory Deferral (nterest

Payments legally inding replacement

language if step"up6

Maturity lo&ering to @0 yr

Senior

Step".p AB100ps6Replacement LanguageLegally inding6

Less ,le9iility Dividend Pusher6

Replacement LanguageMandatory Deferaility Partial Credit6Mandatory Deferaility ,ull Credit6

Mandatory Convertile

Convertile


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Moody#s Approach to $%uity Credit uilding locks

Hybrid Capital .pdate

Optional

Suspension:!eerral

Note: Cumulative = cash cumulative distributions or unlimited stoc settled distributions

Non-cumulative = non-cumulative distributions or stoc settled distributions sub!ect to limitations

"ubordination #ill be e$uivalent to pre%erred in all cases

"


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&atin' ('en)y=s Finan)ial &atios Cal)ulation

,e$era'e&atios

RC,Det* !et DetCapitalisation

:d;ust det reflecting the proportion of e#uitycredit assigned to the instrument

D as-et ?6 E1n transaction &ill add E@?0mto det and E?0m to e#uity

Cash flo& items li-e RC,6 &ill reflect the fullcoupon of the instrument

,or leverage ratios ,,FDet* DetCap6* S%P &illconsider the instrument in t&o &ays8

Considered as 100 det vs2 100 e#uity

Very 'igh +#uity Content Category100 e#uity

Lo& +#uity Content Category100 det

(ntermediate +#uity Content Categoryoth set

of ratios are considered

Interest

Co$era'e &atios

Main ratios are8 ,,F(nterest and ,,F,i9edCharges

,or ,,F to (nterest* Moodys e9cludes a fractionof the hyrids interest payments &hich is e#ualto the e#uity credit received y the hyrid i2e2 ona D as-et ?6 paying E100 million of interestper year* only E@? million &ill e considered as

interest6

,or ,,F to ,i9ed Charges* Moody$s includes fullcoupon as a fi9ed charge* regardless of e#uitycontent

,or (nterest Coverage ,,F(nterest6* S%P &illconsider the instrument in t&o &ays8

100 det vs2 100 e#uity

Remuneration on instruments in the Very 'igh+#uity Content Category is considered as dividendpayments

Remuneration on instruments in the Lo& +#uityContent Category is considered as interestpayments

Remuneration on instruments in the (ntermediate+#uity Content Category &ould generally econsidered as interest payments


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IA! Accounting 3reat-ent

Hybrid Capital *ar+ets

: perpetual security is treated as either det or e#uity on the issuer$s alance sheet

(:S 3@ 7he issuer has an (unconditional ri)ht to avoid pa*in) cash or %inancial assets to settle the obli)ation+:

7rue8 +#uity

,alse 8 Det

:dditional criterion8 7he holder of e#uity must have a residual interest in the assets of the issuer after deducting all liailities

Regulators* rating agencies and ta9 authorities can have different criteria so classification can differ for different purposes

Hybrid Classiies as !ebt .nder I(S 2 Hybrid Classiies as "#uity .nder I(S 2

Terms and Conditions> ,aturit*: Perpetual ,aturit*: Perpetual

anin): Deeply Suordinated anin): Deeply Suordinated

Call: !on"Call ? Call: !on"Call ?

.nterest /a*ment: Dividend Pusher Cumulative .nterest /a*ment: !on"Cumulative

.nterest 0e%erral: Restricted .nterest 0e%erral: .nrestricted

"tep-1p: !o "tep-1p: !o

I(S 2> Det +#uity

I(S 7> 'edge :ccounting for s&ap !o 'edge :ccounting for s&ap

-, Volatility> Lo& Lo& to medium

( -erpetual Is Classiied as "ither !ebt or "#uity( -erpetual Is Classiied as "ither !ebt or "#uity


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Vattenall Case StudyVattenall Case Study


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SG000L1V

4ationale *or the 3ransaction

Vattenall Case Study

Why Issue a Hybrid Capital

Se)urity?

(nders ,ideelt9

-resident o Vattenall

TreasuryWhy we did not Issue a Hybrid

Capital Se)urity ecorporate hyrid offering /H00m6

Chan'es

Hybrid Capital Ofering&esult

(e are state o#ned so our access to

ne# e$uit* capital is ver* limited+


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2SG000L1V

4ating Agencies 3reat-ent


*oody=s Standard ? -oor=s

Senior &atin' :3 :"

Hybrid &atin' Iaa1 III"

"#uity Content Ias-et D ? e#uity credit6 H0 e#uity credit

&ationale

Perpetual

:de#uate replacement language to mitigate

step"up

,ull credit to the mandatory deferral feature

Perpetual

:de#uate replacement language to mitigate

step"up

Partial credit to mandatory deferral

&atio Impa)t

'yrid treated as ? e#uity* @? det for

ratio purposes

More &eight given to leverage and cash flo&

coverage ratios that considered the instrument

as all e#uity

Distriutions treated as interest for fi9ed charge

coverage ratios

('en)y

Considerations

Ratings placed on positive outloo- after

announcement given significant financial

fle9iility

Capital structure to e enhanced given

issuance of hyrid

(ssuance strengthens alance sheet y

enhancing financial fle9iility


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3SG000L1V

ene*its *or 5atten*all



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4SG000L1V

3he 3ransaction


Summary o -rin)ipal TermsSummary o -rin)ipal Terms

89 t issuance; in the mean#hile up)raded to 2 8compan*9 and


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5SG000L1V

Innovative !tructure


541 e#uity )redit rom

*oody=s @


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Key Highlights


Very hi'h #uality

Si'nii)antly positi$e

";)ellent ";tremely

well perormin' on the

se)ondary mar+et

First e$er perpetual se)urity

or a )orporate issuer in the

/ordi) &e'ion

*ost inno$ati$e stru)ture in

the )orporate spa)e

Hi'hest e#uity )ontent

non8diluti$e )orporate debt

se)urity 8 "V"&

Dbn Hybrid Capital

!istribution

Impa)t on &atin'

-erorman)e

%round


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-ors)he=s .S! Hybrid Transa)tion !etails


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&SG000L1V

+vervie


Hi'hli'htsHi'hli'hts Hybrid Transa)tion &ationaleHybrid Transa)tion &ationale

7he hyrid instrument reinforces the Group$sstated conservative financial strategy* providesadditional financial fle9iility* and refinances thecompany$s strategic li#uidity reserves and aond maturing in @00

Porsche is the &orld$s most profitale carmanufacturer and committed to maintaining aconservative financial structure and vie&s theissuance of a hyrid security as a means offurther strengthening its capital ase

.SD &ere selected as currency of issue as theond can e used to hedge foreign e9change

ris-s derived from car e9ports


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2SG000L1V

3ransaction !u--ary


Issuer Porsche (nternational ,inancing plc

%uarantor Dr2 (ng2 h2c2,2 Porsche :-tiengesellschaft

&atin's !ot rated

Tenor Perpetual !C?

Compensation -ayments ,i9ed rate of 2@ per annum payale #uarterly

Optional &edemption Redeemale at par on 01 ,eruary @011 and any compensation payment date thereafter

Spe)ial "$ent &edemption Redeemale at par if either the (ssuer or the Guarantor is re#uired to pay additional ta9 amounts

Redeemale at par if interest e9penses cease to #ualify as ta9"deductile payments for the (ssuer

Redeemale at par if the proceeds of the securities may no longer e accounted for as e#uity of theGuarantor

Optional Compensation-ayments

7he (ssuer may defer payment of compensation on a cumulative ut not compounding6 asis on anycompensation payment date if i6 no dividend or other payment &as resolved on in respect of shares of theGuarantor* ii6 no dividend or other payment &as resolved* paid or made in respect of any ;unior or paritysecurities #ualifying as e#uity of the Guarantor and iii6 the Guarantor has not repurchased any parity or ;uniorsecurities or any shares2

-ayment o (rrears oCompensation

:rrears of compensation &ill ecome due on any compensation payment date on &hich the (ssuer payscompensation &hether due to non"satisfaction of the deferral conditions or due to the (ssuer electing not todefer62 :rrears &ill also ecome due on the earlier of8 redemption of the securities* the date on &hich an orderis made for the &inding"up or li#uidation of the (ssuer or the Guarantor and the date on &hich the (ssuer orGuarantor ma-es any payment on any parity or ;unior security #ualifying as e#uity of the Guarantor2

Status o the %uarantee :t least pari passu &ith any present or future capital securities and guarantees thereon Senior to common and preferred e#uity of the Guarantor

Kunior to all unsuordinated and suordinated creditors of the Guarantor and guarantees thereon

!enominations .SD @*000

Sole


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Summary o -ayment *e)hani)sSummary o -ayment *e)hani)s !i$idend History per -reerred Share!i$idend History per -reerred Share @A@A

'as Porscheresolved

on apaymentdivide

ndin respect of

shares

'as Porscheresolved

on or made apayment

on ;unior orparity

securities#ualifying ase#uity of theGuarantor

'as Porscherepurchased

any;unior or parity

securitiesor any shares

FptionalCompensationPayment Date

CompulsoryCompensationPayment Date

!o !o !o

es eses

89 /lease note that pre%erred shareholders receive an additional >6 dividend p>a>? compared to ordinar* shareholders; No special dividends illustrated

829


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22SG000L1V

!is)laimers

*errill ,yn)h prohibits @aA employees rom9 dire)tly or indire)tly9 oerin' a a$orable resear)h

ratin' or spe)ii) pri)e tar'et9 or oerin' to )han'e su)h ratin' or pri)e tar'et9 as )onsideration

or indu)ement or the re)eipt o business or or )ompensation9 and @bA &esear)h (nalysts rom

bein' )ompensated or in$ol$ement in in$estment ban+in' transa)tions e;)ept to the e;tent

that su)h parti)ipation is intended to beneit in$estor )lientsE

This proposal is )onidential9 or your pri$ate use only9 and may not be shared with others

@other than your ad$isorsA without *errill ,yn)hs written permission9 e;)ept that you @and ea)h

o your employees9 representati$es or other a'entsA may dis)lose to any and all persons9without limitation o any +ind9 the ta; treatment and ta; stru)ture o the proposal and all

materials o any +ind @in)ludin' opinions or other ta; analysesA that are pro$ided to you relatin'

to su)h ta; treatment and ta; stru)tureE For purposes o the pre)edin' senten)e9 ta; reers to

.ESE ederal and state ta;E This proposal is or dis)ussion purposes onlyE *errill ,yn)h is not

an e;pert on9 and does not render opinions re'ardin'9 le'al9 a))ountin'9 re'ulatory or ta;

mattersE Gou should )onsult with your ad$isors )on)ernin' these matters beore underta+in'

the proposed transa)tionE

Merril Lynch on Hybrid Bonds

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