Fixed Incomeand CreditYearbook

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Cover.50 3/5/05 6:17 PM Page 1

Insidefront Cover 3/4/05 10:56 PM Page a4

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Contents

Co-publishedfeaturesBloomberg 116

National Australia Bank 119

Grange Securities 122

TD Securities 126

RoundtableTD Securities 26

Allens Arthur Robinson 58

UBS 72

Q&AAllens Arthur Robinson 102

Grange Securities 106

Macquarie Bank 108

Standard & Poor’s 110

TD Securities 112

DirectoryIssuers 152

Investors 159

Intermediaries 168

Professional Services 173

Issuer ProfilesANZ Bank 86

Commonwealth Bank 87

CSR 89

Foster’s Group 90

Macquarie Bank 91

Mayne Group 92

National Australia Bank 93

St.George Bank 94

Sydney Airport 96

Tabcorp 97

Telstra 98

Westfield 99

Westpac 100

Pacific ProspectLevel 25 Chifley Tower2 Chifley SquareSydney NSW 2000AustraliaT 61 2 9251 1820F 61 2 9251 8182E mdiamond@pacificprospect.comDisclaimer:Although every care has been taken to ensure theaccuracy of the information contained within thispublication, neither Pacific Prospect Group Pty. Ltd. nor their employees can be held liable for anyinaccuracies, errors or omissions. Nothing in thispublication should be construed as being FinancialProduct advice. Readers are strongly advised tocontact their professional financial, tax and/or legaladvisers before entering into any transaction orcontract to buy or sell any Financial Products.

Fixed Income and Credit Yearbook 2005ISBN 0-9751366-4-XEdition: 1Publisher: Pacific Prospect Group Pty Ltd

Who’s WhoIssuers 128

Investors 131

Intermediaries 137

Professional Services 147

EditorialForeword 4

Primary Markets 2004 Wrap 5

Fund Managers Outlook for 2005 16

Asian-based Investors 40

Can you Afford to Retire? 52

Primary Markets 68

Growth & Development 82of the Kangaroo Market

Changes to UBS’ 84Australian Bond Indices

001-002 3/4/05 11:43 PM Page 2

4

Despite theundeniable – and ongoing –attractiveness of offshore capital markets, the Australiancorporate bondmarket enjoyedanother record-breaking year in 2004.

The increased competitiveness shown by the Australian market in recent years, in providing funding in sizeable volumes,continued apace in 2004, with heightenedactivity at both ends of the investment-gradespectrum. The strong performance of theKangaroo market boosted total issuancethrough the $40 billion mark for the first time,while at the other end, landmark issues bylower-rated credits showed the market'smaturity and ability to price at globallycompetitive levels.

And market participants expect the lower end of the spectrum to provide plenty ofactivity in 2005, with the recent (effectiveFebruary) expansion of the ratings spectrumof the UBS Credit and Composite Indicesfrom A- to BBB-. While this change is notlarge numerically, it is highly significant in itsramifications for the market – for the simplefact that most Australian companies are BBB-rated.

Inclusion of BBB issuers in the mainbenchmark index assures them of demandfrom Australian institutional investors, whopreviously could not buy their securitiesbecause their investor mandates did not allow them to go outside the index. The ramifications for the market's growth – and diversification – are huge and eagerlyawaited by the market.

However, the question of whether theappetite of local investors springs up quicklyenough, and in large enough mass, to divertAustralian companies from the deep andtempting US markets – for example the US private placement market – is a difficult one. Many market participants are hoping (in terms of the UBS indices) that it will be a case of “If you build it, they will come”,while others worry that issuers will only issuein the local market if they can do so at a costof funding which is competitive compared towhat they could do offshore.

Financial issuers continued to dominate the market, accounting for just over three-quarters of issuance in 2004, which poses a diversification challenge for the market.Many bankers wait to see whether changesto the index will bring an influx of industrialcredits to Australian institutional investors.

Conversely, the continued pull of the USprivate placement and Rule 144A marketsswelled the leakage of Australian issuanceoffshore, and there are no signs that thistraffic is on the wane.

In the structured credit area, record sub-wholesale and retail volumes continue to mask the fact that the participation of domestic wholesale investors, due to mandate restrictions, is limited. However,the ongoing contraction in credit spreadsshould continue to drive investor appetite for structured products.

This yearbook surveys the Australian market in detail. It provides a broad overviewof 2004 from the perspective of investorsand issuers. It contains detailed profiles of some of the more notable transactions of 2004; three roundtables with industryleaders capture the state of play and likelydevelopments for 2005 – in the primarymarkets, credit and structured credit. All sections of the markets are undergoingenormous change, and the Fixed Income & Credit Yearbook represents the mostcomprehensive and up-to-date summary of the market's current thinking and potentialdirections.

Many thanks go to our sponsors, withoutwhom this yearbook would not be possible.They are – lead-sponsor; Bloomberg. AlsoIntermediaries; National Australia Bank, TDSecurities, Fitch Ratings, Grange Securities,Nomura, Standard & Poor's, UBS, MorganStanley, JPMorgan, Westpac InstitutionalBank, Allens Arthur Robinson, BNP Paribas,MBIA, ASX, RBS, Citigroup, MallesonsStephen Jaques, Deutsche Bank, SG,Moodys Investor Service and Reuters.Investors; Macquarie Funds Management,ING Investment Management, QueenslandInvestment Corporation, Principal GlobalInvestors, Absolute Capital, ChallengerFinancial Services Group, SchrodersInvestment Management, Basis Capital andAberdeen Asset Management. And Issuers;Treasury Corporation of New South Wales,Treasury Corporation of Victoria, QueenslandTreasury Corporation, Commonwealth Bankof Australia, National Australia Bank,St.George Bank, Macquarie Bank, ANZ and Westpac Banking Corporation.

Michael StanhopeManaging DirectorPacific ProspectT 61 2 9251 8116E mstanhope@pacificprospect.com

Foreword

004-005 3/4/05 11:46 PM Page 4

Growth sums up Australia's corporatebond market in 2004. In the process of absorbing a record $41 billion of issuance, the market made a stepchange in the pricing, tenor and volumeit offers. It is now globally competitiveand attracting borrowers – domestic and international – that previouslydismissed the market as too small, too hard or too far away.Written by Marion Williams

The market had little choice. It had tobe competitive to attract the issuancerequired to satisfy investor demandamid heavy government and corporatebond maturities, the bulk of which –$15 billion – fell due in the second halfof the year. Australia's institutionalinvestors demonstrated they haveestablished the skills and resources to move beyond their previous comfortzone in terms of ratings and tenors.Intermediaries agree the market ispoised to mature further.

Kangaroos critical to volumeThere is no way that the market would havebroken the $40 billion issuance barrierwithout Kangaroo borrowers, says MarkGarrick, head of primary markets of NationalAustralia Bank's Institutional Markets andServices. According to the bank, Kangarooissuance totalled $20.1 billion in 2004, almost triple the previous year's volume, and it was responsible for 49 per cent of theyear's supply. Kangaroo issuers now make up36 per cent of the corporate bond market'soutstandings, up from 28 per cent at the endof 2003.1

Garrick explains that several factors were at play to attract non-domiciled borrowers to the Australian market:

a) proceeds of Australian dollar issuesswapped into attractively priced US dollar Libor funding

b) with the spread between the governmentbond and interest-rate swap curveshovering around 50 basis points,domestic investors that previouslyshunned AAA Kangaroo bonds becauseof their narrow margins to swap were now keen buyers to take a view on thebond/swap margin. With some AAAKangaroo bonds trading level with swapscompared with semi-government bonds at 25 basis points under swap, the tradewas a no-brainer

c) on 4th March the Reserve Bank of Australia broadened the range of securities it accepts as collateral

for repurchase agreements. This broughtin banks' liquidity books as a new investorbase

d) there were periods when global investorsbought AAA Kangaroo bonds as one of many global “carry trades” to exploitwide interest-rate differentials betweenAustralia and the US and a favourableforecast for the Australian/US dollarexchange rate while taking virtually nocredit risk.

With these four factors interacting, thevolumes issued in the Kangaroo sector put Australia on the radar screen of moreborrowers than ever before.

Market pricing lower-rated credits involume at globally competitive levelsA similar thing was happening at the otherend of the investment-grade rating spectrum.The debuts by Tabcorp Holdings andGoldman Sachs (A+/A3) proved the marketcould offer volume and tenor at competitivemargins. In fact Goldman Sach's $1 billiondebut was one of nine transactions to hit the$1 billion mark during the year. Through thesetransactions four domestic and four offshoreissuers raised $9.345 billion.

Tabcorp, rated BBB+ with a negative ratingoutlook, is one demonstration of theAustralian credit market's maturity and ability to price at globally competitive levels.Via lead manager Westpac Institutional Bank, the gaming group priced $450 million ofseven-year debt at a margin consistent with the pricing on the 10- and 12-year deals

Primary Markets 2004 Wrap

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it subsequently priced in the US privateplacement market. Likewise SPI PowerNetpriced $235 million of seven-year debt whileits A+ rating was on CreditWatch Negative.When National Australia Bank embarked on a massive funding task to boost its capitalratios in the aftermath of its currency optionfiasco, it started its subordinated debtissuance in the Australian market. TheAustralian market effectively set the pricingfor the US dollar and Euro legs that followed.

The acceptance of investment banks as credits is another milestone, says RobVerlander, head of securities origination at Commonwealth Bank. “They providefrequent and liquid deals and they areprofessional borrowers that structuretransactions to meet investor requirements.”He also points to the growing acceptance of different structures such as Rabobank's$500 million perpetual issue that qualifies as Tier 1 capital and Royal Bank of Scotland's$1 billion Lower Tier 2 capital issue of callable10-year debt as signs of the market'smaturity. “When you can't get variations in credit you look for variations on thestructures that are coming. The reality is ifinvestors can pick up any additional spreadon a credit with which they are comfortablethen you can vary the structure.”

Credit intensity to growChanges to the UBS bond indices that

were proposed in July 2004 and becomeeffective in February 2005 will support further development in the credit curve. The Australian benchmark bond index nowincludes credits across the full range ofinvestment-grade ratings. Bankers say thatnot only must investors measured against the index buy into issues rated at the lower-end of investment-grade but those fundmanagers that previously sought tooutperform the index by buying BBB creditswill want to extend along the yield curve inthat part of the rating spectrum. A glimpse of that was seen in the fourth quarter.Previously issuers in the A and BBB ratingbands struggled to get competitive pricingbeyond five years, yet Goldman Sachs, SPIElectricity and Gas Holdings (A-), Tabcorpand SPI PowerNet raised over $1 billion ofseven-year debt in the space of two months.

Intermediaries welcome the index changesbut view the revamp as a validation of whatwas already occurring in the market anyway.Peter Bloomfield, head of corporatesecurities at Westpac Institutional Bank, says local investors are obviously gettingmore aggressive for lower-rated credits andthat has enabled the market to absorb lower-rated credits in greater volume than the past.“Over the years they have become morecomfortable with their ability to make calls on lower-rated credits and to do it in volume.”

The Australian benchmarkbond index now includescredits across the fullrange of investment-graderatings.

Chris Viol, head of credit research atCitigroup Australia, agrees, saying funds are more credit focused and have expandedtheir resources in this area. He notes that theimpending index changes have already had animpact on margins for 10-year subordinatedbank debt, callable after five years, ahead of their inclusion in certain revamped indicesin February. “You saw a real bid for those in the secondary market in the third quarter.”Another development potentially enablinginvestors to better use their credit skills is the launch of the DJ iTraxx credit defaultswap index in July. The 25-name indexincludes seven names that have not issuedlocally. As Citigroup's credit analysts wrote atthe time: “While admittedly credit derivativeshave thus far remained a mostly inter-bankmarket, how long fund mandates can ignoresuch changes remains to be seen.”

The combination of greater credit skills andthe index changes will see increasing depth in the BBB sector over the next one to twoyears, predicts Grant Bush, head of debtcapital markets at Deutsche Bank –Australia/New Zealand. In the past, therelatively short tenors of corporate bonds

have meant that they were buying the paper simply for the running yield. Now that investors have developed credit skills,“you will see them wanting to extend theduration of those investments so they'll get rewarded for the credit skills they havedeveloped. Instead of purely a running yieldargument, they will look to buy for out-performance, credit improvement andappreciation.” So rather than seeking capitalgains through duration views, they will alsolook to do this via credit views. Investorscan't really take a view on a company'smanagement or industry with a three-yearbond because the time frame isn't longenough and the capital appreciation won't be significant on a short-dated security. Thus Bush foresees investors expandingtheir use of credit from merely as a way of maximising spread to also helping tomaximise returns.

Verlander at Commonwealth Bank has similarexpectations and envisages that this will see relatively fewer domestic corporatesmake the trip to the US to undertake privateplacements. “Institutional investors arepricing at globally competitive levels, certainlyin the five- to seven-year part of the curve,and likely out to 10 years. I think you will seepretty big growth – if the yield curve makessense – given the cost of swap lines, upfrontfees and the logistics.” Such a developmentwould be timely. National Australia Bankcalculates that over the next two years 76 per

Primary Markets 2004 Wrap

The combination of greatercredit skills and the indexchanges will see increasingdepth in the BBB sector overthe next one to two years.

Grant BushHead of Debt Capital MarketsDeutsche Bank

Japan remains the mostsignificant international bid for Australian dollarproduct.

James HoustoneHead of Debt Capital MarketsNomura

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Source: Reserve Bank of Australia

cent of industrial issuance will mature, alongwith 63 per cent of debt issued by consumer-related corporates and 57 per cent of bondsissued by the media sector. In addition, over35 per cent of the outstanding issuance from each of the property, resource andtelecommunications sectors falls due in 2005 and 2006. Unless replaced by similarpaper, the market's long-standing diversityproblem will worsen. As it is, on NationalAustralia Bank's numbers, financialinstitutions, supranationals and governmentagencies account for over 65 per cent of market outstandings.

Wrapped and LPT supply down, index-linked rises – underpinned by government Other trends in the year include a smallerproportion of supply that is guaranteed bymonoline insurers. Excluding index-linkedtransactions, there were just four credit-wrapped issues totalling $2.4 billion, starting with Brisbane Airport's privatelyplaced floating-rate notes (FRNs). EnergyPartnership Gas and Lane Cove TunnelFinance followed but of course the standouttransaction is Sydney Airports' $1.42 billionof wrapped debt. It is well known that asizeable proportion went offshorenotwithstanding strong local demand. Garricksays with credit spreads at six-year lows,some investors believe they aren't beingadequately compensated for taking credit risk so they are moving out of A and BBBpaper into credit-wrapped issues. Verlanderconcurs. “It looks relatively cheap to A-ratedcorporate credits and there is opportunisticbuying on a trading view that at currentpricing it looks like good value.” Garrick says the wrapped issues offer an extra 20basis points versus GE Capital and a 35 basis point pick-up over some of the AAA-rated foreign banks.

Other trends in the year include a smallerproportion of supply that is guaranteed by monoline insurers.

Some of the earliest adopters of thedomestic corporate bond market were listed property trusts but again there wasreduced issuance from this sector in 2004.The fall back in supply partly reflects rapidrationalisation in the sector. The less frequentsightings in the domestic market are also due to the trusts heading to the US privateplacement market for funding diversification.Remarkably, despite the corporate activity,credit ratings in the sector were stable. Mostcredit ratings were ultimately either affirmedor affirmed with a negative rating outlook.Nevertheless, the rise in event risk causedspreads in the sector to widen. In prior yearsproperty trusts had traded inside the marginsof similarly-rated corporates, partly becausetheir activities and gearing levels were

Primary Markets 2004 Wrap

BBB+ to BBB- and below investment gradeA+ to A-

AA+ to AA-

AAA

53%

24%

19%

4%

2004 Domestic Bond Issuance – Total $68 billionBy rating

ABS

20%

12%

37%

31%International

Financials

Corporate and PTE

2004 Domestic Bond Issuance – Total $68 billionBy issuer type

0

5

10

15

20

25

30

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015+

2004 Domestic Bond Issuance – Total $68 billionBy maturity; per cent of total issuance

010 3/4/05 11:51 PM Page 10

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restricted by trust deeds. Now however,property companies are trading at marginsfive to 10 basis points higher than 'true'corporates because of the escalation in event risk, says Garrick.

One area of growth that receives littleattention is index-linked debt. AngusCameron, previously division director, debtfinance at Macquarie Bank, says althoughstarting from a low base, issuance is up byone third on 2003. The Lane Cove Tunnel and Sydney Airports' deals were thesegment's main transactions. Both were wellsupported and attracted a diverse range ofinvestors, he adds. “We are alsoexperiencing greater interest in the classfrom offshore investors, contributing to theout performance versus the nominal market.”

The bankers interviewed for this article saythere was little to note in the government and semi-government bond market. Thatsaid, its presence is vital to the continueddevelopment of the non-government sector.“It is predicated on a very deep bond marketand futures market and deep and liquidcurrency and swap markets. Fixed-income isthe last one to develop. You need that entireinfrastructure before you can support volumeissuance at this level,” says Verlander.

Internationalisation of the market –intermediaries and investors follow issuersInternational issuers have been a feature of the bond market for several years now, and as the Kangaroo sector has grown inleaps and bounds, so has the number ofintermediaries. There are now 21 banks in the league tables. The internationalisation of Australia's non-government bond marketextends to the investor base. Granted someof the offshore investor involvement in 2004was cyclical as highly-rated Kangaroo bondswere one of many global “carry trades”favoured by investors around the world,however the participation of Asian investorsis a permanent feature of the landscape.Verlander at Commonwealth Bank saysthese days most transactions are over-subscribed and order books may have morethan 50 accounts. This is a change from thepast when the market was struggling todevelop and cornerstone investors wererequired. “We now tell investors to come in early with their bid so we can give them an appropriate allocation. If people leave ituntil the end they can get disappointed.”

Asian investors important, particularly for bank issuers of EurobondsThe arrival of Asian investors in the Kangaroosector needs to be kept in perspective.James Houstone, head of debt capitalmarkets at Nomura, reminds us that Japanremains the most significant international bidfor Australian dollar product. Japaneseinstitutional investor buying of large liquidlines of semi-government debt promoted tooffshore investors – the so-called global andexchangeable lines issued by QueenslandTreasury Corporation and New South WalesTreasury Corporation, respectively – issupplementing the waves of retail-targetedUridashi bonds. He adds that Asia's bid forAustralian dollar product is tiny comparedwith its bid for securities denominated in USdollars and Euros, thus the relevance of Asianinvestors to the Eurobond programmes ofAustralian borrowers, particularly the majorand regional banks.

Gerard Perrignon, director of debt capitalmarkets at Nomura, sees Westpac BankingCorporation's US$1.5 billion three-year FRN in May as a significant example of anAustralian borrower successfully combiningdemand across the Asian, European and US time zones with one product offering. It is one of the few global issues undertakenby an Australian borrower outside of thesecuritisation sector and it highlights theemerging opportunities available to Australianbanks to raise senior debt in the US market.Houstone says the banks have tended to relyon the Eurobond market for the bulk of theirsenior debt funding and have traditionallytargeted the US market more forsubordinated debt.

US private placements lead leakage offshoreSimon Maidment, head of fixed income

at UBS, says while it has been a good yearfor domestic issuance, the celebrations mustbe kept in the context of still strong growth inAustralian issuance in the Rule 144A andprivate placement markets in the US, as wellas in the EMTN and offshore securitisationmarkets. “There is still leakage of Australianissuers driven by the need for size or need for term or the ability to price credits thatdon't have ratings.” Research by NationalAustralia Bank shows by mid-year, AustraliaInc had already raised more money inoffshore markets than in any year exceptfor 2003 “and that year's total looks likely to be surpassed in the next six months”.2

Speculation that US private placementswould peter out proved incorrect. Around thesame number of Australian issuers tappedthe market as the previous year, but theypriced larger transactions, so producingincreased volume in 2004, says Bloomfield.With the tick-up in Australian merger andacquisition activity and a scant forwardcalendar of US corporate issuers, it is likelythe US private placement market will remainaggressive and continue to get its fair shareof deals, he says.

Outside of the private placement sector, the only Australian corporates to tap the US market via Rule 144A transactions were Foster's Brewing Group and Westfield.According to Simon Rothery, managingdirector of fixed income, currencies andcommodities at Goldman Sachs JBWere,Foster's achieved funding 15 basis pointscheaper than was possible in the domesticmarket, confirming that the US 144A marketremains competitive. Natalie Vanstone, head of debt capital markets at JPMorgan,views the US market as the hottest around.After all where else could an Australiancompany – Westfield – raise US$2.6 billion of debt in one go?

Europe offers greatest diversificationThat may be so but Europe offers unrivalledinvestor diversification through itsfragmented investor base, says Bush atDeutsche Bank. “There is no corporateissuer in Australia that has come close to tapping its full potential investor base in Europe. Mainstream Europe is massive so Europe is a fantastic opportunity forcorporates.”

Like the US where year-to-date corporatesupply has fallen to 28 per cent of totalissuance, corporate bond issuance has fallento 10 per cent of the European market'ssupply, from 15 per cent in 2003, saysVanstone. Therefore the slippage of 'true'corporate supply in the Australian market to around 17 per cent from 28 per cent in theprevious year isn't a local phenomenon but a global one, and nor did it stand in the way of the record $41 billion supply. Corporateliability management is exacerbating thesituation in Europe. Some companies areeither buying back debt or buying it to reissue

Primary Markets 2004 Wrap

There is still leakage of Australian issuers driven by the need for size or need for term or the ability to price credits that don't haveratings.

Simon MaidmentHead of Fixed IncomeUBS

012-014 3/4/05 11:55 PM Page 12

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14

fresh paper because it is more economic. In early December, for example, JPMorganconducted the buyback of €600 million bondsthat InterContinental Hotels had issued only a year earlier because it had a cheaper andmore flexible source of funds provided tothem by the bank market.

If Australian bond investorswant genuine namediversity they will have to compete on price.

Again, in a repeat of the US experience, therewas very little Australian corporate issuanceinto Europe in 2004. Amcor and Telstra'sEuro-denominated bond issues were verywell received, says Vanstone. She adds thatUS and European investors have a very highlevel of comfort with Australian borrowers. In the case of Australian banks, the country'slargest borrowers with annual senior debtfunding requirements of over $10 billion,offshore investors are comfortable with theoperating environment. The banks areperceived as having good quality, low riskassets, and stable strategies andmanagement teams. They therefore get“ticks across the board” as a way to diversifyaway from US and European banks, saysVanstone. She comments that Australian

issuers are very good at being transparent,proactive and maintaining comprehensivewebsites for offshore debt investors.

Despite domestic growth Australian issuersstill reliant on offshore debt marketsMaidment says it is vital they continue to bebecause Australia is reliant on foreign capital.Australian borrowers therefore need to haveclean credits to maintain access to offshorecapital markets. According to the NationalAustralia Bank research cited earlier, in the12 months to March 2004, Australian'scurrent account data reveal gross outflows of $80 billion and a net outflow of $74 billion.That net outflow consisted of $8 billion ofequity and $65 billion of debt. During thattime, Australian entities acquired $15 billionof foreign debt securities. So over the period,foreigners bought around $80 billion of debtsecurities from Australian entities.

Looking forward, the fundamentals look goodfor demand in the domestic market. There isvery little pre-deal switching by investors toaccommodate new supply, there is ongoingdemand to meet the portion of compulsorysuperannuation savings that is directed to thefixed-income portion of balanced funds, andRothery says around $10 billion of couponflows have to be reinvested each year.Furthermore, $12.2 billion of corporate bondsare scheduled to mature in 2005, $700 millionmore than fell due in 2004. Garrick adds thatif the equity market continues to perform as itdoes, fund managers will have to keep sellingequities to rebalance their portfolios so thatthey aren't overweight the sector. That freesup cash for other asset classes. Noting thatcorporate issuance is falling around the worldand stiff competition for assets, Bush says ifAustralian bond investors want genuine namediversity they will have to compete on price.“This isn't a volume market or one offeringdiversification of tenor.”

Vanstone comments that offshore investorsare divided into two camps – the technicaloptimists and the fundamental realists. The optimists believe credit will remain wellbid because corporate balance sheets are in good shape and because of thesupply/demand imbalance in global debtmarkets. The realists are mindful of a rise in shareholder-friendly behaviour such asshare buybacks and the up-tick in mergersand acquisitions. This leads them to questionhow long the current narrow credit marginscan be sustained before investors increaseallocations to other sectors.

1 Australian Credit Markets, National Australia Bank“Maturities in 2005 to add a new dimension?” 14 December 2004

2 Australian Credit Markets 20 July 2004 “FundingAustralia and the basis swap” National Australia Bank

Primary Markets 2004 Wrap

Offshore investors aredivided into two camps –the technical optimists andthe fundamental realists.

Natalie VanstoneHead of Debt Capital MarketsJPMorgan

012-014 3/4/05 11:55 PM Page 14

The consensus among Australian fixedincome fund managers is that 2005should be another year of benign creditconditions. They have identified a fewpotential landmines to monitor but seelittle on the horizon to cause a wholesalerebound in credit margins. Written by Marion Williams

The prolonged credit-friendlyenvironment isn’t necessarily sopositive for fund managers. Forstarters, retail and sub-wholesaleinvestors will continue to investdirectly in the raft of relatively highyielding and complex structuredproducts that investment banks are touting. The banks are devotingincreased resources to theseburgeoning investor segmentshowever some fund managers are hard pressed to find ways toinclude innovative products such as collateralised debt obligations(CDOs) in their clients’ portfolios.That is particularly so when assetconsultants have yet to embracestructured credit and instrumentssuch as non-investment gradedebt/equity hybrid securities. In the meantime, fund managers are listening to what their clients say they want and are trying tostructure new products accordingly.

Fund Managers Outlook for 2005

Another unwanted consequence of thepositive credit environment is that it willremain an issuer’s market. Notwithstandingthe changes to the domestic benchmarkbond index, the offshore debt capital marketsand the local bank loan market will continueto tempt a fair share of Australian corporateborrowers, so depriving local fund managersof the diversification they have craved foryears.

Somewhat ironically, therefore, life might get better for Australia’s fixed income fundmanagers when the inevitable downturn in the credit cycle hits. Local corporateborrowers may then discover the attractionsof their domestic bond market. It could alsobe a wake-up call to retail and sub-wholesaleinvestors that investing in credit is not a one-way bet and is perhaps something better leftto the experts.

A great year for Australia’s credit market – and most markets around the worldUndoubtedly 2004 was a great year forAustralia’s fixed income investors. Despite a rise in corporate activity, there were nomajor credit blow-ups and credit ratingsfinished the year largely unscathed. Creditmargins continued to contract against aglobal backdrop of reasonable economicsettings and corporate profitability. The other factor at work pushing in marginsglobally is too much money chasing too few investments. This is exacerbated by the rise of structured credit products. Thenarrowing in credit margins helped Australianfund managers to post solid returns overthe year.

It was the second consecutive year of recordcorporate bond issuance with over $41 billionof supply absorbed and with new issuers andnew structures arriving ahead of the changesto the benchmark UBS Australian CompositeBond Index in February 2005. Fund managers

applauded Rabobank’s step-up perpetualissue and Tabcorp received accolades for its willingness to test the local market’sability to absorb BBB-rated credit risk inreasonable volume and tenor at margins that are competitive with offshore markets, notably the US private placement market.

The offshore debt capitalmarkets and the local bankloan market will continue to tempt a fair share of Australian corporateborrowers.

Local fund managers were riding a wave that is sweeping across the world. WayneFitzgibbon, head of cash and fixed interest at Macquarie Funds Management, views the global fall in risk premium as the mostfascinating thing about 2004. “Creditspreads have contracted and we’ve seenmost bond markets rally or certainly notrespond as one would have expected to the Fed’s interest rate increases. I think itreally has been a bull market in pretty mucheverything and it is really interesting that wehave seen that reduction in the global riskpremium given the geopolitical picture andthe building economic risk in the worldeconomy.” After all, political risk hasn’tdiminished over the year, the US FederalReserve Bank is still on a path of monetarytightening, oil prices are up sharply, whichapart from anything else has implications for the worsening US current account deficit, and the US federal budget deficit hasincreased massively. All these factors haveimplications for the currency markets yet, asFitzgibbon points out, except for the closingweeks of 2004, it wasn’t a particularly volatileyear in the foreign exchange market.

16

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18

Fund Managers Outlook for 2005

While few investors anticipate significantlytighter spreads, they don’t expectfundamentals to deteriorate to the extent that sharply wider margins are warranted.Glenn Feben, Perennial Investment Partners’head of fixed interest, sums up the thoughtsof many fund managers. “We see only a modest and temporary slowing in Australianeconomic activity in the New Year and expecta continuation of the recovery story in bothEurope and North America. In our view, while the rally in credit markets has all butbeen exhausted, the favourable economiclandscape does not threaten any serious sell-off in credit markets.” If credit spreadsweaken in 2005 Feben believes it will bemore a correction from arguably extendedvaluations than as a result of any fundamentaleconomic weakness. Bill Entwistle, head of structured debt investments at AbsoluteCapital, comments there is a strong technicalbid with a wall of money still to flow intocredit.

Beware RMBS and corporates flush with cashThat is not to say that fund managers arecomplacent about credit performance in2005. The two most frequently cited hotspots are cashed-up corporates and theimplications of a hard landing in the propertymarket for the bubble that is residentialmortgage-backed securities (RMBS).

Mark Beardow, manager, credit markets at AMP Capital Investors, says acquisitionrisk is clearly a key event risk for the creditmarket at this point of the cycle. “Well-ratedcompetitors in consolidating industries may

be at risk and also those companies withfinancial positions materially stronger thantheir desired financial policies.” In a similarvein, Craig Vardy, portfolio manager, fixedinterest at Barclays Global Investors, is wary of corporates within sectors that are predisposed to returning capital toshareholders in the current environment.Therefore, rather than sectors wherecompanies are building cash, Beardowfavours those that are still benefiting from the strong economy and repairing balancesheets. He also likes property trusts andsome of the swap proxies. Subordinated debt of regional banks is the pick of GeorgeBoubouras, senior investment manager, fixed income at HSBC Asset Management.“Given the increase in competition in thedomestic bank market from the large globalplayers such as HBOS, HSBC and Citibank,we still view the regionals – includingSt.George Bank, Bank of Queensland and Suncorp – as performing well. It will be the larger players that will initially feel the competition given they have so muchincumbent market share.”

While it isn’t his central case, Rob da Silva,managing director of Principal GlobalInvestors’ asia-pacific fixed income, says a sharp decline in the residentialproperty market will likely have negativecredit consequences for mortgage-backedsecurities and for banks. In his view, non-conforming RMBS could be particularlyaffected because they are a relatively newphenomenon. As such, there is no historyregarding their performance in marketdownturns.

Robert Camilleri, senior manager, credit at Portfolio Partners, is one of several fund managers who is concerned that thecontraction in credit margins has beenfollowed by a loosening of credit standards.He says that when margins on AustralianRMBS reached their peak some three or four years ago the risks seemed muted given there were several mortgage insurers,lending standards were acceptable andproperty values were only just starting toappreciate. Camilleri contrasts that with thecurrent situation of RMBS margins trading at, or in some cases through, historical lows,and effectively there being just one mortgageinsurer. Additionally, “the concept of alending standard has become a myth in aneffort by the mainstream lenders to maintainmarket share in that anyone can walk in offthe street and state their income and borrowmoney. To top it off, the sector has seen the strongest growth for a decade fuelledartificially by government handouts and low interest rates.” He asks why spreadshaven’t widened if the risks have increased.

Relative value key in 2005As Fitzgibbon notes, the sharp fall in creditmargins means running yields are lower andthe probability of margins falling further isalso lower. Future returns are therefore going

to be less than the recent experience. Hesees debt/equity hybrids as most vulnerablebecause these deeply subordinatedsecurities are offering sub-bank bill marginsafter the franking credits are stripped out. “I think we’ll see a lot of investordisappointment with those sorts of fundsgoing forward because historic performancelooked great but the real performance going forward can’t be that great just looking at where spreads have got to.”

Credit spreads have beentrading on technicals, such as CDO issuance and hedging activity, forsome time and the rewardfor risk taken from movingaggressively down thecredit curve is negligible.

Fitzgibbon’s expectation for the creditmarkets in 2005 is “steady as she goes butwith increasing risk.” Beardow is in the samecamp. He expects that returns from the localcredit market won’t be of the same quality as in 2004 and also anticipates a higher ratioof spread wideners to tighteners. “It seemslike relative value will be the key, but at somepoint a less aggressive stance will need to be taken.” Vardy concurs. “One thing we willnot be doing is chasing absolute yield. Creditspreads have been trading on technicals,such as CDO issuance and hedging activity,for some time and the reward for risk takenfrom moving aggressively down the creditcurve is negligible.”

Fitzgibbon expects Macquarie FundsManagement’s focus on relative value will berewarded in 2005 and in the following yearspreceding the inevitable downturn. He says in a bull market, managers that rush out tobuy everything look like geniuses whereasmore circumspect managers like Macquarieunder perform. The opposite applies at theend of the bull phase. “As past experiencehas shown, our approach really substantiallyoutperformed our competitors when we’vehad meltdowns in the past. Not gettingcaught up in bull market frenzies and notgetting caught up chasing paper just for thesake of it always stands you in good stead in the long run.”

How to meet client demand for absolutereturn at the top of the credit cycleFitzgibbon doesn’t envisage a major ruction in credit until perhaps 2008 or 2009. In themeantime fund managers must respond tothe shift towards direct investment by theretail and sub-wholesale sectors. In part thetake-up of instruments such as CDOs anddebt/equity hybrids by non-professionalinvestors is a product of the benign creditenvironment. They are frustrated at the

It will be the larger playersthat will initially feel thecompetition given theyhave so much incumbentmarket share.

George BoubourasSenior Investment Manager, Fixed IncomeHSBC Asset Management

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Fund Managers Outlook for 2005

relatively low yields offered by traditionalfixed income and, after a sustained bullmarket, many people are tempted to thinkanyone can make money from investing.

In the case of fixed income, Tony Adams,senior portfolio manager, credit funds atColonial First State Investments, says thereis the additional problem that a managed fixedincome fund doesn’t look or feel anything likebuying a fixed income investment. Beingopen-ended, bond funds don’t have a fixedmaturity date. Nor do they have a promisedcoupon rate – the funds can only distributewhatever they receive. In his view, that is why CDOs are proving so popular – it isn’tjust the yield they offer but because they looklike a bond. Rightly or wrongly, because thereis a quoted coupon, retail investors believethat there is more certainty of the return.

To Andrew Canobi, senior credit analyst,fixed income at INVESCO, one criticalchallenge for 2005 is to work through the risk and liquidity issues with investors whoare searching for absolute or minimumreturns in a rising interest rate environment.In some respects there is a chicken-and-eggsituation when trying to include structuredproduct in managed funds. Open-endedfunds have difficulty with the illiquidity of

many structured products but liquidity andprice transparency will remain elusive as longas structured products continue to be held by the retail and sub-wholesale sectors.Beardow expects asset consultants willaccept structured products over time andbelieves those who don’t will come undercompetitive pressure. He adds though that to date the push for structured product hasbeen led by investment banks rather thanfund managers.

Regardless of whether or not assetconsultants come over the line, Derek Tsui,BT Financial Group’s head of credit, says itwill be some time before he is comfortableputting all structured products into his funds.“The ability to manufacture complexsophisticated products has not always beenmatched by the ability to understand andanalyse them. Consequently we haveavoided many of the more esoteric structuressuch as CDO-squared. We may purchasethem in the future but only when we aresufficiently comfortable that we can fullyanalyse the underlying risks.” Similarly, while QIC has a positive disposition towardsstructured credit and high-yield securities, it believes static CDO pools are inherentlyrisky and should be avoided because itsphilosophy is that investing in CDOs requiresprofessional active management. SusanBuckley, QIC’s general manager of globalfixed interest, says the breadth anddevelopment of available credit derivativeinstruments gives active fund managers theability to structure credit transactions such as managed credit-linked notes to deliverhigher returns for clients with lower levels of risk than passive investments in CDOs. In addition to credit default swaps and credit-linked notes, Buckley also favoursincorporating index derivatives such as theDow Jones CDX.

It is not always easy to offer return via high-yield bonds given the illiquidity and verylimited diversification of the Australiandomestic high-yield market. “It may be moreappropriate to consider high yield as a smallcomponent of an otherwise high-grade fundor to think in terms of global high yield,”comments Canobi. In Vardy’s opinion, thereal issue for consultants remains one ofselecting the most appropriate benchmarkagainst which to properly measure the alphaand tracking error being generated bymanagers who provide high-yield fixedincome products.

The search is on for new productsIt is clear that Australia’s fixed income fundmanagers are going to have to do thingsdifferently. Camilleri says Portfolio Partners is focusing on enhanced cash-type products.“With the recent successful marketing ofING Direct and Dragon Direct, we believe the old-style cash management trust is dead.The investor needs a return consummatewith these offerings. The challenge is can

we deliver a better return after fees withoutdelivering substantially more risk to theinvestor.” da Silva at Principal GlobalInvestors views the development of retail and sub-wholesale segments investingdirectly in innovative products as a logicalmarket response to a high level of demandthat presumably was not being metadequately – or perhaps not at the right price– by the managed fund alternatives. “Thechallenge for managed funds is to mount acompetitive response in the form of productsthat deliver the risk/return outcomes that thismarket wants, using distribution models thatare designed to provide pricing that is seenas value for money.”

The challenge for managed funds is to mounta competitive response in the form of products that deliver the risk/returnoutcomes that this marketwants, using distributionmodels that are designedto provide pricing that isseen as value for money.

Thus around half of the fund managers whocontributed to this article are launching newofferings. AMP Capital Investors is receivingencouraging feedback from clients andresearchers on its new retail-focusedEnhanced Yield Fund. In 2005 the group willfine-tune its line up of products and promotethe launch of its new Core Plus StrategiesFund. The fund, which combines Australianbonds and global credit, is co-managed byGoldman Sachs Asset Management.Beardow also expects significant progress in its efforts to include structured products in portfolios for clients.

BT Financial Group’s Enhanced Credit Fundtrades corporate securities, structured creditincluding RMBS and CDOs, hybrids and high-yield bonds. Tsui says the fund activelyseeks returns from multiple strategies ofperformance within a comprehensive riskmanagement framework. Through thisframework various strategies are rigorouslydefined by their underlying risk/return profilesrather than limited by traditional securitymeasures. According to Tsui, this approachgives the fund great flexibility to takeadvantage of various opportunities acrossthe whole market. Citigroup AssetManagement will focus on further developingits alpha transfer product capability. MitchellStack, director and head of fixed income atCitigroup Asset Management, says there willbe particular emphasis on its global capabilityin the high-yield and emerging debt marketsas sources of added value to a core domesticmandate.

20

The additional problem thata managed fixed incomefund doesn’t look or feelanything like buying a fixed income investment.That is why CDOs areproving so popular – it isn’tjust the yield they offer butbecause they look like a bond.

Tony AdamsSenior Portfolio Manager, Credit FundsColonial First State Investments

001-039 3/4/05 11:59 PM Page 20

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22

Fund Managers Outlook for 2005

Macquarie Funds Management is enjoyingsuccess from its entry into the hedge fundbusiness. Having started with an activecurrency product, the group will look toexpand the range of hedge fund products in 2005. It is also developing its competency in credit management and over the comingyear will be adopting a number of differentstyles, moving into higher risk products and looking at mixing and matching activemanagement and credit portfolios with someother investment styles. Additionally, thegroup is working on alpha transfer products and Fitzgibbon says its currency hedgingsolutions business for superannuation funds is proving very popular.

The lack of diversificationin the domestic corporatebond market continues to be a major challenge for local fund managers.

Amid rising allocations to overseas equities,the hedging solutions business has arisenfrom equity managers’ growing awarenessthat the perceived wisdom that currencydoesn’t matter in the long run is misplaced. “I think it has just focused people’s minds on the impact that currency fluctuations canhave on the overall return in their funds. Withcompetition increasing between super funds,and further intensifying with the choice-of-fund, I think a lot of superannuation fundsdon’t want to be in the position where theycome up with very well thought out strategiesand well thought out portfolio structures fortheir members but forget to think about thecurrency hedging and end up being blown outof the water by having the wrong amount ofhedge or none at all.”

Merrill Lynch Investment Managers isharnessing its global credit expertise to offershort duration credit products such as the MLDiversified Credit Fund and the ML MonthlyIncome Fund. Both access global creditexposures that are swapped into floating-rateAustralian dollars. Stephen Miller, managingdirector of fixed interest and cash at MerrillLynch Investment Managers, says theMonthly Income Fund lends itself to theincome-motivated investors in the sub-wholesale market. “We believe investing for income will be a growing market trend and one that is substantially concentrated in the sub-wholesale part of the market.Accordingly, much of the work we have donein the product space and in terms of businessstrategy is focused on this part of the market.Distributional strategies will also be animportant ingredient in the success ofmanagers engaging this market.”

To da Silva, one of the highlights of 2004 wasthe launch of the Principal Global StrategicIncome Fund. It is a low duration, low volatility

fixed income fund that targets high-incomeopportunities around the globe. Theinvestment objective is to achieve, beforefees, a total return for investors of three per cent per annum in excess of the UBSBank Bill Index when measured over rollingthree-year periods. According to da Silva,performance has been strong and the initialresponse and interest has been veryencouraging.

Adams at Colonial First State Investmentssays it is all well and good to launch newproducts but fund managers must be mindfulof cannabilising their existing offerings. “We have ‘X’ amount of product but we can only get ‘Y’ amount of shelf space fromanyone, whether it is from a planning group or an asset consultant. We have to targetwhat product we offer and we have to focuson what can meet our clients’ objectives andgive them the best value. It is a major productissue.”

Domestic diversification remains difficultIn the meantime, the lack of diversification in the domestic corporate bond marketcontinues to be a major challenge for localfund managers. There are several reasonswhy “true corporates” are still a minority inAustralia’s domestic corporate bond market.The average rating of rated corporateAustralia is in the range of A- to BBB, a partof the rating spectrum that the local markethas been slow to embrace. That was partlybecause the benchmark index cut off at A-.As such, even securities rated A- struggled to attract investors because fund managersdidn’t want to be forced sellers in the event of a credit downgrade. Additionally, the localbank loan market and offshore bond marketshave considerable appetite – at verycompetitive margins – for corporates in thisrating group. Another consideration is thatfund managers and asset consultants aremindful that portfolio diversification becomesincreasingly important further down theratings ladder. In an economy as small asAustralia, accessing a sufficiently diverserange of companies in the lower investment-grade and non-investment grade rating bandsis always going to be difficult. Of course thisproblem isn’t confined to the bond market –banks and financial institutions account foraround a third of the local share market’scapitalisation.

Fund managers therefore don’t view thebroadening of the benchmark index inFebruary 2005 to capture BBB credits as the panacea for the market’s diversificationproblems. Canobi at INVESCO says theindex change will have little impact on the market’s dynamics until there is a greatdeal more issuance by lower-rated credits,something which is unlikely to happen quickly.“Issuance by lesser-rated companies will only be encouraged if fund managers,consultants and end-investors are willing to put more risk into portfolios, price it

appropriately and commit the necessaryresources to understand and manage therisks adequately.”

Boubouras at HSBC Asset Managementcomments that private placements in theBBB category have not always presented the required liquidity in the past. The entry of index managers to a new part of the creditcurve will therefore benefit issuers andinvestors alike because of the improvedliquidity. Principal Global Investors’ da Silvasays while the broader index will provide a deeper investor base for BBB-rated issues at the margin, the change itself won’t automatically lead to more corporateissuance. “The domestic corporate bondmarket will still have to compete with sharppricing from bank loans and with the deeperoffshore markets, in particular US privateplacements, which a number of well-knownlocal companies have tapped this year.”Buckley notes that several Australian bluechip companies such as PBL and Fairfax havetheir only domestically issued bonds maturingin the next 12 months. “It is imperative to the development of the Australian creditmarket that such issuers refinance their debtdomestically and that new issuers are alsoattracted to the market,” she says.

Fund managers are taking a number of different pathsto deal with the limiteddomestic diversificationopportunities.

Fund managers are taking a number ofdifferent paths to deal with the limiteddomestic diversification opportunities. Some,such as Macquarie Funds Management, are outsourcing global credit. That way theycan offer co-mingled Australian and globalcredit product. Likewise, QIC uses a blend of internal and external management in itsDiversified Fixed Interest Fund that includes a global credit component and AMP haslinked-up with Goldman Sachs AssetManagement for its Core Plus StrategiesFund. Others are using their group’s globalcredit expertise to access diversificationopportunities through alpha transferproducts. Merrill Lynch InvestmentManagers’ process embraces the concept of non-benchmark foreign-sourced credit and sovereign securities in its portfolios. “The beta is defined by thebenchmark, the alpha is anywhere that youcan see to extract it,” says Miller. In the caseof QIC, Buckley says that structured productwill be a focus in 2005 as a way to continue to diversify exposures via the creditderivative market and that the group is givingattention to the use of credit default swaps in domestic credit funds. “The developmentof the credit default swap market will presentopportunities in 2005. These products

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Fund Managers Outlook for 2005

provide the opportunity to gain exposure toless liquid securities and issuers not includedin the index.”

Diversification no less a problem in CDO collateralEntwistle at Absolute Capital believes thelack of diversification in the Australian marketextends to the CDO sphere. He says thatrecent history has shown that lower volatilityclasses of collateral such as bank loans andasset-backed securities (ABS) are better and more reliable sources of income streamthan high-yield and investment-grade bonds.

Bank loans are generally senior obligations of corporations secured by the workingcapital assets of the company, are floating-rate in nature, have relatively high recoveryrates as a result of the security package and they have low price and default volatility.Likewise, the mezzanine tranches of ABS are mostly floating-rate and have significantlevels of structural subordination that alsoresult in relatively low price and defaultvolatility. Entwistle contrasts this with high-yield and investment-grade bonds. Theseforms of collateral have fixed-rate coupons,are unsecured obligations, require an interestrate hedge at the special purpose vehiclelevel and are inherently high in terms of price and default volatility. Event risk isanother major component of investment-grade corporate credit that impacts theperformance of CDOs. Therefore inherentlylower expected loss features of this collateralare at odds with unexpected credit eventsbecause of the amount of structural leverageapplied to these transactions, he says.

I don’t think you canmaintain that cycle for a long time withoutsomething nasty happening.

Noting that CDO performance is stronglylinked to the performance of underlyingcollateral, Entwistle says collateralised loanobligations (CLOs) have the best historicalperformance at all levels of debt and equity,while CDOs backed by high-yield andinvestment-grade bonds have the worstperformance. He thinks the point aboutcollateral is important because the vastmajority of structured credit products offeredto Australia’s retail and middle market isCDOs backed by investment-gradecorporate credit. To Entwistle the implicationsare obvious. “Investors are generally notgetting access to the most suitable collateraltypes. Only investors taking advantage of themanaged funds approach to credit have thatluxury.”

Active/passive debate reopens andpotential for increased government supplyFor Feben at Perennial Investment Partnersthe challenge for 2005 is to think creatively

about ways to enhance returns while stillremaining true to the general notion of fixedinterest being the “defensive” asset class.He views the reopening of the debateregarding active versus passive fixed interestmanagement in Australia as one of thehighlights of 2004. “We think this is a veryimportant discussion and think it will againoccupy the minds of many investors in theyear ahead as we all confront the reality oflower nominal returns and the continuedstructural transition of the Australian fixedinterest market from government-guaranteeddebt to corporate debt.”

Only four or five years ago there were projections of budget surpluses thatwere going to be used to pay down the socialsecurity deficit.

That said, in the years ahead, Fitzgibbon at Macquarie Funds Management seespotential for a “massive” increase inissuance from the federal and stategovernments. He believes their underlyingbudgetary positions have deteriorateddramatically in the last five years although this hasn’t become obvious yet amid 14years of unbroken economic growth, lowunemployment, and with property priceskeeping state government coffers healthy via stamp duty. Furthermore, spending oninfrastructure has been constrained and thiswill have to be reversed at some point giventhe growing negative noise surrounding thelikes of trains and hospitals in New SouthWales.

As well as this pressure to increasespending, Fitzgibbon sees pressure comingon the revenue side once the property marketand broader economy cools. “If at somestage the unrelenting boom in the Australianeconomy ends I think people will be verysurprised by how dramatically budgetarysituations will deteriorate.” He has seenresearch that points to new (federal)government bond supply of $100 billion to $120 billion over a three- or four-yearperiod in the event of a recession.

He says the recent experience of the US is instructive. Only four or five years agothere were projections of budget surplusesthat were going to be used to pay down thesocial security deficit. Contrast that with thecurrent US budgetary situation. “Admittedlythere are special factors with the militaryspend but the pace of decline in the USbudget has been breathtaking and the realityis there’s no reason it won’t be just asbreathtaking here if you have the combinationof political pressures on the expenditure sideand the fact that the revenue base of mostgovernments is grossly inflated by the stateof the economy.”

Eyes on CDOs when credit cycle turns downAgain looking far beyond 2005, anothercommon theme is how CDOs will performwhen the credit cycle turns down. Entwistlesays the cycle-low credit spreads haveimplications for investors, particularly instructured credit where investors are taking a levered credit position. “Tighter creditspreads have driven structural innovation inthe search for maintaining yield in structuredcredit. That has been at some cost in termsof additional complexity and higher risk forthe less savvy investor.” He points to thesynthetic CDO-squared market where hesays the economics of these transactions are driven by only 10 to 20 per cent of thecollateral with the remaining 80 to 90 per centcontributing nothing in terms of economicsexcept portfolio diversity. When the creditmarkets experience some stress Entwistlepredicts the more levered structures willinvariably be the ones to be impacted first.“Under this scenario, the concept of a barbellapproach to credit will have true meaning to the participants who have the biggestinformation disadvantage – that being retailand middle-market investors.”

Adams at Colonial First State Investmentssays the ramifications of stress in a particularindustry segment back through the CDOswith their leverage and the debt hedging willbe phenomenal. “It has to be when you leversomething that hard. When it works, it worksreally well. When it doesn’t, it blows.” Hiscolleague, Philip Preston, senior manager of credit at Colonial First State Investments,says now that pricing has come down, thenext thing that has inevitably happened in thebenign credit environment is that structuresand credit standards are really starting tochange for the worse. “I don’t think you canmaintain that cycle for a long time withoutsomething nasty happening.” TonyFitzGerald, Colonial First State Investments’head of credit funds, adds: “It is just like themid-1990s again. Spreads and structuresdeteriorate in some belief that the creditcycle has gone away but guess what – ithadn’t. We are already seeing corporatesstart to support shareholder returns withspecial dividends and other shareholder-friendly activity. These are the first steps to increased leverage and a return to thereality that if you own a five-year bond, a lot can change in that time.”

Vardy at Barclays Global Investorscomments it may not be all bad for fixedincome managers. “If we were to see severalcorporate failures or big-name ratingmigrations there could be a shift backtowards more conservative and transparentcredit strategies. That would present anopportunity for us.”

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26

Roundtable – TD Securities

Pashley: 2004 fixed income, I think a numberof things have taken people by surprise. In preparation for today I thought it wasworthwhile to collate some of the thoughtsfund managers put to us in early January.Each year we try to get a theme from the fund managers we speak to, to get a handleon where TD can position itself in relation to offering product, outlining our stanceregarding the economic backdrop and our view on rates.

Here are some of their comments:

“Credit spreads were way too tight in January, so it was a bit crazy to overweight them.”

”If you're not short directionally, you're crazy because rates are going higher.”

“Why on earth would you be holding longbonds right now with a yield curve this flat?”

“Honestly there's absolutely no reason tohold Australia at 200 basis points over theUS – see you later at 400 basis points.”

Here we are in December, 12 months on, and using the Lehman credit index as abenchmark, the credit spread is 14 basispoints tighter than when we started. We'vegot 3-year bond yields 50 basis points lowerthan they were in January when thosecomments were made and the 10-year bondyields 70 basis points lower than they were in January. Furthermore, the yield curve is 20basis points flatter. The Aussie/US spread is now 50 basis points tighter.

With this is mind, I then stepped back andlooked at the general performance of theactive fixed income funds within Australia. I was surprised to see (basis October data)there weren't too many domestic funds that were far away from benchmark. What I wanted to do as an icebreaker today is work

Chairman:

Chris PashleyManaging Director, Capital Market SalesTD Securities

Participants:

James WrightHead of Fixed IncomeING Investment Management

Stephen KnightGeneral Manager, Treasury & Deputy Chief ExecutiveNSW Treasury Corporation

Michael HallVice President & DirectorCapital Market Sales TD Securities

Lindsay SkardoonDirectorSpectrum Asset Management

Julian FoxallPortfolio ManagerPIMCO

Roundtable

Stuart GrayCredit AnalystDeutsche Asset Management

Rob da SilvaManaging Director, Asia-Pacific Fixed IncomePrincipal Global Investors

Stephen MillerManaging Director, Fixed Interest and CashMerrill Lynch Investment Managers

Michael KorberCredit SpecialistPerpetual Investments

Louis DavisHead of Financial Institutions Credit ResearchNational Australia Bank

Ross BoltonPortfolio Manager, Fixed InterestState Street Global Advisors

Primary Markets ForecastIn a roundtable discussion sponsored by TD Securities a group of leading fund managersexplain how they ended 2004 with very good returns despite starting with positions based on expectations that turned out to be misplaced.

They see little reason for credit spreads to widen noticeably in 2005 except for specific namesso for the most part credit will continue to be source of alpha for fixed income fund managers.Nor do they anticipate that the changes to the domestic benchmark bond index will make agreat difference. For the foreseeable future the credit market will therefore remain one of short-duration and high credit quality that lacks diversification of issuers.

Another challenge that fund managers face is the investment banks' move into the sub-wholesale market to exploit the shift to direct investment. That is particularly so when yields arelow, when the bull run in credit hasn't allowed fund managers to show their value, when fundmanagers are paid to outperform an index rather than to provide a specified absolute return andgiven there are so many mouths to feed between the end investor and the fund manager.

For further information, please contact TD Securities on:

Chris PashleyManaging Director, Capital Market SalesT 61 2 9619 8866E chris.pashley@tdsecurities.com

Michael HallVice President & DirectorCapital Market Sales T 61 2 9619 8866E michael.hall@tdsecurities.com

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our way around the table and hear commentsfrom each of you as to whether or not I gotthe themes correct at the beginning of theyear, or whether I was just being spun a story.Alternatively whether or not people were very quick to realise that those main themesweren't going to play out and were able torecoup some of the clear losses that wouldhave been made by that initial strategy and if so, how that came about.

Foxall: I'm the Portfolio Manager at PIMCOhere in Sydney. Out of the Sydney office welook after our Australian portfolios. As well as global portfolios even though they'redirectly managed out of California. I don'tthink our position at the beginning of this year was much different from what Chrissaid. Certainly we thought credit spreadswere too tight, and we had concerns that with the maturities that were coming up inSeptember and October there might be somedifficulties. However obviously they weren't a concern as the year went through. In termsof overall yields we expected yields to gohigher through the year and I suppose for thefirst half of the year they did do that but thenin the second half things turned around. Asfar as the Reserve Bank was concerned wewere thinking they were going to raise ratesat some stage through the year but in nohurry to do so.

In terms of how we positioned ourselvesthrough the year, our ability to put globaltrades in our portfolios has helped us thisyear. I would say through the year we'vetaken advantage of the spreads, not so muchin credit but in terms of swaps. We've had a curve position which is relatively neutral and that's not done us too much harm andwe've also had global positions on whichhave helped us perform through the year. So at the end of the year our performancehas turned out to be pretty good.

Skardoon: We run an absolute return fundand we specialise in credit. We're probablygoing to be the standout here in that weprobably disagreed with everything that wassaid. We certainly thought that credit couldcome in. The reason for that, if you look atcredit over the last 15 years, particularly inthe US, credit spreads were still trading wellabove average. Therefore despite the fact it had contracted quite a bit, we saw therecould still be a lot of contraction comingthrough.

The other thing we thought of at the time wasthere was a war that was being funded. If youlook at the amount of money that was beingpumped into the US economy, if it wasn't upand running hard and fast by December lastyear then there was something inherentlywrong. You could see that if you went to aPolo store in New York where normally theywere 15 deep, you could walk in there andwade up to the counter without having to get in front of anyone. The same anecdotalevidence is here in Australia as well. If youweren't a Harvey Norman then generally

most retailers are struggling, particularly in the clothing and shoe side. They willcontinue to struggle, even more so givencompetitive pressures coming out of China.Therefore we thought if you looked at the market generally there was a lot ofopportunity there for credit not to weakensignificantly as it was unlikely that rates were to rise.

We didn't see a case for interest rates to rise.In fact we probably would have been arguinginterest rates should have been falling, but having said that, the way the ReserveBank of Australia (RBA) has handled interest rate policy this year or monetary policy, it has done a fair job. If you're looking downthe credit curve or further out on the track,credit now seems to be trading well throughits mean (average). Certainly credit is trading through it's mean and then standarddeviation, whether you look at cross-overs, B indices, European high yield, US high yield,they're certainly trading lower now. If you lookat BB indices they're trading-lower as well.About the only thing that doesn't seem to betrading too far out of norm is the BBB area.Therefore if credit spreads could contract anyfurther I'd probably be long the BBB sector. It is certainly an area in Australia that seemsto have well and truly forgotten but you'regoing to have to be very careful on who youpick – the free lunch is no longer there in thelong-term.

Knight: Steve Knight of NSW TreasuryCorporation (TCorp). On the fundsmanagement side of our business, we manage about $15 billion of assets onbehalf of our clients. Our clients are basicallyall state government entities. The money we manage is split pretty evenly betweenfunds that are outsourced, where we act as a manager of managers with the fundsallocated across the asset sectors, and about$8 billion in funds that we manage in-house in cash and fixed income mandates. Typicallywe tend to be at the very conservative end of the credit spectrum which really reflectsthe nature of the clients' requirements or the liabilities that we are managing against, so we have very little credit in those funds or in their benchmarks. We have tailoredbenchmarks for each of those funds, and wetend to be investors in the supranational areaand in the higher grade part of the spectrum.

So just coming back to the comments Chrismade, I guess in the area of credit spreadswe would have been in general agreementthat we thought they were tight at the start of the year. As I said given the nature of thefunds we manage, lower grade credit spreadsaren't really what we spend most of our timethinking about because we're not investingdown the credit curve. If I look at how we'vegone on duration management of our fundsover the year we've done okay. We've addedvalue but we've tended to have to be quick on our feet to do so. We got a few right and a few wrong but we managed to add value bygetting a few more right than we did wrong.

Institutional investors donot get the opportunity to capture any cross sellfrom the debt capitalmarkets. Loan pricingmargins are riddled withcross sell expectations,additional documentationsupport, relationshipoverlay and so on.

Chris Pashley

The Reserve Bank toldyou they were going to have to tighten againprobably and lo andbehold 12 months laterthey've done nothing and things are actually no clearer after lastnight's speech.

James Wright

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The one comment you made and I wassurprised there was so much consistency in view, was the view to sell the Aussie/US at 200 basis points. I guess our perspectiveon that was driven more by what we see onthe other side of our business. We are anissuer into markets both domestically andinternationally and we've seen a decade-longcycle in terms of the correlation between theAussie/US exchange rate, the interest ratedifferential and the demand for paper fromoffshore. We saw that as a real trend over2002 and 2003 with the large interestdifferential and the improvement in theexchange rate driving demand for $A paper.We've seen very strong demand for ourpaper from offshore and a lot of it was basedon both the view on the Aussie dollar and alsothe interest rate differential, compounded bythe desire for offshore investors to diversify a bit from the $US. When we came to thestart of this year, while the Aussie had made a large part of its adjustment, we still feltthere was room to move in terms of furthertightening of the interest differential so thatdidn't surprise us in terms of that trend.

Bolton: Ross Bolton from State StreetGlobal Advisors. SSgA manages bothindexed and enhanced funds. We have about $4.5 billion under management in thedomestic bond market. At the start of the2004 we were of the view that the absolutelevel of interest rates was probably too lowand may well move higher over the year.However, we still saw value in overall creditspreads and we were quite happy to beoverweight specific credits. We took the view that if we could avoid the major creditexplosions, were able to maintain a healthyrunning yield, we should be able to add somevalue without too much risk. In terms of theduration, we thought that you could be on the shorter side, but would need to be readyto get in and out quite quickly. We like toconcentrate on the momentum of the market.We were able to add some value through this approach. The remainder of our outperformance for the year has come from the contraction in credit spreads.

Davis: Louis Davis of National AustraliaBank. The view we had about credit goinginto 2004 was essentially one that we sawthe issue being a lack of supply. From a creditspread perspective, we thought that goinginto a cyclical upturn in an environment where you had deleveraging and a period of economic growth, this was the naturalenvironment for credit spreads to come in.Coming in on top of that on the credit defaultswap (CDS) side, we've started seeinggreater amounts of CDO squared issuance.Our house view is for interest rate rises in2004 which haven't come to pass. We stillsee with regards to credit similar trends forthe first quarter of 2005, being very much acontinuation of what we have seen, simplybecause we still see the same fundamentalsin play.

Korber: Michael Korber and I've been atPerpetual Investments for the last couple

of months, prior to that with Macquarie FundsManagement. The view we took at the startof the year that credit spreads did seem tight.I think this was partially an intuitive feel.Spreads had contracted an awful lot and thaton the face of it value was harder to see.The way we try to look at markets is to lookbroadly and look longer term and to focus onthe long term values. On that basis, spreadswere still relatively generous for non-volatile,non-risky periods. And all the other aspectsof the market that we look at suggested thatthe outlook was positive. The environmentwas positive and the default statistics weremoving in a positive direction so while on thegut feel spreads seemed tight, on the moreobjective level spreads, particularly in someof the better-rated sectors like residentialmortgage-backed securities (RMBS), stillseemed pretty generous. So despite that gutfeel we concluded that there was still valueavailable.

The way we looked at extracting that valuewas to identify the sectors that seem to havelagged the contraction. The key one that weidentified was the subordinated debt areasand some of the banks, financial institutionsetc. We tried to see areas where there wasstill some fanning left between ratings bands,absolute valuations, and the BBB sector. Part of it was not getting too negative on theabsolute values and finding areas where thevalues have lagged. If you look at longer-termperspectives, tight spreads can be sustainedfor an awfully long time. When I first startedlooking at these markets, RMBS were beingissued at 18 basis points. We're currentlyclose to being back to that and I guess thatjust reinforces that there's some pretty long-term things to keep in mind in these markets.

Miller: My name is Stephen Miller and I'mfrom Merrill Lynch Investment Managers. We manage only a modest amount (close to$2 billion) in Australian fixed income and cashassets but I will say positively it is growing.

In terms of our process, one thing we verydeliberately do is that we allow ourselvesquite liberal and diverse investmentstrategies including making global allocations,including global yield curves and global credit.

In terms of our outlook at the beginning of the year, we were very much of the view thatdomestic rates would rise. I think like a fewother people around the table, we had gotover being dogmatic about it though anddidn't really have a short duration position on for the whole year and tried to be“smarter” in terms of how we reflected thoseviews in portfolios. Fortunately in the end wedid manage to eke some performance out ofthat view. Again, where we probably did muchbetter was rather than focus it exclusively in the domestic market we put a lot of thoseduration bets into the US and on a “spread”basis particularly against Europe. I willconfess to being a recalcitrant where Japanis concerned - we keep trying to short it butare still waiting for that position to work. Ourview domestically too was that we'd probably

Roundtable – TD Securities

We are an issuer into markets bothdomestically andinternationally and we've seen a decade-long cycle in terms of the correlation between the Aussie/US exchange rate, the interest ratedifferential and thedemand for paper from offshore.

Stephen Knight

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see the Reserve Bank continue to raise ratesin 2004. We thought bond yields here wouldrise and we did get that one wrong.

On credit spreads, I guess we had a little bit of an unfashionable view if the rightrepresentation of consensus was that creditspreads would widen in 2004. We did thinkthe credit spreads would likely narrow. Whilespreads had narrowed somewhat by early2004, they had done so from what wethought were elevated levels, particularlywhen compared with any sort of long-termaverage. I think we had a view too that if youlooked at the extent of balance sheet repairthat occurred in the US corporate sector,then on some metrics, it was as healthy as it had been since the 1960's and I think that'ssomething we'd placed a fair degree ofemphasis on.

We perceived that the corporate governanceenvironment was shifting quite markedly sothat in the wake of the Enron and WorldComfiascos that the corporate governance regimehad really tightened up and that the tighteningof that corporate governance regime wassomething that would underpin spreads. I think consistent also with our macro view,we had a fairly sanguine view of the USeconomy and we had a fairly sanguine view of the Australian economy. We thought thatthe macro backdrop, even one in which theFederal Reserve would be raising rates,wasn't one that should cause you to get tootroubled about credit spreads. I'm talking witha global reference here because again I thinkwe were looking to take our credit bets inglobal markets. We deliberately tried to fish in a deeper pond, looking at the US andEuropean markets, even the sterling marketand not necessarily confining ourselves tohere. I think Michael made some very salientpoints about the RMBS sector. That's an area that we were also reasonably active andthat's also something that's given us a bit ofperformance in 2004.

I will say too that again I think it is somethingthat struck me when you made your originalcomments is, we have this duration view, we have this credit view and we have thesespread type views. I think that domesticmanagers might want to throw a currencycapacity into the mix. It is a diversified sourceof value-add for a bond portfolio and one that we made very effective use of (mainlythrough short $US positions) in 2004. I raisethis as part of a broader point that one thingwe did well which we haven't done as well in the past was to make full use of a diversearray of risk strategies. Therefore we weren'tcaught by the fact that our view was thatrates in Australia would go up and they didn't.We might have not done as well as we couldhave done there but we did okay because we had short positions in the US and spreadpositions against Europe, we had a bit of a short US dollar position, we were longcredit and I would have thought reasonablyaggressively so and long global credit. Wehad some foreign curve positions on – a USflattening and a UK steepening – and those

probably made us a bit more money as well. I think when you look at a universe of managers and why they probably appear to have done okay is one thing that we've alllearnt is you don't want to put all your eggs in a duration basket, or all your eggs in acredit basket, or all your eggs in a spreadbasket. What we've learnt is to diversifythose sources of risk which is probably why in the main we've sort of escaped despite our directional domestic rate forecasts being awry – I mean we as a group aroundthis table, we collectively escaped more or less unscathed.

da Silva: My name is Robert da Silva. I headup the Asia-Pacific fixed income operations of Principal Global Investors here in Sydneyso we cover Australian portfolios and Asianportfolios. I guess our views at the beginningof the year, to summarise, was we thoughtcredit was probably slightly on the cheapside, rates were too low and that they would go up, the US/Australian spread was neutralish and the yield curve was too flat. In terms of credit spreads, our view was people felt they were tight because they had moved a lot. However that movement was unwinding a lot of riskaversion rather than anything else and was then being supported by fundamentalmovements in the economy, default ratescoming down and balance sheetdeleveraging.

A lot of things that Steve has been saying, I agree with 100 per cent. We hadincorporated that view that the corporategovernance position was changing andcontinues to change because the Sarbanes-Oxley Act is still being implemented in astaged kind of procedure. Therefore it hadmoved from very cheap to slightly cheap andthe momentum was still in the right directionso we felt positive about credit. We didn't feelgreat about rates but didn't take a position onit. We stayed neutral as far as duration wasconcerned, thank God, basically because wedidn't see the inflation and wages pressurescoming through that should have fed throughto rates and therefore, while we thought rateswere too low we didn't feel motivated to takea duration position. Similarly with the yieldcurve. It was too flat but we didn't feelmotivated to take a position on that either.Therefore most of our performance has come from avoiding positions in those twobecause the motivation was to take thewrong position. Therefore, we didn't take the wrong position which is good and oncredit a couple of things: RMBS, I agree withthe sentiments raised there; another area wehave a long and successful history is hybridsand that is an area we felt would continue to add a fair bit of value. Hybrids have had a phenomenal year and we played that one fairly successfully. We also looked atindividual credits that we thought were cheaprelative to the market or cheap in general andsome credits which were a little more highbeta. The thing is in this sort of rally, astypically happens, you've got the high betastuff outperforming the low beta stuff.

Corporate loan marginsmay provide opportunitiesfor the capital marketsgiven the changes in theindex in January.

Michael Hall

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Therefore, the BBBs, the hybrids and thenames that had been unloved made verysignificant moves and we were able tocapture a fair bit of that. In the end it puttogether a pretty decent year as far as performance goes with which we'repleased. The challenge is to avoid the wrong decisions again coming this year.

Gray: My name is Stuart Gray fromDeutsche Asset Management. I'm a CreditAnalyst there. We tend to have a strongemphasis on credit in our portfolios. We manage $6 billion in Australian dollarportfolios and the offshore mandates that we have are managed out of our London or Philadelphia offices. At the start of the year we did have a view that credit was tightbut didn't think there was anything that wouldwarrant spreads blowing out. We thought the outlook for corporates was good. Theyhad gone through some pain in the previousyears, reduced their cost base and theirperformance going forward was good so we couldn't see any problems from thatregard and as a result we didn't change ouroverweight position to credit at all. We didsee some value in certain sectors that othershave touched on such as RMBS and Hybrids.We were already invested in subordinateddebt, both on banks and on hybrids, and thatparticularly paid off for us. As for absoluteinterest rates, we thought rates were goingto go up but managed to avoid hurtingourselves too badly there. Over the year we contributed from duration by keeping our bets small and just trading around when we had a particularly strong view on movement in rates.

Wright: I suppose it isn't hard to have startedthe year thinking that interest rates had torise. The Reserve Bank told you they weregoing to have to tighten again probably and lo and behold 12 months later they've donenothing and things are actually no clearerafter last night's speech. I think Rob is right,with duration. It is half way about not puttingthe position on and getting it wrong as gettingit right. We've had a reasonably goodduration year but basically with bond yieldsbelow the cash rate as they currently are,they don't look too much value there. I guessit has traded in and out of value all year andwe've done reasonably well in capturingsome of that.

On the credit side, with Rob again, I think we started the year with credit a little bitcheap. We were pretty comfortable on the2003 outlook and we were very comfortablethat the US would come back and job growthwould eventually start to come throughalthough we waited a little bit on that viewearly in the year. Certainly the payrollnumbers that did come through vindicatedour position and credit just roared in. We'vehad a pretty successful year in that hybridhigh yield space as well. Some of ourproducts in that area have done particularlywell. With credit portfolios it is hard to nothave had a good year in credit. There haven'tbeen too many disaster stories. Therefore it

is an unusual year where you're convincedrates have to rise and yet we're trading at an incredibly flat curve through the cash rate.Credit spreads look tightish but it is hard tosee too many potholes going forward giventhe economy is pretty robust and corporatebalance sheets are in good position and thereare not too many things that would warrantcredit spreads blowing out.

Pashley: Thank you very much for yourcomments. Now lets talk about 2005. We'veheard plenty of talk on credit, and the risksassociated with the market at these levels.Local fund managers with the overweights in credit have been able to claw back poorperformance on directional rate trading. I think we all agree global rates at these levels continue to support credit spreads on a excess return basis, if 2005 is the yearto be short rates what do we do with theseoverweights?

Miller: Look, I think like all years we expect2005 to be interesting and like all years weexpect to get some things wrong but that will hopefully be offset by getting more thingsright - i.e. we should continue to aim fordiversity in value-adding strategies. I thinkJames' concluding comments about spreadslooking tight are right. However, again I thinkthere are things that we do sometimesoverlook that can keep us sanguine aboutcredit. If your view is that the net cash flow of the US corporate sector is the best it hasbeen since the 1960's and you think the US economy will muddle through and youtake the Fed at its word that it will bemeasured and neutral, sort of some distancefrom where we are, then real rates are stillquite low by cyclical standards, whatevermetric you care to use, so I'm thinking that a reasonable overweight credit position is still a desirable feature of bond portfolios.

I said I was a recalcitrant with respect to Japanese government bonds. I'm arecalcitrant with respect to the Aussie bondmarket too. We will probably be structurallyshort? Now whether that's wrong or right,we'll know in 12 months time – but what weneed to do is to continue being a little bitmore clever in determining how we play thatdirectional view. I think, for example, thatdespite 2004 being a difficult year in trying to work out what the appropriate directionalview of rates was domestically, not many ofus have lost money. Some of us even mademoney. I think it is a testament to the fact that we adapted our game plan about how we played it. I suspect whatever your process is, you presume you have some form of riskbudget, you have a set of strategies thatcorrespond to some sort of risk limit and that we will give emphasis to those things as 2005 unfolds. However, that I don't thinkfrom a global perspective that credit is waytoo expensive. It might look tight but Isuspect that you probably should remainoverweight credit in a fixed income portfolio.

da Silva: I agree with those sentiments. The thing about credit is the conditions are

If you look at credit over the last 15 years,particularly in the US,credit spreads were still trading well aboveaverage.

Lindsay Skardoon

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looking pretty reasonable and there's noparticular reason for credit spreads to reactunless there's some fundamental shift inthose things. Default rates are still forecastto look good, companies are still generatingfree cash flow, earnings are still runningpretty well, everyone knows there's a measured pace of tightening going on so toa certain degree that is factored into people'splans etc. Therefore to me I would expect it tobe a year of clipping coupons. Spreads mightbe tight but what is the reason for them to blow out? I can't see them rallying muchbut then there are lots of things you can't see though that happen anyway so maybespreads rally. However I'm more likely to view it as, clip the coupon and that will still be a positive contribution to performance.

You've got to watch out for the risk side ofthe equation and volatility is very low acrossmost markets. That is probably an issue. If you think about what things are expensivethen equity market volatility is very low and I think that is one of the issues. However I think overweight credit is still a reasonableposition to take. You've just got to be a bitmore wary about it because you're travellingin waters that aren't cheap anymore. On theother things, can you have the bond belowthe cash rate? I don't like it. The three-yearbond yield below the cash rate – I really don'tlike. The market has got something in its mindthat a lot of people around the place don'tseem to have certainly in terms of economicfundamentals, at least speaking for myself.Therefore, in terms of what's expensive, that looks more expensive than credit does. I might be setting myself to make some new mistakes that I avoided last year. As for hybrids I think they're probably moreexpensive than historically. Within their own history they look bloody expensive andrelative to where other credit spreads are,not so much. Therefore, again it is an areawhere you can add value but you've got to be more careful about how you play it.

Miller: Can I just make a supplementarycomment on product? I guess so we're notall dancing a jig and feeling happy. If there was one thing we do worry about and again it is sort of what we would like to see in adevelopmental sense in the Aussie market,we do see it as a fairly short maturity, highcredit quality market. I think in a productsense, one way we've addressed that is tovery deliberately extract a lot of our creditalpha by going global so you can fish in amarket that has deep liquid, BBB offeringsand you can get a properly well diversifiedportfolio. If I was to pick a pitfall with theAussie market it is that it doesn't appear to be well diversified. That in the corporatesector at least, it is very much a shortmaturity, high credit quality market and I sometimes wonder about the longevity of the product that seeks to exploit the creditopportunities available in the Aussie marketonly. I'm not saying it is a no-go. If you want a universal credit product, I think you've gotto, in a product sense as a fund manager, itseems to us that it is beneficial to have an

offering that includes the ability to accessoffshore credit, and swap back however youwant to swap it, back to floating or fixed.

da Silva: But in terms of issuers, one of theother things to bear in mind is the change in the index which is happening in February.That is going in the right direction in terms of the things that Steve is talking about. Look at the way the benchmark is changing.Managers are going to follow that, at leastthe managers who haven't been using thebroader benchmark anyway which we have,so more BBBs, etc etc, so people will wantthat naturally because the benchmark nowhas it or will have it.

Pashley: So with the benchmark change, forthose managers here who have had the abilityto trade outside the benchmark, do you feelyou've lost some of your competitiveadvantage?

Skardoon: In answer to that, we actuallywelcome and embrace the idea of wideningthe index. As a non-index manager, we wouldlike to see more people get involved in creditand that in itself will lead to a greater varietyof product. One of the great shortfalls of thismarket is, looking around here; everyone is used to working within silos. Most fixedincome portfolios are a law unto themselves.Hybrids are now starting to gain a little bit ofmomentum and they're starting to build a siloaround themselves as well, where in actualfact they're a fixed income product and theyshould be residing within a fixed incomeproduct. Having said that, more peopleinvesting means there is going to be moreissuance. Whether that means tighteningcredit spreads or not, the market will dictatethat. So where do we go from here? I thinkthat in itself will mean that there will be amassive movement within credit. We'll seecredit tightening up, so if you are long credit,happy days are going to be here for a while.We're having some duration ourselves. We'rebasically floating rate and we tend to take theview that we're there to manage credit andnot there to manage duration so strip out allthe duration effects as far as possible.

Coming back to what Steve and Rob weretalking about on credit spreads. One of theinteresting things that I think a lot of peoplemissed this year was the fact that when you look at the main reason credit spreadstightened up globally, a lot has to do withCDS and collateralised debt obligation(CDO) issuance, particularly to hedge funds.Now the real driver will be how these hedgefunds perform this year. Most are not doingthat well so does that mean they get newmoney or whether they get redemptions. If there are redemptions, watch out. Creditspreads are blowing out because there isgoing to be a lot of unwinding of defaultswaps and the like. If they're able to maintaintheir position then the status quo holds.

The real issue I suspect is there is a lot of talkabout China exiting the US Treasury market.If they turn around and just buy US credit as 31

Yields overall haven'tchanged much over theyear even though wethought they might, soyou've had a lot of fundsbased in Australia withthe credit market toosmall to provide enoughinvestments for themoney that's available.

Julian Foxall

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a surrogate for US Treasuries they'll get a slightly better yield and then that is going to compress credit spreads. If they ceasebuying US credit, given the amount of whathas had to be issued over the next year or two and if we believe the story of USeconomy on fire, you would expect to seerefloating of balance sheets, i.e. more debtborrowings so therefore more issuance. Is that going to happen? If that happens it'llbe very interesting to see what happens tocredit spreads. I suspect they should start todrift out. If we don't see that happening thenonce again that's going to be an underlyinglever on credit which I think will actuallycrunch it inwards.

Foxall: One of the issues you touched onthere was funds chasing too few securitiesglobally and so we've seen in the last 12months margin compression from peopleseeking yield. Yields overall haven't changedmuch over the year even though we thoughtthey might, so you've had a lot of funds basedin Australia with the credit market too small to provide enough investments for the moneythat's available. Hence people like us havedone pretty well by people looking for globalcredit product. However, otherwise, globallypeople have also been investing in Australiaand other credit markets such as emergingmarkets. You mentioned the Chinese: even if they don't buy credit, they're taking theTreasuries and someone else is saying the Treasuries are too expensive so they go up the credit curve and buy the credits.Therefore you're just pushing everything out and that has led to globally compressedyields.

Looking forward to 2005, it sounds verymuch that we're thinking exactly the same as we were around the beginning of 2004. I would say that it is exactly not going to bethat, but what it is going to be is difficult towork out. I would say on the credit basis,even if we haven't seen any reason whycredit spreads should march out, Lindsay hasbrought up the only one I can think of, whichis whether there is a structural problem withthe people who've been buying the margin in the CDOs. If there is a structural problemthere, sure you'll get a widening out, but interms of real money investors, I think theystill want yield. They don't want yield levelswhere they are but they are, going to stillwant carry as the larger element of it ratherthan capital gain itself.

As for the Australian credit market, as Rob said, I don't think the change in thebenchmark is really going to make that much difference because I don't think there'sstill that many issuers that can come to themarket to expand the BBB segment to makeit anything like what you get in the US. You're not going to get Lehman Global Agg-type of credit exposure here and that is stillgoing to mean that people, for diversificationpurposes, are going to look overseas.

The other thing about the new index is thatincluding fixed rate asset-backed securities(ABS) and RMBS is broadening the

spectrum, which I think is good. However,from our point of view, a lot of our creditexposure is floating rate anyway: RMBS,corporate floating-rate notes (FRNs),commercial mortgage-backed securities(CMBS). Stuart, I think you mentioned thecredit exposure is all short duration and is allrelatively good or in fact excellent credit, but I think global credit is by far the best place to get diversification and the sort of returnsthat you need. Going forward, if yields are the same at the end of next year as they were at the beginning of this year, I'll be verysurprised. I wouldn't be surprised if they'rerelatively lower.

Pashley: Julian, your boss is very vocalabout PIMCO's stance on a number ofsectors. Does it make it difficult for you to take a different stance from PIMCO's base case?

Foxall: In terms of how we manage credithere for the Australian portfolios, we have the advantage of providing sources of carryfrom the global market as well. Therefore,even if we don't take credit per se there areother ways of getting the carry out of globalmarkets, through the US curve or mortgagesor whatever. Therefore we are substitutingcredit for other forms of carry which webelieve have a great deal less risk. As far as the Australian market is concerned, giventhat it is a great deal better credit than globalmarkets, our exposure is mainly in the frontend in terms of duration, that is FRNs andRMBS. We're not overweight that's for surebut we're not significantly underweight either,by the time you add in all the different formsof carry.

Bolton: In regards to the proposed indexchanges from February 2005, while a move in the right direction theoretically, given what will be on issue at that time, the actualphysical changes will have little impact on the duration, or yield, of the index. Therefore,what we would like to see occur in 2005 is an increase in the number of BBB corporatescoming to the market. However from what we heard, it doesn't look like we're going to be inundated with such corporates comingto the market in the near term.

We've been interested in the wrapped dealsfor quite a while. They've done fairly well as have a number of the subordinated debtdeals we've participated in over 2004. We would look to be involved in more ofthese sorts of issues in 2005. Looking at2005, we're probably still seeing interestrates moving up a little, but do not expectsignificant increases. We do not see a majorsell-off to the extent that credit spreadsshould be significantly hurt. With this in mind,the one thing we have done is move ourspread duration a bit shorter while still lookingto target a certain yield level. This has workedwell over the last three months. We willcontinue this approach into 2005. We're stillable to maintain a good yield and a fairly welldiversified corporate exposure, but, at thesame time keeping the spread durationsomewhat shorter than index.

As for absolute interestrates, we thought rateswere going to go up butmanaged to avoid hurtingourselves too badly there.

Stuart Gray

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Davis: Probably the one thing I would like to point out that we do see changing in 2005is we do see the correlation that has beenobvious in the credit spreads this past year to start to break down. The point we broughtout earlier about how credits have over-performed and compensated for theunderperformance, I think that is going to beharder to replicate in 2005. There are alsosigns that we're approaching the top of thecredit cycle. Traditionally what has signaledthe change of environment has been eventrisk, which we have seen more of in theAustralian market in the last six months.

The kind of event risks in 2005 that you'regoing to see will result in greater sectoralvariance in spreads. We would see thatidentifying, and managing that risk, to probably being one of the key creditdecisions. People are going to have to pickout the kind of credits that we've seen asevent risk comes in two forms. Not just intakeovers but also in structural changes in the market so we do see that on thefinancial market side. If you look at what GE is planning to do in the local market that is abig change, so one of the areas that peoplewill be increasingly focusing on will be thefinancial sector, but there are other sectors.

So, we do see in some ways it is a return tothe 1980s. In the 1980's the credit attentionwas a sector by sector issue. We believe it isgoing to be a feature of this year. We believethat majority of your time is going to befocused on one sector. But, I think that is going to be the one big characteristic of 2005 that the variance from the averagecredit spreads can be quite high andmanaging that will be the thing to look for.

Pashley: 2001-02 credit spread volatility is still relatively fresh in our mind; spreads are back to historic margin.

Skardoon: Just coming back to structuralchanges, do you also think you'll see banksadopting a far more responsible attitude tothe way they lend? The reason I bring this upis, I look at a particular issuer that tried to doan issue earlier this year. The issuer at bestwould have been rated a BB. When the Bankwent to the market using their capital marketsteam to determine the credit spread, themarket gave them what would have been a fair price, approximately Bank Bill SwapRate (BBSW) +200bps). That bank then tookon that loan at roughly 50 basis points overswap rather than explain to the issuer that thereal level to issue was BBSW +200 and whythat was a fair level. As far as the seriousimpediment to this market going forward, you don't want lower-rated issuers getting a feeling that their spread should be 50 basispoints or should be 100 basis points overswap because that is where the bank will lendto them. If I look at this market place, I look at a Telstra loan and I look at a Woolworth'sloan, there's hardly any difference in basispoints spread between them. Okay there is a bit of a fee difference, but as far as where

they are borrowing against BBSW there isvery little difference. We're talking a well-rated, AA+ to at best an A- because it is thebiggest retailer in Australia but if you look atthe company on a global basis it wouldstruggle to achieve it's A-rating more likely itwould be rated in the BBB rating band. To methat is structurally the most important aspectof our market place that has been totallyoverlooked. What is going to force the banksto get loans off their balance sheets and getthese issuers into the market place at faircredit spreads? When that happens, then wewill get a decent BBB market and we will geta decent BB market.

Davis: I think you're basically talking aboutBasel II. Much of the emphasis of Basel II is to align the pricing of risk to underlyingcreditworthiness. So a lot of what Basel IIwould be focused on, if you go through therisk weightings, will be a move towards anenvironment where all credits will probably be internally rated by the major four banksand priced accordingly.

Skardoon: Just on the point regarding themarket vagaries, when we expose them(issuers and corporate relationship bankers)to the market, then they might get reallyupset, when they're told what the spreadshould be. That's a pretty big ask for a bankespecially when a corporate relationship may be at risk.

Pashley: Institutional investors do not getthe opportunity to capture any cross sell from the debt capital markets. Loan pricing margins are riddled with cross sellexpectations, additional documentationsupport, relationship overlay and so on.

da Silva: The other thing to add to thispessimistic run we're having at the moment is the other competitive forces of the USprivate placement market. Insurancecompanies are acting the same way thatyou're talking about banks here and doingdeals that you'd look at and ask why the hellyou would want to do that. Even outside ofthe private placement market you've still gotcompanies in love with issuing in the US andEurope where they can get longer terms andpossibly lower spreads or even the samespread and twice the volume in 10 years or15 years of debt. There are a lot of challengesand you know, my company and our team arevery happy with a global approach becausewe've got the resources to do that. I wouldlike to see the Australian market developbetter than it has, from a personal viewpoint.From a corporate viewpoint we can handlethe global situation. It's fine. It's our naturalhunting ground. There are a lot of challengesto lever issuers out of the banks, out of theprivate placement market and out of theliquidity and depth of other markets. As tohow you get these people to issue here, I don't know the answer to that but that's a big issue.

Roundtable – TD Securities

In terms of credit spreads,our view was people feltthey were tight becausethey had moved a lot.

Rob da Silva

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Hall: Can I ask Louis whether the NationalBank has done any work on the Baselchanges for their balance sheet & whethercorporate loan margins may provideopportunities for the capital markets giventhe changes in the index in January, and also whether the mortgage backed marketwill benefit from the Basel changes?

Davis: I'm not aware about the actualmargins. We haven't done any research, nor am I aware any external research, that'sgone out to that market.

Bolton: I think the general response we'vehad from a number of people involved withbringing people to the market, is that it isgoing to be hard. That is the feedback I'vereceived.

Pashley: Steve, you've been spending quitea bit of time internally working on systems.Clearly the work that has been done isdirected at the asset book and portfoliomanagement systems. The book is growingquite quickly and definitely looks like it'sgoing to continue to do so. Are there going to be any major shifts in how TCorp operateswithin the market on a mandate basis or thepart you play within the types of securitiesyou'll be looking for, for that asset book?

Knight: If the question is are we going to go further down the credit curve in ourinvestments, it's very unlikely. The mandatesof our clients call for a conservative creditprofile and we do not expect this to change.The growth in our asset managementbusiness reflects, among other things, theimproved balance sheet position of NSW and the Government's strategy of investingagainst liabilities. When you think about it,our business is really reacting to the trends in the fiscal cycle so the fact you've had aperiod of strong surpluses reflects nearly a decade where governments in Australiahave done a lot in terms of improving theirbalance sheets. The rating agencies haveacknowledged this, though we expect aperiod going forward where much of thefocus goes back to the other side of theequation, with greater calls for infrastructurespending. That is not suggesting we think our asset management business is going to go down in size because the focus of thegovernment, certainly in New South Wales, is about managing their net financial liabilityposition.

Pashley: I have a question associated withthe growth in the amount of resources thathave been allocated to what is classified assub-wholesale accounts within Australia byintermediaries. I would imagine the bulk of the accounts are clients of your own so this is a movement towards increased directinvestment. How are you responding to the growth in direct investment?

da Silva: Clearly it isn't just people who areclients but people who we would like to be clients who are being tapped in a prettyserious way. There are people now who

aren't considering managed funds becausethey're buying CDOs directly, all kinds ofsmall organisations that you would say well,where is the expertise in being able to dothat? I guess the issue that has just been a dynamic driven, one, from the investmentbanking side. They have devoted resourcesto people going out there and cold calling andtrawling through the lists and putting theseproducts up there which is basically nice highyield and the risk disclosure which lasts 10 pages of the document. The yield is on the front page with big numbers 10 feet highso what the fund managers do about that is difficult. The most controllable thing is in terms of the products you deliver and theperformance you deliver and therefore tryingto design products that are going to tap thereal risk/return profile that those clients want.They don't necessarily want UBS CompositeIndex. They want a low kind of duration, highyielding, stable, outperforming, all-singing, all-dancing. Therefore, you're not going to get nirvana but, for example our firm launcheda fund six months ago with low duration andhigh yield that is tapping the global creditmarkets and aiming for 300 basis points overthe bank bill index. That fund taps into thatspace and there are a lot of other thingstapping into that same space – hybrid funds,mortgage trusts, direct CDOs etc. You'vereally got to join in that competitive battlefieldand hopefully show that a product which isdiversified and properly managed will in theend justify its fees and its performancebecause of having proper oversight of thething. The difficulty is it sometimes takes timeto come out in reality and in the mean time.

Miller: Can I say, and I agree with Rob'scomments, we're not dogmatic about it, butwe do have some reservation about how thatmarket has grown. I think he is right when he says the challenge is to bring the sorts of products he describes to market. That is, in the current environment, (floating rate)credit products offering reasonable pick-upover bills, utilising a global investmentuniverse at reasonable and transparent fees.

I think another thing the fund managers doneed to be wary of, and it isn't somethingwe're paid to think about as fund managersas opposed to people who can actually run a business, is the distribution side. The reason I think some of these productshave been so successful is that they haveappeared to cut three or four middle men outof the equation (although there is a certainlack of transparency regarding the fee thataccrues to the manager of some of theseCDO type products).

In the standard fund manager world, whereevery part of the fee chain is exposed, aninvestor doesn't get rewarded sufficiently byan investment in the bog-standard retail bondfund. That investor currently obtains a grossrunning yield of 5-5 1/2 per cent in a flat yieldcurve environment when bonds are arguablysubject to some considerable upside risk inyields. Even if yields go sideways, by the timethe investor has paid the platform fee and an

Roundtable – TD Securities

I'm a recalcitrant withrespect to the Aussiebond market too.

Stephen Miller

If you look at ithistorically, the funds, the part of the investmentmarket that we represent,have come from anextremely risk adverse,extremely vanilla sort of perspective.

Michael Korber

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advisor fee and a fund manager fee etc. hehas probably paid away 2 per cent or more of his return. It is the same with any floatingrate product of a reasonable quality. Youwould get 2 per cent eaten away in fees.

I think ING sort of woke us up with ING Directthat this “typical” retail income product wasgoing to be severely challenged. I think insome measure, the fund managers have tobear responsibility for being complicit in whatis a “red hot” distributional arrangement fortypical income products. There are too manyin the chain. Some money flows from hereto here and there are all these people at thetrough nibbling away and the end punter getsless than the cash rate and he is wearing all this risk. All the people getting paid are in the middle and I think where the fundmanagement groups have to respond is by looking at their distribution channels forincome-type products. I think we've all got to rebuild because we've all got lazy by not worrying about how we distribute ourproducts. I do think we have to revisit how we distribute our products and look atrebuilding a direct infrastructure to tap intothat sub-wholesale type market. Basicallythere is a funds management fee, a smallerthan current distribution fee and then it's thepunter, not everything else we currently havein between.

da Silva: Mind you, these mobs are gettingpaid fees for selling this stuff as well.

Skardoon: One of the real issues the DIY guy has in many respects has beenperformance. When you look around a lot of money has been spent on getting peoplethrough the gate to hand over their dollars but when you look at say Steve's teamaround him, there are probably about 20marketers to each person who is responsiblefor a portfolio. If you want to lift performance,at the end of the day you need to build upyour quant teams, your analysis teams andhow are you going to call it. That is where you add your value for the small guy out in the street. He has absolutely no idea what he is trying. He doesn't understand whether it'stoxic or not until the actual thing blows up.

One of the great experiences about Australiais that we have had very little that has blownup. We've had a lot of issues that have comethrough recently, particularly in the hybridmarket, with several deals that are projectfinance deals. If I was going to do aMezzanine Finance deal the return should bein the order of about 13 per cent, or forexample a junior telecom issue and youcompare the composite value in the US andthat's trading at Libor plus 12 per cent for a slightly shorter tenor and we're doing thetransaction in Australia at BBSW plus 3 percent. Where is the value for that? If youexplained to the person in the street justexactly what he was buying, he'd throw hishands up in shock and run away and say I'mnever going to do it again. So I think for thefund managers, what we have to explain tothe people is, we actually add value because

we understand these instruments. Theproblem then is how do you articulate thatpoint of view and you've also got to articulatethat with performance.

When you look around the marketplace, oneof the big drags is that there has been a lot of index hugging and that is one of the thingsyou have got to get away from. If you look atthe whole value argument of index hugging it is presupposing that everyone has thesame ability. You look at investment banksyou see a prop trader. Not all prop traders are the same and I hasten to say not all fundmanagers are the same on the same basis,so you have to differentiate yourself throughperformance and lifting your performance. I'm quite sure if that comes through and theguy realises how difficult it is to understandthe instrument he's getting into, (that isbearing in mind, I was at a conference not solong ago where the people were saying theaverage reading age is that of a 10 year old.)That is a real drama. You've got to get thatstory out there and say, these things are alittle more complicated than getting 10 percent and we (the funds managers) add valuebecause we try to understand theseinstruments and by investing in us the risk is lower and performance is consistent.

Korber: If you look at it historically, the funds,the part of the investment market that werepresent, have come from an extremely risk adverse, extremely vanilla sort ofperspective. We've been inching slowly,some almost reluctantly, down the riskspectrum. I remember when I first got intothis market, the only buyers of mortgage-backed subordinated debt were some of these sub-wholesale accounts becausemany mainstream investors considered these securities as illiquid, almost “toxic”.Everyone laments the fact that there is nohigh risk sector here, BB or BBB or whatever,but in reality, if you look at the risk sectorsthat do exist, like the hybrid market, theyhave really come into being because the sub-wholesale and the retail investors haveled the way.

And at the end of the day, many of these sub-wholesale investors are looking at yield tomaturity. They're not interested in the mark-to-market revaluations on the way through.The credit risk is assessed by ratingsagencies on a default probability and they are usually correct. Therefore, from theinvestors' perspective, he doesn't need tofocus on the nuts and bolts of a structure if he knows it isn't going to default, that hecan collect his 200 basis points margin andwill get his capital back at the end. Secondlyfor a lot of these investors, their starting point is the equities market where they have much riskier exposures and are used to more volatility than is usual in fixed interestmarkets. So I think to say that these peopleare irrational and they don't know whatthey're doing is wrong. On the contrary, they help to seed the market and theygenerate secondary market liquidity. For example income securities and hybrids,

Roundtable – TD Securities

I would actually make a point to everyone – don't underestimatesupply capacity ofinfrastructure finance.

Louis Davis

At the start of the 2004we were of the view that the absolute level of interest rates wasprobably too low and may well move higherover the year.

Ross Bolton

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which are a fantastic asset for the fixedinterest markets here, exist because of the sub-wholesale and retail market.

Looking at 2004 and looking at 2005,unfortunately markets don't necessarilyfollow calendar year cycles, but last year wasa bull run and blind Freddy could have mademoney. One feature of credit markets is whenthings are going right, most managers lookssimilar. It is very hard to distinguish individualperformances and risk controls and it is onlyduring stress periods that robustness isactually visible. So a lot of the time being a credit manager can be a little unrewardingbecause some of the value-adds, particularlyrisk control, aren't very visible. I think goingforward a lot of the surplus value has beenwashed out of the market. We've beeninundated with new issuance and I thinkLouis' point earlier about sectoral risk coming back is right. A recent example wesaw the call being exercised on NAB incomesecurities. These were trading well above par and people were surprised that they werecalled. The whole sector has had to reprice torecognise the call risk properly. I think the riskis that the market gets so bullish about creditthat buying becomes undisciplined. It’s at thatpoint in a cycle that a good credit manager is going to make a difference. I think that is probably one of the features that will start to re-emerge next year after this cyclical bullrun we've had this year.

Foxall: We're not in the hybrid market verymuch but we do see clients coming to us who want to move away from benchmarks.The rationale for that is that yield levelsoverall have got so low that people are justlooking for a yield rather than outperformanceof a benchmark. One of our problems,probably all fund managers, is that we're paidto outperform the benchmark rather than onthe absolute return. You can have a fantasticyear relative to benchmark and still losemoney if it is a negative year on an absolutebasis. What we have seen people ask us totry to create is a Libor-plus type of product.The difficulty from a manger's point of view is that it is all very well while returns are stillpositive but from a business managementpoint of view, if you do get a negative year,unless you go straight back to cash, all these Libor-plus products are going to lookpretty ugly. The point is you have to managecompared with the retail guy or the sub-wholesale guy who is probably looking for absolute levels of yield rather than 50basis points over whether it be the UBSComposite or whatever. You have to managethe absolute return goals that these guyshave relative to any asset allocation which a normal fund manager has-equities or fixedinterest. I think it's going to be very difficultwhen you've had such a bull market in credit if you just stick to credit: we would diversifythe types of trades in these products.

da Silva: High alpha plus funds will bechallenged if spreads blow out, if there isevent risk, or whatever. I would guess the

relativity will be how will the single CDOs that people have in their portfolios be doingrelative to those funds when things like thathappen. My guess would be they would belooking at CDOs that have dropped 20 percent, 30 per cent, or 40 per cent as opposedto a fund which has given zero return orsomething, maybe a small negative. Thevalue therefore will still be clear from a self-managed versus a managed perspective. It is right that it is a tough time to competewith these things because developing aproduct in a tight spread environment entailsdealing with and managing a fair bit of riskacross a bunch of different sectors andacross a bunch of different markets, etc. I think going back to what Michael wassaying, it is pretty clear that fund managershaven't really understood what the true riskappetite of their end users is because clearly,they're always at the leading edge of takingup the new risks that come to the market.Whether it is hybrids or anything else, it endsup being the same thing until everythingblows up and it goes pear shaped. Of all the innovative products, I think Australia is leading the world in terms of middle market and retail taking up all these things.

Pashley: ING, particularly its New Zealandoperation, has responded in the New Zealandmarket that in a way, I think, has reapedrewards. I am interested in whether or not what ING has done in New Zealand, is a model that could potentially be rolled out here in Australia?

Wright: The New Zealand market is a verydifferent market to that of Australia. Theircredit market is relatively small and they do not have the depth of listed and unlistedcredit securities that exists in Australia.

INGNZ developed this product to competedirectly in the higher yielding space. Thegreatest difficulty with building products likethis from scratch is the ramp up stage. Thefund flow is small to start with and you aretrying to build a well balanced portfolio withan unknown application flow. However, theteam in NZ have done an excellent job andnow have themselves a very well diversifiedportfolio of CLOs and CDOs, across asset-backed securities and bank deferred loans.The fund is quite large, with good cash flowfrom retail investors and regular incomestreams from the assets providing sufficientliquidity. The fund has grown to something in the order of US$220 million in a relativelyshort space of time.

We certainly have high yield funds already in the Australian market place, and I am sure that structured credit is likely to play an increasing role within these funds goingforward. I think the success of these funds,and in fact more traditional fixed interestfunds, depends heavily on the distributionmodel. We don't seem to hear the debateabout managed funds versus direct holdingsin the equity space as much. There areadvantages to both. Going direct is generally

lower cost, however, managed funds offerthe advantage of getting a manager's skill setand risk control. In the equity space, I thinkwe have found a reasonable balance in termsof how much people are prepared to pay forthe advantages of managed funds. However,when it comes to the fixed income space,we've got to look at ways of getting ourproducts to our clients at a reasonable price.

That said, we have had few disaster stories in the Australian credit space to date, andperhaps investors have become a little toocomplacent about the prospects of futureproblems. In the current context, investorsmay be underestimating the benefit of amanager's credit skills and risk managementsystems when they compare them to thebenefits of buying direct.

Davis: I know we have focused with regardsto corporates as to expecting this to grow. I would actually make a point to everyone –don't underestimate supply capacity ofinfrastructure finance. Looking at areas forgrowth, I would say that you would probablyexpect corporates to under-deliver anddisappoint and probably infrastructure toover-deliver on supply expectations.

Pashley: We will have to now bring theconversation to an end. We have coveredsome significant ground; I personally havefound it very interesting.

Roundtable – TD Securities

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Over the last one to two years, Asian-based investors have made theirpresence increasingly felt in Australia'snon-government domestic bond market,particularly in the bank and asset-backed sectors.Written by Marion Williams

This has contributed to a tightening of credit margins and enabled thedomestic market to deliver muchlarger issue sizes than was previouslypossible.

Should these investors be welcomed as a permanent part of the market or should Australian issuers andinvestors be bracing themselves for a torrent of selling when theseinfluential newcomers change theirview on the Australian currency or as Asia's local currency bond marketsdevelop?

The question is important becausetheir participation may well continueto grow.

Asian-based Investors

Asia's liquidity highBased on interviews with six investors and anintermediary based in Asia and one Australianbank issuer who recently visited the region,two clear themes emerge. Firstly the region is awash with money seeking a home. ChrisBannister, head of global funding at WestpacBanking Corporation, says what really stoodout when he visited in mid-November is thesheer amount of liquidity in Asia. Centralbanks' foreign currency reserves are growingstrongly and many commercial banks alsohave high levels of liquidity, partly becausecorporate Asia is liquid and not borrowingheavily.

Keiran McPhee, Westpac Institutional Bank'shead of investor sales in Asia, comments that generally, across the region, corporateand bank balance sheets are improving, fund managers' assets under managementcontinue to grow, hedge fund activity isincreasing and private bank networks arehungry for high-yielding assets. Bannister is hearing of substantial growth in the volumeof money pouring into banks' Australian dollaraccounts, particularly in Hong Kong.

Within the Asia-Pacific region that spanscountries such as Japan, India, and China,Australia is a desirable investmentdestination based on the credit quality of its issuers, transparent and well-regulatedfinancial markets, strong legal framework,freely-traded currency, stable politicalenvironment and over a decade of unbrokeneconomic growth. Bannister comments that it is still true that Asia has a very strongaffinity with Australia, which as a bankborrower “gives us a strong competitiveadvantage versus our peers in Europe and the US”.

Investors in Asia are huge and vary enormouslyIt is also readily apparent that the size andrange of investors in Asia is immense. ScottClements, managing director of treasury at Bank of Nova Scotia, Asia and head of

Scotia's regional dealing room, says whilethere is no doubt that Asian banks areinterested in investing in Australian assets,the percentage of the banks' portfoliosinvested in Australian dollar product – even if it looks like a lot to the domestic audience – is still quite a small proportion. “It may looklike they are being aggressive and buying at very expensive levels but for the size anddiversity of their global investment portfolio it is not large.”

Indeed from the perspective of PhilippeDirckx, Fortis Bank's head of fixed income in Asia, his Asian commercial and privatebank clients don't have regular interest inAustralian dollar assets. “When talking aboutprofessional investors, if they are looking for quality paper, they usually go to US orEuropean paper because there you haveliquidity. Most of our clients are buyingcorporate or bank paper. They buy Australiannames as Euro medium-term notes (EMTN)but not much. From what I see, I don't seemuch interest from our clients.”

Nevertheless, the range of investors in Asia buying Australian dollar product isenormous, encompassing commercial and state-sponsored banks, private banks,asset managers, governmental institutionsand central banks. The buying is spreadacross the region. McPhee says there is very good buying of financial institutionspaper, especially in China, Hong Kong andKorea, and now India is emerging as aninvestor. Bannister says banks are generallybuying floating-rate notes and relativelyvanilla paper while private banks are buyingstructured product to enhance yields. Theasset managers and some of the biggerinstitutions buy across the board, includingsenior and Lower Tier 2 debt, generallythough with a preference for fixed-rate, he adds.

Reflecting this vast array of investors, theirreasons for involvement in the Australianmarket vary widely. “The buying behaviour

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Asian-based Investors

of a European bank in Singapore is vastlydifferent from a state-connected institution in Hong Kong or that of an asset manager or private bank or someone in Japan. It issuch a diverse market with a wide variation in factors that motivate investment decisionsthat it is very easy for people to get confusedsignals,” comments McPhee. He adds thatinvestors in the region tend to buy relativelyhigh credit grade Australian dollar product to put in their bottom drawer, leaving them to focus on trickier, more credit intensivesectors such as regional utilities and airlines.

Australia not uniqueBefore the back-slapping begins, Australia is not unique in receiving attention fromoffshore investors. It is merely feeling theripples of a global phenomenon. SaysGraham Kershaw, general manager and CEOof Erste Bank in Asia: “There is a shortage of assets in the world. There is too muchmoney chasing too few assets. It is a globalphenomenon being felt in Australia.”

Asia itself is on the radar screens of globalinvestors, says Kershaw. “After the Asiancrisis, everyone said never again and focusedon Australia but as the Asian economies havecome back, the whole world – hedge funds,etc – have returned to Asia and driven yieldsbelow pre-crisis levels. If it is an Asian fundthen it has to be invested in Asia. Whencoupled with domestic/offshore arbitrageopportunities, in some instances yields have even been driven through Libor.” One example is South Korean government

bonds maturing in 2008 that recently tradedat 16 basis points under Libor.

This huge pool of liquidity coincides with a credit-friendly environment of relatively low interest rates, narrow credit margins,improving balance sheets, low default ratesand even lower prospective default rates. In this environment, the search for yield and investments is driving the growth of leveraged assets such as CDOs andAustralia is one of many markets oninvestors' calling cards as they comb theworld for relative value and diversification. As Martin Wehling, a dealer of structuredproducts at DZ BANK (Singapore Branch),comments: “To be honest, Australia justbelongs to the big global market just like the US, Japan and Europe.” In McPhee'sopinion, increased globalisation has linkedeconomies and buyers of debt securities in a way that has never occurred before,leading to investors in multiple jurisdictionsdetermining pricing.

Non-Asian banks – just one subsetLanguage barriers and a desire by manyAsian institutions to keep their activitiesunder wraps necessitated that this article be based on interviews with non-Asian bankslocated in Singapore and Hong Kong that areinvesting in the region. Even within this onegroup there are huge variations in objectivesand the products they buy.

To crudely summarise, the branches andrepresentative offices are investing in theregion to diversify the parent group's globalrisk and revenue. Some banks are doing this because they have outgrown their homemarkets while others are investing to fundoperations in Asia as they follow their homemarket customers' expansion into Asia. Most have a strategy of not having Asiancustomers. Just one of the banks interviewedinvests in securities to boost returns fromAsian clients that wouldn't otherwisegenerate an acceptable return to the bank.

Most of the European banks in this sampleare very conservative. They principally buytranches of asset-backed securities (ABS)rated AAA and AA and bank paper rated A or better. They generally require one or morecredit ratings and prefer securities that arelisted on an exchange. Government andsemi-government bonds aren't on the list of most of the investors in this particulargroup and sometimes corporate andsubordinated bank debt is also excluded from their mandates. They tend to haveguidelines regarding how much of any one issue they can hold and restrictions on issuer concentration. Several hold quite a large proportion of ABS denominated in a range of currencies for the diversificationABS bring and because they view ABSmargins as attractive for the expected returnand volatility. That is particularly so when thecapital charge associated with holding highlyrated ABS is taken into account.

While some banks have been buyingAustralian dollar product for over 10 years,others only began buying in earnest this year. Most of them are still building up their holdings but say they will trade theirportfolios a bit once they reach their targetlevels. That said they regard themselves aslong-term investors. Furthermore, given thelimited liquidity of the Australian market, theytend to trade in paper that is denominated inUS dollars or Euro. That includes residentialmortgage-backed securities (RMBS) fromAustralian issuers.

For some of the banks interviewed, Australiais a core part of their Asian fixed-incomeportfolio because of the relatively smallnumber of Asian banks and corporates withsufficiently high credit ratings and attractivemargins. Sometimes the disproportionatelylarge holdings of Australian dollar product in their portfolios reflect the difficulties of funding and hedging local currencyinvestments.

There is a shortage of assets in the world.There is too much moneychasing too few assets. It is a global phenomenonbeing felt in Australia.

These banks do not have benchmarks or an index against which they are measured.Instead they focus on portfolio diversification.However, they do have internal targets forrevenue plus targets for return on assets orequity. These targets are usually on a risk-adjusted basis, but sometimes also on anabsolute basis.

Why Australia?Australian dollar product brings highly valued diversification to Asian fixed-incomeportfolios. As such, and with Australian dollarproduct only a small part of their parentbanks' global books, they see little scope for undue risk concentration, particularlywhen they observe strict limits on individualissuers, industries and countries.

Dirckx at Fortis Bank in Hong Kong says: “I can invest in every investment-gradecountry in the region. I think Australia is probably providing a very good mix in the portfolio of OECD top-quality banksand corporates. It is part of the portfoliomanagement and composition that weprovide some diversification in terms ofquality and of industry and Australia is theonly country in the region that is issuingmortgage-backed securities.” Lars Purland,vice president at Svenska Handelsbanken,holds a similar view. “We are buying AsianABS and where else in the region do you find AAA issues with this level of collateral,mortgage insurance and 40 years of payment

It is such a diverse marketwith a wide variation in factors that motivateinvestment decisions that it is very easy for people to get confused signals.

Keiran McPheeHead of Investor Sales, AsiaWestpac Institutional Bank

040-071 3/5/05 12:10 AM Page 42

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Asian-based Investors

history.” The banks say investing in ABSfrom elsewhere in Asia may necessitateinvestigating how to do title searches inTaiwan, determining the exact definition of force majeure in Korea or relying on a prospectus written in Kanji characters.

Diversification is one reason why Erste Bankruns treasury operations and money marketactivities in several currencies. “Yield curvesfor each currency differ so it makes sense for us to diversify currencies in our treasuryoperation. Rather than just run a US dollarbook, we also have a substantial Australiandollar book and thus investing in Australiandollar assets is an integral part of thisstrategy,” says Kershaw. In Bannister'sopinion there is a recent trend for investors to diversify by currency and by issuer. “It seems that more investors are nowinvesting in Australian dollar assets as a buy-and-hold and funding either with their ownAustralian dollar holdings or simply borrowingAustralian dollars from the marketplace.”

Australia is the best qualityin Asia so you will still havea weight of investment bybanks in quality issuance or to quality countries or to quality issuers.

While Bank of Nova Scotia doesn't have a dedicated pool of Australian dollars toinvest it can easily fund Australian dollarinvestments. Clements says Australia'ssound credit quality and political stability havealways attracted the bank, but historicallyreturns in Australia haven't been as good asfor similar credits elsewhere. As a relativevalue trader, his involvement in the Australianbond market is very opportunistic and givenhe tends to swap investments into USdollars, he is heavily influenced by the basisswap. When the market and basis swap areworking however, Clements takes “prettychunky” positions in paper such as Kangaroobonds, especially when spreads are tradingwide of what is available for similar credits in other global markets.

Dexia BIL's Singapore branch has increasedits activities in the Australian market in thelast two years partly because the growinginvolvement of international investors hasincreased liquidity. Kelly Kong, assistant vicepresident at Dexia BIL, says prior to 2002 the market was quite domestically focused.However that has changed since thegovernment removed interest withholding tax and Australian issuers and originatorsstarted to visit the region.

Kong also notes that it is much easier to fundin Australian dollars than in many othercurrencies in the region. Although investorsin different time zones may be exposed to the

basis risk that arises from buying securitiesthat are referenced to a 365-day bank bill rateand have to be funded via 360-day basedLibor, most of them accept that because of the higher spreads on Australian dollarproduct.

Involvement seen continuingThe conservatism of many of the Europeanbanks points to continued investment inAustralian dollar product even when Asia'slocal currency bond markets have developed.Says Ross Atkinson, Treasurer of DZ BANKAsia-Pacific: “We want global diversificationand would like to see the local currencymarkets further develop but the problem is there are not enough banks and corporatesthat meet our investment criteria.” Dirckx atFortis Bank concurs. “Australia is the bestquality in Asia so you will still have a weight of investment by banks in quality issuance or to quality countries or to quality issuers.”

Of course relative value is always a focus.Thus one bank no longer buys Australiandollar RMBS, viewing the fall in margins onsubordinated tranches from 70 basis pointsto around 40 basis points as signaling thesector is approaching the top of the cycle.

Another consideration is the convertibility of the Asian currencies. Kershaw commentsthat although there are reasonable markets in countries such as Thailand, the relativeprice of the securities, limited fundingsources, government controls or the absenceof a long-dated swap market limit offshoreinvestor participation. Therefore it remainsdifficult for investors to fund in a number of Asian regional currencies as well as to manage the inherent fixed interest raterisk. Thus, unless they have a local branch,development of the local bond markets would not affect the banks' allocations to the Australian dollar market. However Dirckxbelieves deregulation of the currencies wouldcause banks to adjust their allocations.

Clements says that Bank of Nova Scotia'sinvolvement in the Australian market and thedevelopment of Asia's local bond markets arenot mutually exclusive and both can increasein parallel, while Wehling at DZ BANK addsthat given the diversification that Australiandollar RMBS provide, there would have to be substantial changes to induce them to exitthe market. Dexia BIL's Kong comments thatin any case, despite all the talk, change isslow to happen. She says most of the localcurrency supply of ABS has been the resultof restructuring or government pushing.

Credit investors not currency tradersThe banks' treatment of Australian dollarcurrency risk varies but the main point theymake is that they are running credit books,not interest rate or currency books. Some will asset swap Australian dollar products but generally the banks' currency exposure is managed by another desk. Depending on

their view on the currency, they may leave theposition open or hedge it. Others match-fundtheir investments on a rolling basis, therebylimiting currency exposure to coupon receiptsand any capital gains on the security.

They stress that they do not have to buyAustralian dollar product to create Australiandollar exposures. Erste Bank, for example,began swapping US dollar and Euro-denominated bonds into Australian dollarswhen the currency was around US$0.55.“We got better margins because of the basisand now we have cash flowing in from a muchmore valuable currency than US dollars,”Kershaw says.

Svenska Handelsbanken's Purland says hisP&L is ultimately counted in Swedish kronerso if he expects substantial depreciation ofthe Australian dollar, he would hedge the P&Lposition rather than the actual investmentposition.

Originators rather than buyers of hybrids and CDOsNot surprisingly, given the conservativeparameters they operate to, the Europeanbanks generally do not have much interest in Australian dollar debt/equity hybrids.Rather they would be issuers of securitiesthat qualify as Tier 1 or Tier 2 regulatorycapital and some have issued Asian-targeteddeals denominated in US dollars or Euro. In contrast with the European banks, Bank of Nova Scotia is probably one of the largest

We are buying Asian ABS and where else in the region do you findAAA issues with this levelof collateral, mortgageinsurance and 40 years of payment history.

Lars PurlandVice PresidentSvenska Handelsbanken

040-071 3/5/05 12:10 AM Page 44

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Asian-based Investors

investors in convertible bonds in the region.While Clements would be keen to seeAustralia develop a convertible bond marketalong the lines of those in Asia, Europe andthe US, he does not expect it to happen inthe near future.

As for structured credit products such ascollateralised debt obligations (CDOs), someof the banks say their involvement would beon the structuring and originating side ratherthan as an investor. Some say that in principalthey would look at AAA CDO tranches but inrunning an Asian investment portfolio, theyrequire a much higher Asian component thanthe 35 per cent proportion normally offeredby CDOs in the marketplace.

There are not a lot of BB or weak BBB or credits on an upward trajectory.

Atkinson comments that another problem is finding CDOs that offer diversificationaway from the credits in which he is alreadyinvested. “If you concentrate on largely Asian names then Asian CDOs will havethose same names so you are onlyduplicating, not diversifying. For us itrepresents higher risk/return but not a gooddiversification play.” Purland notes any CDOinvestments would have to meet the bank'srequirements for regular mark-to-market andcollateral performance reviews. Kong sayswhile she would welcome a new asset class,currency risk arises from buying Australiandollar CDOs based on credits from Europeand US. “When you do a CDO you tend towant the issue to be denominated in thatcredit's home currency.”

Again Bank of Nova Scotia is the exception.Clements describes the bank as a reasonablyactive investor in structured credit productsand it manages its own tailored investments,although not for any dedicated Australiandeals to date. Also, the bank's capitalmarkets arm, Scotia Capital, has been white-labelling instruments for distribution by Australian institutions. “Our structuringdesks in Dublin and Toronto have been verysuccessful in this area.”

Basel II creates interesting dynamicsIt may be a global market but banks' approachto the current and proposed capital adequacyregimes differ. Bank of Nova Scotia forexample relies on internal return models to evaluate investments and does not seeany great changes in its regional investmentstrategy with the new capital adequacyguidelines. Wehling says many of thesecurities DZ BANK is buying will achievemuch better capital treatment under Basel IIthan currently. “So you will see spreadcompression on certain tranches in the futureand we are buying into those AAA and AAinvestments on the view that we will need to set aside substantially less capital.”

Svenska Handelsbanken is one of the banksleading the way. The Aa1-rated bank recentlyadopted Basel II, says Purland. “We arebuying highly-rated securities and gettingcharged almost no capital. It is a good way forthe bank to fund its expansion in the region.”Similarly, DZ BANK has agreed preferentialcapital treatment on some assets with theGerman regulator. If it complies with certainregulations, approved ABS only attract a 20per cent risk weighting and that will fall furtherwhen DZ BANK moves to the advancedmodel under Basel II, says Wehling.

Generally though, banks say that the capitalcharge associated with their investments is a secondary consideration to portfoliodiversification and risk-adjusted returns.Kershaw views the bonds of the Governmentof Malaysia as more attractive than Australiandollar bank paper with a similar rating ofsingle-A. While the Malaysian paper attractsa higher capital charge, he says it is moreliquid and higher yielding.

Australia's limitations – and opportunitiesThe bank investors regard Australia as a keysource of diversification while recognisingthat it is limited in terms of the range of issuers, reflecting Australia's smalleconomy and population. Dirckx observesthat Australia's corporates are not multi-national conglomerates and therefore theirborrowing needs are small. Bank of NovaScotia has successfully invested in 'fallenangels' when other institutions' mandateshave forced them to sell. It would like to seeAustralia's credit curve round out beyondinvestment-grade. “There are not a lot of BB or weak BBB or credits on an upwardtrajectory. If people were skillful at bringingthose companies to the market it would give investors more confidence that noteverything in Australia with a low rating is about to default,” says Clements.

Another frequently observed limitation of Australian dollar product is liquidity,something the banks suggest would beimproved by offering larger issue sizes.Dirckx comments the low liquidity stems from having a lot of demand and not a lot of supply. Kershaw agrees. “The growth of superannuation funds has created anenormous demand for investments – it hasoutgrown the Australian market.” He addsthat RMBS are filling the gap not being metby the corporate bond market. “That hasbeen a big development.”

Purland says the fact he has been able to source sizeable amounts of ABS in the secondary market indicates there isreasonable liquidity in Australia's domesticmarket and Wehling comments that at themoment any reasonably priced paper from a reasonable name will find a buyer within a day or two.

Purland sees room for improvement in termsof having a 'one-stop shop' where investors

can collect all the information they need onAustralian RMBS rather than having to chaseit up through various sources such as ratingsagencies, Perpetual Trustees' website and Bloomberg. He also says there is noconsistent model among the brokers forcalculating the cash consideration whensettling Australian dollar RMBS transactions.

The fact that Australian dollar product isreferenced to bank bills but many offshoreinvestors can only fund themselves inAustralian dollar Libor is limiting participation.“If the basis was changed there would be alot more investors,” says Kong. According toDirckx, depending on the level of interestrates and whether rates are falling or rising,the difference can be as much as 10 basispoints.

Australia gets a lot of credit for having a fairand transparent regulatory environmenthowever things could be better. The removalof interest withholding tax has certainly drawnoffshore investors but in Clements' opinion,Australia missed an opportunity in the late1980s/early 1990s to become a regional hubwhen banks started to think about the HongKong handover to China in 1997. Because of Australia's high corporate tax rates“places like Singapore took that marketshare. As a result the (Australian) market is very domestically focused and that willalways limit its size”.

It may look like they arebeing aggressive andbuying at very expensivelevels but for the size anddiversity of their globalinvestment portfolio it is not large.

Scott ClementsManaging Director of TreasuryBank of Nova Scotia, Asia

040-071 3/5/05 12:11 AM Page 46

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Asian-based Investors

Purland notes that the UK, US and Europeancentral banks accept highly rated ABS asrepo collateral and would like to see theReserve Bank of Australia follow their lead.

Finally, Atkinson at DZ BANK recommendslisting Australian dollar issues. “If Australianissuers want to diversify with Europeaninvestors, they should go down that path. For us it is always a preference to invest inlisted products.”

Liquidity to improveMcPhee at Westpac Institutional Bankbelieves the broader investor base hasimplications for prices, noting that recentAustralian and US dollar deals, especially in RMBS, are coming much more in line with each other. “Increased Asian interest in these deals introduces an area of demandthat wasn't there in significant volume two orthree years ago so that does have an impact.I think at the end of the day it results inAustralian deals being benchmarked againstglobal pricing of similar assets.”In Atkinson'sopinion, the fact that Australian borrowershave so many choices around the world forraising funds has more implications for localinvestors than does the growing involvementof offshore investors. Unless there issufficient supply, “returns or yields will get to the level at which there is no longerinvestor interest.”

Everyone agrees that increased offshoreinvestor participation will boost liquidity in the Australian market and support largertransaction sizes. Clements believes thatover time, new people and new players

with different views will arrive to take uppositions, thus improving the depth andliquidity of the market.

Participation to grow further, at least in RMBSAll the banks interviewed envisage investing in Australian dollar product for the foreseeable future and some expect to be joined by an increasing number of other investors from the region, particularly in RMBS.

Says Wehling: “There are so many peoplejust starting to look at ABS and they will startto buy in 2005. To be fair there is so muchliquidity in the market we just don't knowwhere to put the money. Rather than putting it into Asian corporate or bank paper wherespreads have gone from 500 basis points to 60 basis points, I would rather put it into a well-diversified Australian ABS, withlenders’ mortgage insurance, at 20 to 30basis points.” He says Australia's mortgageoriginators have a guaranteed mortgageproduct that is unique in the world becauselenders' mortgage insurance is built intoborrowers' costs.

To be fair there is so muchliquidity in the market wejust don't know where toput the money.

Bannister is seeing a growing focus on MBSand says that some investors are lookingparticularly closely at Australian-issuedRMBS across the currencies. “It may beslow progress but there are now some verylarge investors such as central banks andgovernment entities looking at RMBS.”McPhee is seeing the same thing, saying thattwo years ago the range of investors lookingat mortgage-backed paper was quite limited,but it now extends across real moneyaccounts, fund managers, state-sponsoredinstitutions and banks.

Additionally the range of product hasexpanded with Asian investors not just buying prime pools but they are now largeand regular buyers of low-doc and sub-primedeals. He says Chinese and Japanese banksare also looking. “Asian banks are taking a little longer but no doubt they will be veryactive in the future as they continue toupgrade their systems and risk managementprogrammes in tandem with the developmentof the local securitisation market.

That is generating interest and thetechnology, so positioning them to step up to the Australian market.” As it is, some of the more established investors are nowventuring into issues backed by non-conforming mortgages. As they understandand become more familiar with the benefits of the structural features and monitor

performance and valuations, these investorsstart buying bigger amounts and diversifyingaway from pure prime-backed RMBS.

McPhee believes as far as the investor basegoes, private banks have great potential. He says they are becoming quite attracted to Australian transactions from well-knownnames via EMTNs and private placementsthat are structured to give yield. “Privatebanks tend to be attracted by yield such as offered by Rabobank's recent Australiandollar perpetual. They have incredibleappetite – it is a huge growth area.” In his opinion, Asian investor participation has at worst plateaued, but more likely willgrow further, noting the quality of Australianfinancial institutions is very good relative to banks in some parts of the region.

Bannister certainly views Asian investors as a permanent feature of the landscape.“With those economies growing, I think we should – and we do – count Asia as asustainable source of funding to the bank.”

With those economiesgrowing, I think we should – and we do – count Asia as a sustainable source of funding to the bank.

Chris BannisterHead of Global FundingWestpac Banking Corporation

040-071 3/5/05 12:11 AM Page 48

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040-071 3/5/05 12:12 AM Page 51

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We are about to enter unchartedterritory where retirees are supposed to have taken measures to provide fortheir own retirement and are expecting a far higher standard of living than thegovernment age pension provides.Written by Marion Williams

The oldest members of the baby-boomer generation who were bornbetween 1946 and 1964 are due toretire next year. They will only have the benefit of 14 years of compulsorysuperannuation savings.

Can you Afford to Retire?

The collapse of Pyramid Building Society andthe difficulties of the state banks of Victoriaand South Australia pre-date the introductionof compulsory superannuation saving in 1992 and amid relatively steady gains in equity and house prices and 13 years of unbroken economic growth, risk may seem an almost out-dated notion toindividuals new to the investment arena. In this environment do-it-yourself (DIY) orself-managed superannuation funds (SMSF)are growing at an annual rate of nearly 25 percent. The introduction of choice-of-fund inJuly 2005 is predicted to accelerate the trendtowards DIY funds.

Some participants in the professional debtmarket question whether retail and othersmall non-professional investors aresufficiently educated about risk and return.Assuming they are financially literate, do theyhave access – at an economic cost – to thesame range of products that professionalfund managers have to ensure investmentportfolios are diversified and not overweightin growth assets such as equities or lockedinto lumpy, illiquid assets like property?According to this school of thought, there is a lack of appropriate fixed-income assetsthat are fairly priced and easily accessible by retail investors and DIY funds. They seethis as a recipe for disaster.

However, in the wider universe that includespolicymakers, industry bodies and financialplanners, the problem is seen as one ofinadequate retirement savings. Addressingthe level of savings should be the focus ofpolicy, not the range of investment productsavailable. They believe a mix of cash andequity, supplemented by the government agepension, the latest generation of retirementproducts and recent developments in thearea of reverse equity mortgages give smallinvestors ample scope to construct a'sensible' portfolio that produces sufficientincome.

Australia unusual in lacking a retail bond marketAustralia differs from many other developedeconomies in that it doesn't have a thrivingretail bond market. Government securitiesare readily available in small parcels incountries such as the US, UK and Italy, andfor years highly-rated borrowers around theworld and those with strong brand nameshave sourced attractively priced funding fromEuropean and Japanese retail investors viathe Eurobond, Samurai and Uridashi markets.Across the Tasman, in the absence of acompulsory superannuation savings plan,New Zealand's retail bond sector has evolvedway beyond debentures issued by financecompanies.

Cultural and taxation differences help toexplain some of Australia's idiosyncrasies.Europe has traditionally had more of a bondculture while Australia and the UK have beenmore favourably disposed towards equity.Elsewhere around the world, some retailbond markets have evolved around local tax structures. In Australia however few tax incentives favour fixed-income sincemeasures were put in place that tax intereston zero-coupon bonds as it accrues ratherthan when it is actually paid to bond holdersand that discourage holding bearer bondssuch as Eurobonds. Instead, frankeddividends and negative gearing steerAustralia's small investors towards the equity and property asset classes.

Low level of disintermediationSustained periods of inverse yield curves in Australia have also discouraged investors to venture along the interest rate yield curvebeyond bank term deposits. This leads to another distinguishing feature of theAustralian and New Zealand economies – the relatively low level of disintermediation.Sean Henaghan, head of manager researchand selection at Watson Wyatt, believesAustralia needs more disintermediation andsees the dominance of bank issuers as a negative feature of Australia's corporate

040-071 3/5/05 12:12 AM Page 52

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Can you Afford to Retire?

bond market. “It shouldn't be that banks are the sole source of capital. We need a viable corporate bond market and to haverisk spread among multiple investors. Theproblem with banks being the issuers ofcapital is that you are saying they are betterat allocating capital than the market whichhistory has shown is not always the case.”Greater disintermediation would see capitalallocation decisions that are the collectivewisdom of 10 million people rather than a few banks.

It is no coincidence that Australia's creditdefault swap market hasn't developed to thesame extent as those in Europe and the US.Australia's banks have the lion's share ofcorporate loan business and lay off preciouslittle into the credit default swap market. One consequence of this banking dominanceis a significant amount of systemic risk inmost superannuation fund portfolios. Notonly is the corporate bond market dominatedby the banking sector – bank debt accountsfor 34 per cent of the UBS Credit Index inAustralia – but financial institutions accountfor around 26 per cent of the marketcapitalisation of the local equity market as measured by the All Ordinaries Index. If there is a banking crisis, it will not only havean immediate affect on the real economy butalso severely impact people's superannuationsavings.

All the blame can't be laid at the feet of thebanks and the taxation regime. Dr TonyRumble, chief executive officer of TheSavings Factory, notes that a corporate bond market needs a lot of issuers in an open economy. “Even in the early 1990s we didn't have a good listed market andpeople didn't issue corporate bonds becausethey didn't need them. We only floated thedollar and deregulated our financial systemrelatively few years ago so no wonder wedon't have a massive and liquid corporatebond market. So by the time the marketderegulation has taken hold we see newer and more innovative securities in vogue such as debt/equity hybrids andcollateralised debt obligations (CDOs).”

It is noteworthy that until recently Australianbanks have pretty much had a strangleholdover retail cash and deposits. Phil Bayley,head of fixed income credit research atNational Australia Bank, says the market for secured debentures was very strongthrough the 1960s and up until the late1970s. After that however interest rates rose to high levels and individuals could get very high rates by going to the buildingsocieties. “Since then corporate Australiahasn't been convinced about the level of retail demand for corporate bonds and withthe costs the same as on the equity side and the wholesale debt market beingsufficient, there has been no incentive to develop a retail market.”

As a result Australians have no tradition of investing in fixed-income and arguably little appreciation of its value in a balancedinvestment portfolio. That has produced a chicken-and-egg situation where retailinvestors aren't prepared to pay up for fixed-income instruments and there is littleinterest in providing traditional fixed-incomeproducts to retail because there is perceivedto be little demand for it. Consequently, someof Australia's small investors regard bankdeposits, and arguably a handful of blue-chipstocks, as the risk-free cornerstone ofinvestment portfolios because they havenever had exposure to instruments such as government bonds.

Neither investors nor issuers prepared to pay for retail fixed-incomeFor Jim Stening, managing director of FIIGSecurities, the problem is one of retailinvestors having a capital growth mindsetrather than one of capital protection.Moreover, while credit margins and interestrates remain low, issuers and intermediariescan't cover the prospectus, distribution,education and registry costs at a price thatretail investors are prepared to pay and thatleaves any more yield for the investors thanthey can get from term deposits.

Companies are prepared to bear some ofthose costs for hybrid securities and equitybecause that is capital where investors aretaking risk. However there is little upside ordownside in fixed-income. Its value doesn'tchange so investors haven't taken any risk.Wayne Hoy, general manager of capitalmarkets at Commonwealth Bank, says theeconomics of retail products are a lot harderwith fixed-income. Investors are prepared to pay transaction costs on equity on theexpectation the share price will rise and coverthem but there is less prospect of capital gainon fixed-income so investors aren't preparedto pay equity costs to buy it. “You can't covertransactional costs on retail fixed-income at a price that the investing public will pay.”

Hoy says the buying behaviour doesn'tencourage investment in the necessaryinfrastructure and Commonwealth Bank hasproved that by listing senior-ranked bonds on the ASX. “There is no overwhelmingprimary or secondary market demand orconfidence that there is demand for high-grade fixed-income at an economic price – by either the intermediaries or theborrowers.” In any case, issuers have littleincentive to offer retail-targeted debt whiletheir funding requirements are easily andcost-effectively met by banks and thewholesale debt markets.

It is ironic that retail investors can buy the equity and hybrid equity of corporateAustralia but not its senior debt. That lessrisky part of issuers' capital structure is the preserve of professional investors. Bob Biven, market coordinator, trading, at Australian Stock Exchange, comments

that while we see fund managers runninghybrid funds, we don't see managers runningstraight fixed-income funds. “That is becausethere isn't enough in it to offer the retailinvestors,” he says.

Currently retail investors' most accessibleincome-generating instruments withattractive yields are CDOs and debt/equityhybrids. While fine in small doses, to usethem as fixed-income proxies is misguidedbecause when the inevitable downturncomes, they won't perform in the same way as traditional fixed-income. Stening at FIIG Securities says the reason why fundmanagers buy investment-grade debt isbecause in an equity downturn they will getperformance from fixed-income. “You don'twant to be tampering with that safety netwhen things go wrong.”

DIY funds' portfolio allocation differs frommanaged fundsAPRA's data on superannuation funds iscommonly cited as evidence that there is a lack of accessible and appropriate income-generating products for DIY funds. The majordifferences between the asset allocation ofmanaged funds and SMSFs are that smallfunds hold far higher proportions of cash and their holdings of interest-bearingsecurities and offshore assets are muchlower. Chris Caton, BT Financial Group'schief economist, sees an obvious problemwith that given Australia only accounts for 2 per cent of the global economy. “Puttingmoney offshore is a sensible diversification. It isn't healthy to have all your money in theAustralian economy.”

Turning to the other differences, Rumble atThe Savings Factory says APRA's data havetwo flaws. Firstly it is a snapshot of portfoliosat June 30 and self-managed funds tend tomake big contributions just before the end of the tax year. Much of that goes into cashmanagement trusts before being invested.The other problem is that debt/equity hybridsfall into the “listed shares” classificationrather than the “interest-bearing securities”bucket.

While some would argue that hybrids aren'tfixed-income but equity dressed up and soldas debt, Rumble has no issue with retailinvestors buying the reset preference sharesthat have dominated the hybrid market in recent years. In economic substance, they are closer to debt than equity becauseinvestors buying them ask the samequestions as they do when buying fixed-income: is there certainty of income – doesthe company have sufficient cash flow orretained earnings to pay distributions – and;is there certainty of capital – will the companybe around when the time comes to convertinto ordinary shares that can be sold to gettheir principal back.

However Rumble is less happy with the newbreed of hybrid securities that is coming

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Can you Afford to Retire?

to the market as a result of accounting andother regulatory changes. In his opinion, they are more like perpetual preferenceshares and the conversion mechanism to get investors' principal back is no longeravailable. Says Rumble: “So these arebecoming increasingly less relevant to theneeds of retail investors looking for incomewith security of capital. They are still popularbut not quite the fixed-income instrumentmany investors want and that is why I thinkwe are seeing the rapid growth in CDOs –they are filling the gap of hybrids – and alsothe technology of issuers and expertiseamong investors has developed rapidly over the last few years.”

Managed fixed-income has failed but norisk-free asset for direct investmentRumble believes the growth in hybrids andCDOs arises from the failure of traditionalmanaged fixed-income to provide eithercertainty of income or certainty of capital. Nor does he believe that the all of the earliestCDOs – largely static synthetic transactionsthat promised high coupons and paid highselling commissions – were suitable for manyretail investors and financial advisers. Ashigh-risk/high-return investments, they don'tprovide what financial planners look for fromincome-generating products. However, thelatest CDOs with capital guarantees or thatare managed and have AAA ratings, such asthe Generator notes offered by MacquarieBank, more closely fit the bill. He adds thoughthat the market is still looking for cleaner andmore transparent CDO products with lessrisk and more certainty of return.

Watson Wyatt's Henaghan has a completelydifferent take on the role of fixed-income,namely it isn't diversification from equities but the bedrock of superannuation portfolios.Henaghan finds it incomprehensible that a 30-year bond is as viewed as too volatile a superannuation investment for a 30-yearold yet that person's portfolio may be 80 per cent invested in equities.

Noting that corporate funds usually offerthree choices – a low-risk option that returns3 per cent over CPI, a medium-risk optionthat pays 4 per cent over inflation and a high-risk option returning 5 per cent over inflation,Henaghan says the low-risk option could beachieved through an inflation-linkedgovernment bond. “If the government wantspeople to save for retirement then givepeople an asset class that enables them todo that without any risk. That asset class isinflation-linked government bonds. If peoplewant to take risk that is fine but here is yourlow-risk option.”

Not widely seen as a problemConcerns about the lack of easy access to traditional fixed-income by retail investorsaren't shared outside of the wholesale debtmarket. Rumble counters the argument thathybrids and CDOs are relatively illiquid by

saying the fact these securities are illiquidtells investors they are only for a small part of the portfolio and that in any case, cash is there to provide liquidity.

He also rebuts the perception that financialplanners are loath to direct clients into fixed-income because the fees and commissionsaren't high enough and because it locks up the money for long periods. “Financialplanners don't want to trade around becauseit means another statement of advice and a lot of complicated paperwork. I think the progressive planner is thinking abouthybrids and about things like infrastructure as a defensive asset with yield and they are beginning to think about CDOs.” Philippa Smith, chief executive officer of The Association of Superannuation Funds of Australia (ASFA), comments there isn't a perfect stand-alone instrument.“It comes down to the mix of yourinvestments and understanding what youneed in the immediate term and how much is invested for the longer-term and wearingthe volatility of that.”

As far the Australian Taxation Office (ATO) is concerned in its capacity as regulator andsupervisor of SMSFs, there is no problem. In an overview of SMSFs as at June 2001,the ATO notes that SMSFs have a higherallocation to the categories of “cash,securities and term deposits” and “directproperty” and less invested in overseasassets. “Viewed as a whole, this presentsthe SMSF sector as somewhat moreconservative with regard to investment thanthe overall superannuation industry. It is likelythat this is at least in part due to the higheraverage age of SMSF members which putsmany of them closer to retirement where amore conservative strategy is appropriate.”

Caton at BT Financial Group turns the tableon the debate by arguing that there are moreopportunities in Australia to invest than thereare savings. “The clearest evidence of that isour foreign debt and the fact that foreign debtis growing because we rely on foreigners tofund us.”

For the most part, the prevailing wisdom is that equities are the asset of choice forsuperannuation funds. That is based onequities' tax advantages, dividend income,diversification and their superior rate of return over the long term. Biven at the ASXcomments that a portfolio of hybrids andequities spread across the top 20 companiesprovides an attractive grossed-up dividendyield and “it is pretty hard to argue you aren'tinvested in the heart and soul of Australia”.Rumble says most progressive financialplanners are benchmark-unaware and look at absolute returns. “Why not buy a basket of ten or so blue-chip stocks returning 10 per cent per annum and hold that for 30 years?” Portfolios like this, with aconservative approach and low turnover,

offer strong returns for long-term investors.He points to Australia's oldest listedinvestment companies such as Argo, AFICand Milton. These have provided good andreliable returns to shareholders over anumber of years through long-term holdingsof diversified stocks that were chosen for value and yield.

With people living longer, long-term growth strategies are appropriateThe Honourable Nick Sherry, shadowminister for finance and superannuation, sees little point in holding much money in the lowest returning asset classes of cashand bonds. He says it is unlikely that theiroutperformance in the years of negativereturns from equities compensates for the ongoing lower return of holding them.Even as people approach retirement he seeslittle reason to change strategy because oflonger life expectancy. ASFA's Smith agrees. “Even at retirement, people are looking at 20- to 30-year timeframes. That isn't short-term. More increasingly, people are looking at a bit of mix with some of their portfolio in very safe and stable investments withoutvolatility and another part invested for a longer-term growth horizon, accepting there may be a bit more volatility and risk.”

Smith says that unlike the previous complyingpension products that provide certainty ofincome but are very regimented in terms ofwhen and how much people could draw fromthem, the new retirement income productsoffer a much broader range and far more

Even in the early 1990s we didn't have a good listed market and peopledidn't issue corporatebonds because they didn'tneed them.

Tony RumbleChief Executive OfficerThe Savings Factory

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flexibility. The development of growth-linkedproducts offers more growth options. In heropinion, the best combination for many will be those products that give a combination of a regular drawdown and the flexibility foradditional drawdown.

Both Smith and Senator Sherry see reverse equity mortgages as another avenue for people to supplement theirincome, although Smith adds this can be more difficult and limited than peopleassume. Says Senator Sherry: “In Australia it is highly rational to maximise the money in your residential property and it can provide income via reverse equity mortgages,either for consumption or for investment.”

He adds though that the options for saving in Australia, whatever the incentive, don'texist as they do in other countries. While inAustralia it revolves around superannuation,there are broader savings instrumentselsewhere in the world. “I think there is a gap in short- to medium savings for specific things like health and education.”

The issue is the level of savings, not their compositionFor Smith and Senator Sherry the problem is more around the adequacy of retirementsavings, not the range of investmentproducts. The Federal Government's ministerfor health and ageing, Tony Abbott, didn'trespond to requests for an interview for this article.

ASFA's research shows that single peopleestimate they will need around $30,000 perannum for their retirement, or $43,000 in the case of couples. This level of budget was also confirmed by research that lookedat the actual expenditure of older people andwhat would be needed for a comfortable butnot extravagant lifestyle. Yet the age pensionpays just $12,000 per annum and the averagelump sum is $70,000. It leaves a considerablegap.

For those baby boomers who have had less time to benefit from compulsorysuperannuation savings, Smith suggests they immediately increase their savings,preferably through larger superannuationcontributions because it is relatively tax-efficient and because in some cases thegovernment will match those voluntarycontributions with co-contributions worth up to 150 per cent. Taking retirement savingsthrough a pension structure rather than a lump sum may also have tax and socialsecurity advantages for many. If peoplenearing retirement can only save a little bit, Smith says they can use it to better setthemselves up for retirement by paying downloans, renovating their homes or buying anew car to see them through their retirement.

Another option is phased retirement. By working part-time or on a casual basis,baby boomers can extend the time they have

to add to their superannuation and delaydrawing from savings. Smith admits thisoption is currently limited by the fact that age discrimination is “rife”. It also relies on people being sufficiently healthy tocontinue work.

Simon Ibbetson, head of ASSIRT research, at ASSIRT, says the problem is possibly over-stated. Australia's savings ratio is better thanin some other countries and its demographicsin respect of the growing proportion of agedpeople aren't as bad as in Japan, Germanyand Italy. In Australia's case, immigration is a switch that can be easily switched on to increase the number of working people to support the aged population. In any case,Ibbetson suspects that people have beenover-sold on what they should expect interms of benefits when they retire. “Until the compulsory super scheme has beenrunning for a couple more decades the likelyresult for the majority of retirees is a modestsupplement to the age pension. This will be well short of achieving anything like a pension of 80 per cent of the final salary.”

Growth of DIY funds seen as potentially dangerousThere is also general agreement that thegrowth in DIY funds is a matter for concernand that it is crucial to educate the generalpublic about investments as they assumemore responsibility in this area.

As at June 2004, 21.5 per cent, or $134billion, of Australia's $625 billion ofsuperannuation assets were held in smallfunds. Only retail funds, with $210.8 billion or33.7 per cent of the nation's superannuationsavings – hold more. During the June quarter,directly-invested superannuation was thefastest growing sector. Growth of 5.6 percent took direct investments to 36.1 per cent of total superannuation assets, not far behind the 37.3 per cent of assets withinvestment managers and ahead of the 26.6 per cent held in statutory funds of lifeoffices. Since 1995, superannuation assetsheld in DIY funds have grown at an annualrate of almost 25 per cent. A recent surveyby ANOP suggests this sector will continueto grow with the choice-of-fund in July.According to the survey, this growth is likelyto be at the expense of retail funds.

Rumble comments that in some respects,people are right to be disillusioned withmanaged funds. He says that regulatory data indicate that, after fees and charges, the recent returns from the median industryfund are around 6 per cent per annum, or 3 per cent in real terms. The same data showthat the recent returns from the median retailfund or a wholesale fund held through a wrapaccount is around 3 per cent per annum.“Therefore after inflation there is no realreturn generated by the median retail fund so effectively retail investors will not havegrown their savings to live on in retirement.The government is subsidising all the

commissions and fees being paid but it willstill have to pay for people's retirementbecause these funds aren't providing for it.”He attributes the popularity of DIY funds toindividuals wanting more certainty of returnand better control over their investments.“They don't care about portfolio theory andefficient risk/return frontiers. They're sayingthey don't care about the benchmarkbecause if the benchmark goes down theyget nothing.”

Senator Sherry says the trend towards DIYsuperannuation is worrying on two fronts.Not everyone going into it may know whatthey are doing and they may be doing it for the wrong reasons due to misleadingadvertisements and without an understandingof the fees they will be charged. Smith adds that while DIY is good to have on thelandscape because it suits those people withthe expertise and the desire to be involved ona day-to-day basis, there is some mis-sellingto people with small balances, those withoutthe necessary investment expertise or those

It shouldn't be that banks are the sole source of capital. We need a viable corporate bondmarket and to have riskspread among multipleinvestors. The problemwith banks being theissuers of capital is thatyou are saying they arebetter at allocating capitalthan the market whichhistory has shown is notalways the case.

Sean HenaghanHead of Manager Research and SelectionWatson Wyatt

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Can you Afford to Retire?

without an understanding of their obligationsunder the DIY arrangements.

She adds fees can be higher because of theregulatory overheads and because DIY fundslack economies of scale. Furthermore,behavioural research shows people tend to underestimate the cost of DIY funds,overestimate their expertise, change theirinvestments too often and underperform themarket. “That isn't to say some people aren'tbetter but when you look at the funds theycan't make decisions and they will have it in cash,” says Smith. This is consistent with Senator Sherry's observation that most people in managed funds don't make an active choice but rely on the defaultinvestment strategy.

In Smith's opinion, the good news is thatthere is broad support for 9 per centcompulsory superannuation savings and the contributions have been going intodiversified, balanced and well-managed fundsthat have served their members well. “I thinkgreater involvement is good but it isn't good if they start thinking they can do it themselvesif they don't have the expertise. People maywant greater choice and greater involvement.They need to look at what they have now andask if they want something different. In mostcases the funds are relatively low cost andrelatively well performing.”

Education – who cares and who will paySenator Sherry says there are more thanadequate products for people to make choicebetween the higher returns and fluctuations in equities and the certainty of income offeredby bonds. The question is whether or notpeople understand it. “A minority is informed.

It is very difficult to educate people thereforethey either have to go to a financial planner or structure their system so that decisionsare made for them,” as per his earlierobservation that people in managed fundstend to rely on the default option rather thanactively making a choice.

Smith comments that the government hastold people to save but people don't reallyengage in their investments until they reach a certain level of savings and they don't thinkabout risk until it happens. “The informationis there – getting people to read it andunderstand it is a different thing.” She says in many cases people are basingtheir investment decisions on what hashappened in the past two years and withoutan understanding of long-term trends. “For a lot of people superannuation is going to bethe biggest savings they have so it has to bemanaged wisely. It is the difference betweenthe age pension and a comfortable retirementso it is important we get it right from a policyperspective and that we as individuals get itright.”

However, Ibbetson says that few people areprepared to pay appropriately for research,“possibly because we have failed in our taskof explaining its full value”. Rumblecomments that the prospectuses coveringmost new investment products like CDOsare overly legalistic and not at all helpful tounderstanding what the products are reallyabout. He adds that financial planners andadvisers are important to fill in the gaps in understanding that are left by currentprospectus laws. “I believe good financialplanners are very good at that.”

However there is widespread concernoutside of the financial planning industryabout financial planners and even Rumbleconcedes that remuneration structuresbased on commission are undesirable andthat those based on fees for advice andservices are preferable. Smith at ASFA says the superannuation industry is toocomplicated. Ideally products need to besimplified down so that there is no need for financial planners.

No easy solutionAll this doesn't help any small investorswishing to fly in the face of the prevailingwisdom by putting a portion of theirretirement savings into fixed-income. In fact Hoy questions whether widespreadacceptance of fixed-income will occur unlessthere is a major global fright over risk or achange in Australia's tax structure, namelythe elimination of franked dividends,elimination of Division 16 E and removal ofinterest withholding tax on bearer bonds.

In the meantime, Stening at FIIG Securitiessuggests selling down seasoned fixed-income products from the secondary marketto smaller investors. Bayley at NationalAustralia Bank says if corporate Australia is unwilling to issue retail targeted bonds,intermediaries could use credit default swapsto create virtually the same exposure.

In any event, here's hoping equities continue to perform. If not, the 21 per cent of the superannuation market without accessto traditional fixed-income might suffer.

0

20

40

60

80

100

120

via Investment Managers

Directly-invested

Overseas Assets

OtherLands & Buildings

Equity/UnitTrusts

Interest-Bearing Securities

Cash/Loans

$ B

illio

n

Asset Allocation of Directly-Invested Assets and of Managed Assets – June 2004

Source: APRA

040-071 3/5/05 12:12 AM Page 56

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Investment Bank

58

Roundtable – Allens Arthur Robinson

Allchurch: 2004 was an interesting year withplenty of interesting developments. Therewere lots of products and new deals comingalong, with an interesting evolution of productso we saw lots of different types of dealssuch as the single tranche CDOs and capitalguaranteed products. We’re seeing these so-called combination notes, we’re seeingsubstitutable products and we’re seeingmanaged products. So for an easy opener,where do we see 2005 going?

Hargreaves: I saw some of the key featuresof 2004 globally being the transparency and the liquidity in the structured creditmarket, and the CDO market in particular,skyrocketed to the point where multipledealers are quoting on everyone else’s deals.

The bid-offer spreads are in and that definitelyseems to be dragging the institutional clientbase closer to the market. On top of that wesaw the evolution of index products with themerging of the two existing index products.The liquidity that moved into that part of themarket was huge as well. I think those trendsare going to continue into next year. Globallywith credit spreads where they are, evolutionin terms of product will continue if peoplewant to be delivered the same style of returnsand I think one of the key things for 2005could be hopefully more participation by theinstitutional investor segment in the market.

Allchurch: Just talking about development of product, we’ve seen a lot of it and Guy has expressed the view it will continue. One

Chairman:

Matthew AllchurchPartnerAllens Arthur Robinson

Participants:

Michael HendrieManaging Director & Head of Fixed Income Distribution UBS

Gary VassalloExecutive Director, Debt MarketsMacquarie Bank

Moray VincentDirector, Debt Capital MarketsGrange Securities

Jim FingletonDirector, Structured Credit SolutionsSG Corporate & Investment Banking

Craig SwangerDivision DirectorMacquarie Bank

Chris PashleyManaging Director, Capital Market SalesTD Securities

Nick FyffeDirector, Capital MarketsWestpac Institutional Bank

Roundtable

Linda MeadExecutive Director, Fixed IncomeMorgan Stanley

Leo D’AndretiDirector of Fixed Income SalesNomura

Stephen ConradHead of Derivatives Marketing & StructuringCitigroup

Andrew BaumeDirector, Structured SalesDeutsche Bank

Diana ShmulburdAssociate DirectorABN AMRO

Pierre KaterdjianDirector, Rates & Credit MarketingBNP Paribas

Guy HargreavesDirector, Stuctured Credit ProductsANZ Investment Bank

Bill EntwistleHead of Structured Credit InvestmentsAbsolute Capital

Structured Credit in the Australian MarketplaceAllens Arthur Robinson hosted a roundtable discussion of investment bankers, fund managersand distributors about the latest developments in collateralised debt obligation (CDO) productsand their take up by the different investor segments. One major theme in the market is thesuitability of the latest products such as CDO squared and capital guaranteed products to retailand middle market investors and whether disclosure is sufficient defence for CDO packagersand marketers.

Another long-standing question is when will institutional investors embrace CDOs. In themeantime, what changes in CDO structures can be expected when credit spreads begin to move out and the prudence of basing all the CDO product in the Australian marketplace on investment-grade corporate credit are other issues of interest. The roundtable finished with a discussion of whether Australasia is unique or leading the world in terms of directinvestment in CDOs by retail and sub-wholesale investors.

For further information, please contact:

Matthew AllchurchPartnerAllens Arthur RobinsonT 61 2 9230 4943E matthew.allchurch@aar.com.au

040-071 3/5/05 12:13 AM Page 58

Roundtable – Allens Arthur Robinson

of the things we’ve seen this year is thedevelopment of capital guaranteed andcapital protected products in responseperhaps to concerns about how do youdescribe the nature of the risks involved andso taking one element of the risk structureout. Obviously that has an impact on priceand it may be thought to make the productsmore easily understood. But it may also raise questions about whether people reallyunderstand that perhaps not getting all yourincome is, in some circumstances, no less of a bad thing than not getting your entireprincipal. Bill do you have any views on that?

Entwistle: I think clearly there has been a development where the risk has shiftedfrom the principal component of risk forinvestors to the income side so it is aninteresting question to analyse whether that’sa good thing for the end investor. In some of the products that have been in the market,if they’re going down to the middle marketand retail, clearly there is a risk component to the coupon. Now I guess if the endinvestors understand that then that’s okay.What you are really doing is taking a barbellapproach to credit. In other words you’reputting the principal risk aside essentially,give or take a little, and moving it off to theincome side so it has changed the wholenature of what those products are and youwould probably have to question thedeliverability of those coupons over the life of those transactions. Therefore I think that is an interesting development and I wouldcertainly say that any product that we see in the market taking a barbell approach tocredit construction is not necessarily alwayshealthy.

We’ve also seen this in the development ofsynthetic CDO squared. Most of the return is generated from a very small proportion of the product. In other words you might have a product that is backed 80 per cent by low-risk asset-backed securities (ABS)and the balance of return is generated out of a portfolio of single tranche CDOs. Thesame thing is happening there. You’re takinga barbell approach to credit and I throw thisout there to the bankers here, is this really a good way to go or is this really just thesolution for the fact that credit spreads havenarrowed and as we tend to see in thesemarkets, the innovation from the bankers is really delivering a spread that the investorswant but at some cost in terms of risk?

Fyffe: I liken capital guaranteed and incomeat risk somewhat to insurance of our motorvehicles. If we think of third party property,when I first bought a car and I didn’t havemillions of dollars and didn’t have enoughmoney to insure everything I was happy toinsure the risk that I drove into somebodyelse’s car and I could repay that but put my own car at risk. That is what I wascomfortable with, something I could affordand something I could tolerate. In a similarmanner an investor can put their income atrisk; their capital at risk or both, the choice is theirs. It’s important to remember that

investment psychology is a personal thing;it’s not up to the bankers to decide what isbest. If someone can sleep at night becausetheir capital is guaranteed then it’s probablyworth it.

Entwistle: The obvious question from this,and we get back to slotting the distribution of this product into sub-wholesale, is do investors really understand the risk? I’m thinking that is sort of a problem becausedo they really understand where their incomeis being generated from? If it is the equitystrip of a CDO, do they understand thenature of the return components of that andthe likelihood of them actually getting theiradvertised income? It is great to say there is an 8 per cent coupon and for each default it reduces by 2 per cent and at the end whatis the worst outcome is you are going to have zero. It is a pretty simple concept but do investors either understand or need tounderstand the concept of negative carry? I would question that because it is hardlygoing to be on the marketing sheets of dealsbut investors should really understand whatthe risk is and it comes down to how youdescribe it.

Baume: I think the question of investorsunderstanding is too vexed a question for me to try to cover now. But I wanted to pickup on one of Nick’s points about the car andthird party insurance. I think that is partiallytrue but I think there is sometimes a risk thatwhen we do insure the third party property in the way Nick has talked about, it doesn’tchange the overall risk of that car having an accident. Whereas if you invest in things where you’re effectively forced into asituation to take more risk than you otherwisewould have to generate enough income, I think that’s a slightly different question. I don’t know what the right answer is.

I think investors in Australia are pretty smartand are getting better at understanding what it is they are doing. I think there is a reasonable amount of education being had out there but we’ve done three deals andwe’ve had pretty good back-ups from peoplewho’ve bought one deal, to the second and to the third deal in the retail space. We’vealso attracted a lot of new investors eachtime we’ve done a trade so I think people are actually getting to the point where theyare prepared to look at what has happened in the past, and we are getting some back-upand some new investors every time.

However, the overall protection investorshave when investing in CDOs is that theydelay the impact of a negative event andeffectively require multiple events “if theyoccur at all” before they suffer real losses.Principal may deplete in a hurry if multiplelosses end up being suffered, but you don'tmake the losses unless those multiple eventsoccur. I think once you create a CDO squaredyou're pushing the severity of losses (oncethey occur) even further. You're pushing thelikelihood of losses out further but the losshappens more quickly once the loss point

One of the things we’veseen this year is thedevelopment of capitalguaranteed and capitalprotected products inresponse perhaps toconcerns about how doyou describe the nature of the risks involved andso taking one element of the risk structure out.

Matthew Allchurch

I agree that liquidity at an institutional level,and particularly via theindices, has been animportant developmentfor the domesticinstitutional market.

Michael Hendrie

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is reached. In fact when you combine capitalstability with interest at risk in a singlestructure, you're actually creating aninvestment that looks a little bit more in terms of returns like your normal bondportfolio loss curve, but with a higherheadline return. Therefore it's a funny way ofalmost replicating what a normal bond lookslike as an IRR, so that's not necessarily a badthing either as long as investors are awaretheir coupon can be quite risky.

It’s difficult to know which investor should ownwhich thing. It is difficult for us to decide that. Ithink we all have to build products that havecertain features and we have to be able to bequite open about how we talk about thosefeatures operating. Some people, like Nick said, feel more comfortable with the insurance than other people. Others say: "well actually I'm more comfortable to gowith something that has a much lesserlikelihood of happening at all but if somethinghappens, it might be a bit more consequential."

Mead: Given all of the innovation in CDOproduct in the past year, I would be interestedto hear from the distributors whether theythink that investors have had the time to fullyunderstand the differences in the structures.One area of concern is with combo notestructures, since these structures started asfully principal protected but newer structureshave AAA rated principal, for example. I’m concerned that the definition of principalprotection has become blurred, do you thinkthat investors really understand when theprincipal in a structure isn’t fully principalprotected, rather, that it is rated to say, AAA, that their principal is at risk?

Baume: One of the reasons people haveratings on things isn't simply to ratesomething and say it is investment-grade but also to say even though the sponsoredbank is rated 'x', these things are ratedsomething other than 'x'. I think people are relatively comfortable with the idea that a rating indicates yes, it is investment-grade but maybe it isn’t the same quality of investment-grade as something else. Look at the prices that people were preparedto pay when ABN did HY-FIs. They were able to distinguish that one was a different ratingfrom another so I don’t think investors arestupid.

Mead: My concern is that as the structureshave evolved, it is important to make surethat the structures are being marketedcarefully and the differences highlighted. For example, the combo note structures thatwere initially marketed as principal protectedwith just the coupon at risk, have changed.Innovative structures with rated principal and risky coupon have been sold to investors in this region. I just wanted to make sure thatthese distinctions were carefully marketed toinvestors.

Baume: I think it is incumbent on the peoplewho do the marketing of the product to berelatively explicit about the fact that it has

a principal rating only, if that’s what you’regetting at Linda, and the principal rating is not a guarantee by anyone. In fact when we did our first retail issue we got smackedby people for saying it was a bond. We allthought that they were corporate bonds and everyone understood that a bond had a beginning date, an end date and a couponbut apparently just the use of the word bondconfused people so I think you’re right thatpeople have to be explicit.

Vassallo: Linda’s point is a relevant onebecause we did wrestle with that ourselves.Our product was not principal guaranteed or protected. It was in a AAA portion of aCDO. Therefore what we did was treat thetwo parts of the return (principal and interest)as being part of the same investment, justdifferent levels of risk within it. We thereforemake no claims about any guarantees. Wejust say the principal is invested into the AAApart of a CDO and we go through the capitalstructure and show the top piece and thelower piece and we do scenario analysisshowing the number of defaults in theportfolio that it would take to get to that level.Obviously, the income is affected by a muchlower numbers of defaults and that is shownclearly there. I think a point that needs to bemade clear is that we had to go to a lot ofeffort both internally and with our lawyers to make sure investors knew they weren’tgetting a Macquarie guarantee but were justentering into a AAA CDO which has a lot ofprotection in terms of the number of namesto default but that if that number of namesdefault then the principal will be impacted.

Allchurch: Liquidity and transparency. We are starting to see more. How important do people feel increased transparency andincreased liquidity are to the development of this market?

Mead: Very important, especially given the primary investor base for this product inAustralia and New Zealand are middle marketand retail clients. One of the roles that thelarge global banks have tried to fill is providingliquidity and transparency for this product.This transparency and liquidity has increasedthrough several means.

Firstly, the creation of global credit indicesand tranched products. Secondly, the accessto valuation models, such as basket pricingtools on Bloomberg. And finally, the seminarsand educational forums that have been takingplace locally. I feel that it is very importantthat we continue to educate ourselves as well as our investors. This will be the key to the on-going success of the CDO productin Australia and New Zealand.

Allchurch: Are there any other views aboutliquidity?

Katerdjian: I think liquidity is a word that hasbeen thrown around on every structuredproduct that’s come out in the last decade.The thing people need to bear in mind isthese products have actually been selling

Roundtable – Allens Arthur Robinson

Our product was notprincipal guaranteed or protected. It was in a AAA portion of a CDO.

Gary Vassallo

If you make thetransaction liquid thatmeans there are lots of buyers and sellers.Having lots of buyers andsellers means you don’tget a premium to the restof the marketplace, so in fact they don’t wantliquidity.

Nick Fyffe

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without liquidity which suggests it hasn’tbeen as significant a impediment as somewould suggest. I think looking forward,liquidity is going to be a feature of newtransactions in this space, and will enhanceexisting structures, but ultimately productsuccess still comes back to price. BNP hasrecently started offering live, on-line trainingplatforms for structured credit product, andyet the feedback is that that alone isn’t thereason clients want to deal. They’re stillinterested in new ideas and attractive pricing.Basically, liquidity is improving but I don’tthink it’s the holy grail of structured credit anylonger.

Fingleton: The only comment I’ll make aboutliquidity is that we don’t deal in a market thatis exactly liquid anyway. Even our most liquidgovernment bonds and semi-governmentbonds aren’t really liquid in the technicalsense. I can remember years back looking for a price in government bonds in $200million per line. You actually didn’t have to tell the dealer what side you were comingfrom and you could get set in that ticket size.However now, if you walked into the marketand asked for a price in $200 million of agovernment bond: a) you have to tell themwhat side you’re coming from; and b) you’rerather lucky if you get set in $200 million.They’ll probably wimp out and it has got to be about $50 million a ticket.

The issue is requiring liquidity for a productthat has been customised in the first place(so that the investor gets the deal they reallywant), and that incorporates a liquiditypremium anyway. When the investor wants to sell this customised product and expectsliquidity then that is a somewhat unrealisticexpectation.

Synthetic CDOs are not yet a truly liquidproduct, particularly when a transaction is fully customised to a client’s wishes;remember the ability to customise is thebeauty of single tranche products. Theproduct came out of a market where with a cash flow transaction, you had equity,mezzanine and senior tranches and none of the investors really got exactly what theywanted; there were compromises all round.Single tranche transactions solved thisdilemma. The investor gets exactly what theywant; the price for that is that they lose theliquidity on the transaction. However as themarket develops liquidity does improve and itgenerates opportunities to create secondarymarkets in transactions. But you always haveto bear in mind that if it is a highly customisedtransaction then you may not find anotherbuyer unless you are prepared tocompromise on price.

Pashley: This whole discussion associated with liquidity has come about in an environment where credit has been very constructive. There aren’t too manytransactions out there as far as I’m awaretrading the wrong side of par, investorliquidity tends to mean “what’s the bid”,

the accommodating credit market hassupported this. Product technology andinvestor understanding has come along way, I expect to see a more orderly marketapproach to this product if we were toexperience a credit environment like mid/late2002.

Vincent: Liquidity has always been a functionof the numbers of buyers and sellers in themarket and if you don’t get a large number of buyers and sellers you don’t really haveliquidity. Grange has a large number of buyersand sellers and it is easy for us to facilitateliquidity in a rallying market. Obviously if youhave a falling market, people don’t want to sell and take a loss. It just isn’t in humanpsychology to do that so I think everyone will probably see a decrease in liquidity in a falling market.

However there are also two types of liquidity.Going back to Linda’s point, on the indextranches, I think there are two types ofinvestors out there. There are those who arebuy-and-hold and actually investing and thenthere are those who want to trade and movein and out. It is a different type of liquidity. If you want to trade short term rather thaninvest it is clearly essential to have pricetransparency and to be able to move in andout of the market. If you are more buy-and-hold then I think liquidity isn’t a key criterionand may not even be beneficial if you have to mark-to-market because there are priceson the screens every day.

Fyffe: One issue on liquidity that I’d like tomake is most investors, certainly the ones wetalk to in CDOs, don’t want them to be liquid.That isn’t because they wouldn’t like to tradethem but because typically AAA securitiesthat are highly liquid will trade at governmentbond flat. They don’t trade at governmentbond plus100. Therefore if you make thetransaction liquid that means there are lots of buyers and sellers. Having lots of buyersand sellers means you don’t get a premium to the rest of the marketplace, so in fact theydon’t want liquidity. They like it if it is free butthey won’t pay for it.

D’Andreti: All I can add, to the generaltheme, is that basically bespoke CDOs in single tranche format are usually structured to suit a particular investor’sneeds/requirements and thus you’d find itdifficult to suggest that you would instantlyfind a buyer for that investment once theinvestor decided to sell it. However, that said, we are seeing more transactionsoffered in global format with variouscurrencies offered. I think we’ll see a lot more of these transactions come to markethere in Australia and New Zealand and should find favour with institutional investors. Theglobal nature of these offerings should have a positive impact on liquidity. Each investor sub set though has their own set of driversand objectives and so products will betailored with those needs in mind.

Managed funds are very well understood byresearchers and so on and it is the researchersthat form part of theframework that plannersuse to assess suitability.

Craig Swanger

Synthetic CDOs are not yet a truly liquidproduct, particularly when a transaction is fully customised to a client’s wishes;remember the ability to customise is the beauty of single tranche products.

Jim Fingleton

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Baume: I was just cogitating on that aspeople were talking that there is a definitebifurcation of markets. It might even be atrifurcation of markets but the institutionalinvestor base can have as much liquidity as it wants. In Deutsche we talk about creditduration now as those kinds of products havebeen developed, along with Morgan Stanley,UBS and several other market participants.There are 19 banks that make prices in theliquid indices, in the options on the indicesand in the tranche products coming out ofmost of the indices you get several price-makers. Therefore, for the institutionaluniverse there is absolutely no question thatif you want to trade credit duration and youwant to trade correlation, it is as liquid as theAustralian government bond market. In fact alot of the time it will be more liquid than thatso there really is a big difference in which partof the market you're trying to talk about interms of who is taking credit risk. It iseffectively two discussions that we're having.The discussion of the funded note typeinvestor versus somebody who is takingactive credit exposure.

Katerdjian: We started this particulardiscussion around the doomsday scenariowhere the credit cycle eventually pushesspreads wider and investors start looking forthe liquidity door. The technology employedby investment banks to build and managestructured credit risk over the last 2 yearshas developed significantly and one thing noone has mentioned yet is the role of globalcorrelation books. Gone, I think, are the days where there’s a resistance to providinga price for such manufactured product,because any buy-back had to be laboriouslydeconstructed and the hedge unwound. We would now expect that correlation booksand the incredible development of the globalsingle-name CDS market itself would providebid support for credit even at the bottom ofthe cycle. When US benchmark credit Fordwent through a period of aggressive spreadwidening, it was single name CDS tradersthat were providing underlying bid support for Fords cash bonds.

The market has fortunately developed in a good credit environment, with spreadstightening and seasoned deals makinginvestors money. However, general marketsentiment that credit is due to widen ratherthan tighten, most likely within six months,could see a rush to reduce or offlay positions.A lot of seasoned paper will hopefully have enough value to bear some spreadwidening. I think we’ll still see correlationbooks showing liquidity. My original point was liquidity is important but I don’t think it is the selling point. I don’t think it is going to be, “Buy this because it is liquid product”. It is something that is key but it isn’t the mainbuying point.

Baume: I think that depends on the investorbase. For institutions I think “Buy thisbecause it is liquid” is in fact the main sellingpoint because institutions thus far haven’tbeen falling over themselves to buy single

tranche products. The thing that will getinstitutions interested in participating in thecredit trading that is going on among theirpeers overseas is liquidity. I therefore think it just depends on what space you’re lookingat.

Hendrie: I agree that liquidity at aninstitutional level, and particularly via theindices, has been an important developmentfor the domestic institutional market. And although many, if not most institutionshave cautiously dabbled in CDOs of somedistinction, the big end of town are definitelyattracted to the transparency and liquidityoffered by the index product.

But something worthy of more discussion,which Bill mentioned earlier, is the wholesuitability versus disclosure issue. I thinkeveryone in this room would agree that wecollectively have a vested interest in ensuringthe suitability of end buyers of structuredcredit. We’re all collectively pretty dedicatedto making sure that works out because as we know, if an unexpected number of defaults occur there will be questionsasked and fingers pointed as to why this was deemed appropriate for a given investortype. Disclosure issues have clearly beenconsidered, however suitability certainly from UBS’ perspective remains the mostsensitive issue facing the bank whendistributing structured credit product. There doesn’t seem to be, yet probablyshould be an industry group which focuses on suitability.

Liquidity was another issue raised earlier.There has not been a time when moreresource has been dedicated into providingliquidity at the institutional investor level and middle market space. There are moreresources going into distribution to themiddle market, councils, and universities and that can only mean two things. Firstly,increased secondary market liquidity andsecondly greater product knowledge of thosedistribution platforms. So, as opposed toCDOs and structured credit being a product-push investment, it has become more of a solution pull where people are engagingthose around this room in designing productsthat actually suit the investor as opposed todesigning products that solely provide thebest economics. Therefore I think there aresome really positive changes going on.

Allchurch: So that probably takes us fromliquidity into the issue of client suitability.Steve perhaps you have some thoughts on client suitability. The comments fromAndrew about there being different marketsare interesting. With the sort of productswe’re seeing develop now, you’d questionwhether some of these products coming out now–products like Deutsche’s Xenonproduct which is more of an equity-flavouredproduct – are these targeting the samemarket? And how many markets are weactually dealing with? Are we looking at a single market? Steve, some thoughtsplease on client suitability.

There aren’t too manytransactions out there as far as I’m awaretrading the wrong side of par, investorliquidity tends to mean “what’s the bid”, the accommodating credit market hassupported this.

Chris Pashley

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In other parts of the worldCDOs have been adoptedby large institutions andretail investors havebought into those fundsand are getting CDOexposure that way.

Moray Vincent

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Conrad: I think one of the biggest challengesas a product producer and probably for a lotof us around the table is not so much what we put in the offering document nor probablywhat the larger distribution sales forces(attached to a bank) or the largerindependents like a Grange do, because I’msure suitability in those environments will bewell taken care of. The challenge is when ourproducts – a percentage of our products – goout to the financial planning community and itmay be more difficult to gauge the tone ofhow they are sold.

At the end of the day each of thesedistributors is licensed by a very strongregulator however if a client, and this isprobably more at the retail level, does getaggrieved and if they do complain then it willcollectively affect all our products. How dowe as product manufacturers defend againstthat? I think having a dedicated section onsuitability within an offering document that is likely standardised by a group of peerswhich is represented around the table andthat is both graphical and descriptive, issomething that will be the best defenceagainst the inevitable situation of anaggrieved investor making a complaint.

Hargreaves: Suitability is obviously an issuethat ANZ focuses a lot of energy on as welland I think suitability, certainly at the retaillevel, has been driving a lot of the capitalprotection technology that has beendeveloped over the last half-dozen or moreyears but certainly increasingly more in thelast couple of years. Organisations thatprefer to take a profile in products wherecapital is protected, and protected bythemselves or a suitable single name, canfeel comfortable they are going out to themarketplace with products whose marketvalues are not going to fall to less than 50 per cent or 60 per cent in the absolute worstcase. I think some organisations are startingto deal with suitability questions by designingproducts with those kinds of features.

Baume: We are building a very large rod for our back. In hindsight, it appears HIHmandatory converting notes weren’t suitablefor anyone. When you invest, you invest. Youhave a set of things you are used to. We aretrying to create an environment where we canoffer things to people who have licences andwho understand the investors. I personallyhave no idea whether any trade I have beeninvolved with is suitable for any particularindividual investor. What I know is it has a setof characteristics that we expect to be able toexplain clearly and concisely. You and Dianaare in as good a position to discuss whetherthat is appropriate. I think that is a legalquestion.

Shmulburd: It isn’t just a legal questionbecause lawyers are notoriously bad atmanaging their own finances as well. I thinkthe financial planning industry as a wholethough has other frameworks that help themdetermine what is suitable for their clients.There are research houses which dealer

groups employ to assist them in determiningwhether or not a particular product isrecommended for a particular client type with a particular risk profile and it is that sortof underlying platform which allows financialplanners to help their investors decidewhether a particular product is suitable forthem. However having said that, I think just as in the investor space we are starting to be a lot more driven by what our investors are asking for, you need to listen. You can’tlisten to the individual CDO investor or retail investor but you can listen to what the financial planning networks are telling you and what dealer groups are telling you are necessary and you can start thestructured product with that in mind.

Allchurch: I suppose the comment I wouldmake because it has been designated as a legal question is that I think there are twolegal issues. One is that it is a legal risk whichthe issuer and those responsible for puttingtogether the offering document take andwhich they are responsible for. I think all ofyou around this table, when you look at theprospectuses for every deal I've ever seen,there are obviously decisions taken which not everyone would necessarily agree with.But all the decisions relate to the quality of disclosure, which I think has been prettygood on the deals coming to the market.

That is a different issue from the risk ofpeople who are on selling on your behalf.Clearly if financial planners are marketing and they don’t know their client and don’ttake steps to understand their client thatmight leave them in a different position. But if the prospectus is good you should be okay.Having said that, there is obviously capacityfor those things to get blurred, for aggrievedinvestors to complain to financial planners,for financial planners to complain that theywere mislead or the prospectus didn’t do thejob properly or that notwithstanding what theprospectus said they were told other things.So yes, it is a legal issue but commerciallyyou’ve got to tread that line betweenproducing a product that investors are goingto want and that obviously involves a level ofrisk. Investors have to accept the risk thatthey can lose money and if you’ve told themthat and explained it properly then theprospectus should stand up under a test of scrutiny.

Swanger: To me there are three separateissues with this. We have been talking aboutthis problem of suitability now in the industryfor 15 years plus. CDOs haven’t changedanything. When managed funds came outpeople said these are very strange lookinginstruments so we had better explain theseproperly. I guess that is the key point here.Managed funds are very well understood by researchers and so on and it is theresearchers that form part of the frameworkthat planners use to assess suitability. Wherewe as a collective group really have to add alot of value is helping these researchers whountil a few months ago thought CDO meantthat someone had done cash on delivery with

I think that one of thereasons Australia andNew Zealand probablypicked up on this productmore readily than in the US or in Europe isbecause there is lessbreadth of product in Australia and NewZealand.

Linda Mead

We are seeing moretransactions offered in global format withvarious currenciesoffered.

Leo D’Andreti

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a bit of dyslexia thrown in. We’re now in adifferent environment. They’re getting moreused to it but we have a lot of information that they don’t understand at this stage. We know a lot that they don’t know and thefaster we can pass that information on andgive them the tools to be able to assess a good CDO versus a bad one without anyshameless plugging, then that will add a lot of value to the industry.

I think Stephen’s point is a very good oneabout saying we should have some sort ofcommon framework that we use to pass onthat information but you can’t actually say this is suitable for people aged 65-plus withgrey hair and kids. It just doesn’t work thatway. The planners have to make the ultimatedecision about suitability. We have to passthe information on.

The third point is there is disclosure as our line of defense. When it comes to be beingsued, Stephen is right, we have the balancesheets not the planners. We had a situationrecently where an investor in our MPET Trustand MPET is Macquarie Private Equity Trust,there was MPET1 and there was MPET2.MPET1 did very well. MPET2 hasn’t donevery well to date. We had an investor whocame to us and said: “Hang on, after twoyears of a 10-year product, my unit price is85c and it started off as $1.00. I’m going tosue you because I don’t think you’ve done avery good job because it’s gone backwards.”We said okay, well it’s fine, and we got him to talk to the fund manager, Sandy Lockhartwho is very humble. Sandy said, yep westuffed up, that first investment wasn’t verygood but this is a 10-year investment andwe’re making seven or eight in a pool overallhere and we’ve got some other goodinvestments in the pipeline. He took that on board and said: “That’s fine; I’m going to sue you.”

He had already gone to the distributor, whichby the way is represented indirectly in thisroom, so we’re not talking about a Mum-and-Dad financial planner. We’re talkingabout a large distributor and their lawyers had told him to run away and come to talk to us. Our lawyers took it on and gave meimmediate feedback saying the prospectus is so clear that this is a risky investment.Private equity is a risky investment so there is no way a reader of that prospectus couldnot understand there is a good chance theywill lose some of their capital along the way.Then the external lawyers who were engagedby this investor came to us and said we’regoing to sue you, we believe you haven’tdone the right thing according to theprospectus and by the way can you send us the prospectus. Then they came back to us after we sent them the prospectus andsaid actually we’ll pull back that letter thanksvery much. It was so blatantly clear in ourprospectus where we had said right up frontwho is this suitable for–it is suitable forpeople who are willing to risk their capital in order to make above the risk-free rate ofreturn.

That is a very long-winded way of saying yesthis is an issue we need to look at. Suitabilityis an issue where we can help ourselves, butthe prospectus, as long as we disclose therisk very clearly, is a strong line of defense for all the balance sheets that sit behind it.

Vincent: At Grange we don’t see our primarydefence as disclaimers and disclosures,although we obviously have those things for legal requirements, we very much focuson suitability and the quality of the product we sell. We tend to be very conservative interms of whom we sell our products to andwe tend to focus on value rather than high-risk products. We try to make sure theproducts don’t blow up in the first place. That is the easiest way to avoid any kind of negative feedback or being sued – to nothave bad experiences and that is where weare putting the majority of our efforts. Wherewe come into conflict sometimes in some of our CDO deals is with those arrangerswho want a lot of disclaimers and disclosuresand they don’t want to take sufficientresponsibility. Ultimately we want them with us trying to design a great product for investors and we feel they have to takesome responsibility for that product. Grangeis all about having built up a franchise ofdistributing value product to people and,touch wood, we haven’t had any blow-upsyet. There is a lot of our franchise value inthat and we want to work with people whoshare those same values. Therefore really I think that we in this room should spend a lotmore time making sure that the investors aresuitable; unlike the one Craig mentioned whocame back and wanted to sue him. He clearlydemonstrated he wasn’t suitable for thatproduct in the first place by his actions.

Entwistle: When I think of suitability, the best defense against suitability is to deliver a quality product because you don’t run intothose problems down the track.

I just wanted to switch pace for a second.Absolute Capital, as a professional CDOmanager, arranger and packager oftransactions has a unique perspective. We’re the only one in the room – the rest are distributors or manufacturers of product.The thing I often observe in the market – and I think we have this perspectivebecause we look at the wider credit markets– and a lot of the focus today is in a verynarrow part of the credit market. Therefore interms of a defence and the appropriatenessof products, I think the quicker the bankersredirect some of their innovation intodelivering some access to the wider creditmarkets the better and we’re principally here today talking about investment-gradecorporate credit risk. There’s a whole worldof credit risk out there, whether it is theleveraged loan market, high-yield bonds,emerging markets, ABS and its variousderivatives. I guess the challenge out there isdelivering some of that more diverse productinto the market. There are challenges andthat is the exact reason why the type of creditrisk that is ending up in the middle market

To the extent that therehas been the high profiledevelopment of the CDOproduct, that in itselfcould be unique, but in terms of volume andbreadth of product wehave got a long way to go.

Stephen Conrad

Overall protectioninvestors have wheninvesting in CDOs is thatthey delay the impact of a negative event and effectively requiremultiple events “if theyoccur at all” before theysuffer real losses.

Andrew Baume

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and retail is very concentrated in investmentgrade corporates, so to the bankers here thesooner you get some of that product out, andI know people are working hard on it, a lot ofthese issues will go away.

Fingleton: One of the problems withattempting to attain a wider diversity ofproduct in terms of the type of underlyingcredit exposure is that it is really not feasiblewith single tranche product; diversity ofunderlying product type is really the realm of cash CDO product. The underlyingframework of synthetic CDOs effectivelyeliminates using leveraged loan product andrestricts access to high yield product andother markets. Unfortunately the verymention of product with high yield underlyingexposures tends to generate unfavourableresponses simply because of the associationwith the pejorative term “junk bonds”.

The market space we have here in Australia is predominantly synthetic investment-gradeproduct (with an increasing exposure to ABS)because that is probably the easiest productto deliver. Offering the investing public amore diversified product in terms of the typeof credit exposure can only be achieved if theinvestor is prepared to take a product whichis essentially only available in US dollars orEuro – that then gives rise to other risks,primarily prepayment optionality and currencyexposures.

It is probably more appropriate thatexposures to these types of structured credit products be gained via a managedfund. In my view these two investmentstrategies can co-exist; there is no one here saying that you shouldn’t invest in funds and you should only invest in syntheticinvestment-grade product. What we aresaying is that synthetic investment-gradeCDO product is an alternative to aninvestment in a fund which invests in a diversified CDO portfolio.

D’Andreti: If we talk about the retail space,and why CDOs have taken off, in such a short space of time, some of the reasonswhy this has occurred is because investorshave been disappointed by the performanceof managed funds in the past but more soinvestors are managing their own money(there has been an explosion in self managedsuper funds) and so it is taking charge overthe direct investment process.

As would be the case with any investment,suitability, advice and diversification are themajor issues for investors. Hence the issuesfor us as manufacturers, and the distributors,is making sure who it’s being sold to isappropriate and that investors understandboth the benefits and the risks associatedwith these types of investments.

Allchurch: Regarding investorsunderstanding where the risks lie in thestructure, there have been some commentsaround the tightness of credit spreads. Credit

spreads are pretty tight at the moment andthat might lead people to think that to get the high yield you have to look at how you’re going to generate that yield in thisenvironment and that’s going to impact on thetype of structure you come up with. What willbe the impact if that low spread environmentchanges and if spreads start to widen?

Fingleton: It is probably the opportunity to doa couple of more deals. However for anyoneholding product, particularly transactionstructures that are highly leveraged, it won’tlook terribly tasty. For an investor that marks-to-market their holdings, then obviously thatis an issue but to the extent that product is held by retail then that isn’t so much of aproblem (as generally such an investor wouldnot revalue their holdings). However it reallyprovides a better chance to generate productand I’d like to think less risky product.

In a scenario where credit spreads get tight I can only reflect on the experience with cash flow CDO product from the 1998cohort. There were a couple of structuresimplemented around that time that wereprobably sub-optimal. The transactions wereput together in the context of very tight creditenvironment and, when things did go pearshaped, certain structural features wereexactly the wrong thing to have in anenvironment where the default experiencewas an outlier. In fact, certain of thesefeatures actually made a lot of transactionsworse.

I’d like to think that with the transactions thatare coming out now, we’re not going furtherdown the risk spectrum. Recently I have seensome deals which have had some prettyaverage names in the portfolio and clearlythey are put in the portfolio to leverage up the spread in the deal. I’d just like to thinkwe’re not leveraging up the credit exposureon the trade to simply get a deal out the doorbecause we have to beat someone’s last dealbenchmark number.

Pashley: Credit spreads have come in a long long way in the last 18 months. One of my concerns associated with productinnovation is that the first knee jerk reactionhas been to keep similar-rated trades atsimilar levels and by responding to thecompression in spreads, all we’ve done is introduced additional leverage. I am notsaying using additional leverage in responseto the compression is the wrong thing – I do though wonder if the repeat investorsAndrew refers to understand the additionalsensitivity the performance of thesetransactions will have to credit spreads.

Hargreaves: I think the current credit spread environment does beg the questionas to whether or not transactions are more properly structured with experiencedmanagers who are probably going to give you a performance that might more resemblethe average of the portfolio’s credit quality as opposed to the static deals that perform

Roundtable – Allens Arthur Robinson

You can’t listen to theindividual CDO investoror retail investor but you can listen to what the financial planningnetworks are telling you and what dealergroups are telling you are necessary and you can start the structuredproduct with that in mind.

Diana Shmulburd

Basically, liquidity is improving but I don’tthink it’s the holy grail of structured credit any longer.

Pierre Katerdjian

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much more like the bottom 3-5 per cent. Withthe technology that is in the marketnowadays, it could be the case that the nextbear market in credit is characterised bysome fairly large falls in certain names thathopefully experienced managers can keepyou away from. However as a general ruleperhaps credit index levels might not moveout as far as we saw them move in 2002because the market is a bit more mature and it may not tend throw the baby out with the bathwater in the next bear cycle.

Entwistle: That is a topic dear to my heart.Let’s not do the manager thing to death today but I think what Guy was getting at was you’re not actually going to find that out,the value of the manager and good managerselection in today’s environment. You’ll onlyfind that out when you need them and is thatsix, 12 or 18 months away, something in thatrange. Therefore I think I’m probably onlygoing to convince you all of the benefit of themanager in hindsight so if we do this forumagain next year then we may be able to standtall and say look it was a bloody good ideahaving a quality manager in place because in the good times in credit, they don’t play asimportant a part, they construct the portfoliobut their real benefit is apparent when thecredit index pops off the cliff and they can add their value then.

Vincent: I think Bill’s possibly right. In 18 months he may be standing here andsaying “these managers really distinguishedthemselves in these deals I did, they werevery good and in these other deals I did theyweren’t so good” so I think there willprobably be a spread of managers. I think if there is a downturn in credit you won’t findthat all managers add value, you’ll see thatthe good or lucky ones do and the poor or unlucky ones actually subtract value. To illustrate this let’s suppose Bill has gotParmalat in his portfolio and he wants to“manage it”, i.e. sell it before it defaults, who is he going to sell it to? Is AndrewBaume at Deutsche Bank going to bestanding there with an attractive bid to takeit? In this situation Parmalat is out there in themarket and the only sort of players in thatspace are good managers and bad managers.Some manager has to take the loss, it doesn’t magically disappear. It is essentiallya zero sum game or possibly a less than zerosum game because everyone is paying feesto managers and this is an additional cost to investors over and above the loss onParmalat. Hence, I think that good managerswill distinguish themselves positively but I think bad managers will also distinguishthemselves negatively and the deals withpoor managers will certainly perform worsethan static deals with no manager.

Fyffe: First of all I think there is a lot ofarrogance going around the room in terms of our ability to forecast the future, ourunderstanding of CDOs, our intelligence in credit and the view that seems to be heldthat investors don’t understand what they are buying. There is no guarantee that credit

spreads will blow over the next six, 12, or 18months and actually I would find it offensivebuying a product from someone who wasfirmly of the opinion that the product theywere selling would under perform in the nearfuture. At Westpac we aren’t as bearish asyou guys so we’re happy to sell our products.That’s a plug. But I think the arrogance interms of assuming that retail, commercial and high net worth doesn’t understand theseproducts is quite annoying. These people do understand a lot of the products they’rebuying, they may not understand some of the finer detail but they understand theirrisks. The other thing is we’re all talking about products that are AAA, AA and A. AAA means that the product can withstandthe economic cycle, the business cycle, the life cycle, the buyer cycle, any cycle wewant to put in there and people who buy AAAproducts probably should be able to rely onS&P to give them good advice.

Hendrie: Structured credit in Australia is a bitlike the housing market at the moment. If yousaw a serious hit or deterioration in the creditmarket, I think there’s a lot of money lookingto invest on the next down cycle. At the topend of town, the institutional investors aregetting more comfortable with the productsbut they’re reluctant to participate with creditspreads at the current levels; leveraging atthe bottom does not make sense. If you had a three-year plan and you looked back wherewe were 1 1/2 years ago, the product hasdeveloped tremendously here. In the nextyear and a half you’ll see it triple, quadruple in size as well.

Katerdjian: I wanted to make a quickcomment about the institutional market inAustralia. The irony of the Australian investormarket is that by-and-large it’s gone from an illiquid CDS market to a liquid retail CDO market. But we still have an illiquid CDS market and there’s this massive gap of product and investor class in the middle. It is quite ironic because every year isexpected to be the institutional watershedyear, and institutional investors are expectedto jump wholeheartedly into CDOs. We allseem to have forgotten the range and depthof other credit derivative product available as stepping stones.

Ultimately, product development is notsuffering because of lack of investors anymore. Now the manufacturers are trying tokeep up pace, come up with new productsand ideas and if you hadn't previouslyinvested in static CDOs, you’re now lookingat ABS CDOs and CDO squared andmanaged CDOs. Once you’ve decided to get involved as a new investor, at what pointdo you get onboard?

Pashley: Moray, your business is a netbeneficiary of the growth in direct investment(retail and sub wholesale) – There must be areason for the growth – has it come about byfrustration associated with the performanceof the institutional investors? Sheer growth in funds under management? Has the direct

Roundtable – Allens Arthur Robinson

The bid-offer spreads are in and that definitelyseems to be dragging theinstitutional client basecloser to the market.

Guy Hargreaves

The obvious question from this, and we get back to slotting the distribution of this product into sub-wholesale, is do investors reallyunderstand the risk?

Bill Entwistle

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investor been enticed by the yields? I am nottoo sure, the one thing I do know is withoutretail /sub wholesale we would not have ahybrid market, we would not have astructured rate, structured equity or astructured credit market.

Allchurch: We might wrap it up with one last question related to Australia leading the world with this type of stuff. When I had a discussion with one of my peers in Londonand told him what I was doing, he looked atme aghast and said you can’t possibly bedoing that for retail investors. So is Australialeading the world or are we just going off onthe wrong track?

D’Andreti: From the Australian point of viewit certainly is the enigma and New Zealand to a lesser extent. However having said thatwe are beginning to see demand starting to come through in Europe, be it areas ofScandinavia and the UK and the like and alsovia Asia as well, so it is picking up. However,it’s worth noting that typically investors in Asia, Japan, the Middle East and Europe have had more of a focus on the structurednote market to deliver the higher yields theyare looking for. Interest rate, FX, equity andcommodity linked structures are commonplace so the push for credit type productshas to compete with these other products.It’s been the reverse here. So it’s not a matterof sophistication its more the point of whatpeople are accustomed to.

Baume: I think that our first deal was the first listed CDO in the world and I think weprobably played that up a bit. However inreality it is giving ourselves an unwarrantedpat on the back to think we’re doingsomething that the rest of world, who arebasically brighter than us in most stuff, aren’talready doing. It is just that we’ve been louderabout it and we’ve also been as a group, allthe people in here have been a lot more openabout actually getting the issues out andspoken about and into trade publications, but if you look at the kind of activity that wesee being printed with private banks and whathave you that are clients of Deutsche aroundthe world, there are loads of CDOs beingdone into the non-institutional, privateinvestor and retail space. It is not so muchthat we in Australia are doing it and no oneelse is. It is that we in Australia as a group areactually talking about it a lot. We are engagingwith the people who are going to participate,we are getting ourselves in the businesspublications, we are having nasty articleswritten about us and when we have nastyarticles written about us we are rethinking the way we express ourselves. I think it isn’tactually that these aren’t going on in the restof the world but that we’re doing a relativelygood job of drawing out what it is that theissues are.

Conrad: If you walk around any of the retailbranches in Asia of the large banks up there,the sophistication and the volumes of capitalguaranteed and structured funds far dwarfsthe development in this market. To the extent

that there has been the high profiledevelopment of the CDO product, that initself could be unique, but in terms of volumeand breadth of product we have got a longway to go.

Fyffe: Obviously the innovation began with the Labor Party turning up thesuperannuation guarantee levy that in turn educated Australians into becomingsophisticated investors. There is an elementof political manoeuvering there but as anation for 10 years we have been made veryaware that we need to save for our future.Europeans don’t need to because they get it in pension. Asians do. So to say we’remore sophisticated, it makes sense that weare slightly more sophisticated than the restof the world because of the fact that we havea culture that has to save for the future.

Vincent: I’d say that I think we’re going to getto the same end point as the rest of the worldby a different methodology. In other parts ofthe world CDOs have been adopted by largeinstitutions and retail investors have boughtinto those funds and are getting CDOexposure that way. Now you’re seeing thoseareas follow perhaps Australia’s or Asia’slead into more direct investments so retailinvestors are going to choose between fundsand direct investments in structured creditproduct generally. I can see exactly the samehappening here. The institutions are gettinginto structured credit product and then retailinvestors will have the choice, betweengetting into these products directly orthrough a fund manager so I think we’re going to end up in the same place.

Shmulburd: The other issue with comparingEurope with Australia is that in Europe theparcels in which your retail investor could buystuff are actually greater. Therefore eventhough you may be selling in Europe to thesame style of investor, you’re actually sellingin greater parcels that don’t require retail-style disclosure from a legal or regulatoryperspective. That may be another thing that is happening, that wholesale-style productsare being sold to retail-style investorsbecause the parcel appetite in Europe and the US is in greater parcels and that level of disclosure is simply not required.

Mead: Just along those lines, I think that oneof the reasons Australia and New Zealandprobably picked up on this product morereadily than in the US or in Europe is becausethere is less breadth of product in Australiaand New Zealand. By comparison, in the USyou have a very large corporate bond marketwith many different types of products. You have interest rate products andmortgage bonds which are tranched in somany different ways and are made availableto retail and small institutional investors. I think that is why CDOs may have beenembraced a bit more aggressively down here than elsewhere so far.

Hendrie: We’d agree with that. TheAustralian retail investor comes from an

Roundtable – Allens Arthur Robinson

equity mindset and the fixed income-likeproducts that have been successful in themarket – for example hybrids – have hadhigher yield, been sold off a prospectus viathe broker networks and been ASX listed and traded. There is not a retail awareness ofmore conservative fixed income instrumentsas there is in the US or continental Europeanmarkets.

Swanger: New Zealand. Another bit ofarrogance. New Zealand has actually donemore than $400 million in a country with4,000,000 people. New Zealand is a long way ahead of Australia in this space. Thereason New Zealand investors took off withthese things so broadly is exactly Linda’spoint – an incredible narrowness of what elseyou can go into. There was a BBB- issuedone in New Zealand a year ago at 75 basispoints over and it was over subscribed 10times over for a $500 million issue. There is just not that much money in New Zealand,but they love their fixed interest. They areobsessed with fixed interest and have a 60 per cent allocation. That is a factor in Australia but nowhere near as much as I think the lack of alternative product is.

Mead: As a retail investor in the US I haveaccess to all sorts of things. A lot of thingsthat you see in the institutional market in the US you can buy as a retail investor. It is quite easy. There is someone packagingit up for retail so it is quite easy to access.Furthermore, US pensions / Supers, havebeen DIY for many years.

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Whether you look at the onshore or offshore primary market in 2004, it was undoubtedly a very big year for the local banks.Written by James Dunn

As balance sheet growth continued,retail deposits declined and thereforethe amount of money they had to raisein the wholesale markets increased.

Primary Markets

Financial issuers dominated the market lastyear, accounting for 76 per cent of totalAustralasian issuance. In a sense, 2004showed the confidence of the Australianbanks, and their flexibility: they were at theheight of their funding powers, encounteringno constraints anywhere, with the marketseager to accommodate their idiosyncraticborrowing strategies.

National Australia Bank, for example, tendsto issue large public deals, and does the leastnumber of transactions in any one year; at the other extreme, Commonwealth Bankprints hundreds of small reverse-enquirytransactions that are sold into retail andprivate bank markets all over the globe. ANZ and Westpac are somewhere in themiddle of this range, but continue to becapable of innovation and flexibility, asdemonstrated by Westpac's US$1.75 billion“extendable” bond issue that tapped themassive US 2a7 (money market funds)market, and ANZ's €800 million fixed-rateEurobond with opportunistic £400 millionsterling 'floater' attached.

“There's not a major financial market thatthey couldn't issue into, or a currency thatthey couldn't raise money in. It's hard to imagine a product they couldn't issue,”says Jason Murray, director of capitalmarkets at Citigroup. “If you look at thediversification that the Aussie banks have,versus a Barclays, a Lloyds TSB in London or a Wells Fargo in the US, it's phenomenal.

“It's almost to the point – but it hasn't gotthere yet – where you could argue thatthey're too diversified, they're spending toomuch time trying to raise money in severaldifferent currencies in different maturities and different products. The benefit of doingthat – and the reason they do it – is that it's a hedge against any one of those markets, in particular the domestic market, closing upor experiencing a widening of spreads.”

Murray says this approach “differs hugely” to big banks in the rest of the world. “WellsFargo, for example, has never issued in acurrency other than US$. They have been tothe Euromarket, they've issued in Eurodollars– they have a Euro MTN programme – butthey've never issued in Euro, never issued

in Yen, or Sterling. They seem to take theview that they're a US bank, all their revenueis in US$, and even though it's easy to swapfrom one currency to another, they wouldrather just do everything in US$. Australianbanks are the opposite, they want to have an established presence in all of the majormarkets, because it's a lot easier to go backto them and tap them than it is to go there for the first time.

“The diversification they've got gives themfantastic choice, and that's the way they look at it – they look at every market, andwhichever offers the cheapest cost of fundson an all-in swapped basis (that is, in A$) at any one time, they'll go and raise fundsthere. Investors view Australian banks asgood credits: they're all AA and have verystrong balance sheets, very low loan losses,very low delinquencies on their mortgages.Definitely, if you look at the Aussie banks,they are phenomenally well-diversified andsensible about the way they fund versus their international AA peers,” says Murray.

If you look at thediversification that theAussie banks have, versusa Barclays, a Lloyds TSB in London or a Wells Fargoin the US, it's phenomenal.

The Australian banks are well-accepted in the US, the deepest market globally, and “can always raise money there”, says Murray. “But they also have thedocumentation and programs to issueanywhere, which makes sense.”

From an issuer's point of view, says CraigShapiro, executive director treasury atMacquarie Bank, conditions “couldn't bemuch better” at the moment. “The absolutedemand for credit is so strong, and if thiscontinues, the supply/demand imbalance will continue to worsen. There seems to be bucket loads of cash being generatedglobally, at a rate faster than investmentproducts are being generated for them to place that cash into.

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Primary Markets

“If economic growth tempers a little bit, theneed for banks to issue paper will probablyreduce slightly. At the same time, though,fund managers will probably still begenerating an increase in the cash they haveto invest – so the supply/demand imbalancewill remain. In the near term it's hard to seeanything that's going to change that; howeverat some point, there will be a change in thecredit environment.”

If economic growthtempers a little bit, theneed for banks to issuepaper will probably reduce slightly.

When this may occur, and what might causeit, is the “sixty-four dollar question”, saysShapiro. “There's a lot of focus on currenciesat the moment, there is the twin US deficits,the holdings of US treasuries that have built up in the Asian central banks, even oil, but that seems to be off the agenda at themoment. There are some big imbalances at the moment, and how long it will remainsuch an issuer's market, we don't know.”

Much will depend on the interest-rateenvironment, says Ross Glasscock,executive treasurer, group wholesale funding, at ANZ Bank. “Every year seems to be different, and this year will be different. It was an issuer's paradise last year: we hadbenign interest rates, investors were cash-rich and asset-poor, and the major tradingbanks did about $50 billion of funding. I think competition for funds this year is goingto be all that much harder. But the marketscontinue to evolve and we see new investorsopening up for us in Asia, in Europe and theUS, and that's very important to us.”

Increasingly, says Anthony Miller, executivedirector at Goldman Sachs JBWere, issuers are realising that the major marketsare becoming one – or at least, behaving like it. “From an execution point of view, thedevelopment of one global market will alwaysbe somewhat constrained by the challengesof accessing US versus accessingRegulation S financing, but certainly from a Regulation S point of view you can viewAsia and Europe as one pool of capital.

“We saw this with CBA's Euro and US$ dual-tranche deal. What was a very interestingdynamic in that deal was the level of Asianparticipation in the Euro-denominatedtranche. Clearly the appetite and capacity to move away from US$ is growing: the factthat some of the sizeable orders we got onthat Euro transaction were from Asia was a really good sign.”

Miller does not believe that Asian investorsare likely to dump their preference for US$-

denominated assets, but says the extent ofEuro appetite that the CBA name attractedreinforced that in the capital markets today,“you've really got to be thinking across anumber of different regions when looking to execute a transaction.”

“The fact that Asian investors will buy Euros means that if you're doing a Euro-denominated transaction, you shouldn't be shy about at least speaking to Asianinvestors, or even roadshowing along the way,” he says.

Get your head around itFor corporate issuers, getting their headsaround the market is less a case of viewingthe various funding sources as one than ofdeciding to tap them in the first place.

“That has been one of the most interestingthemes of the last two years, that some ofthe smaller companies in Australia – andunrated companies – heading to the USprivate placement market, and really takingadvantage for the first time, not only ofoffshore capital markets, but in some cases,the capital markets; companies like Tabcorp,or Spotless,” says Murray. “Some of thecompanies going to the US would find it hard to raise money in the Australianmarket, because it's so ratings-sensitive – you usually need a BBB rating at least. So to go out and raise US$100 million in theUS private placement market, without anyrating, very quickly and very effectively, atphenomenally tight credit spreads, is a realboon for these companies. The appetite ofthe US private placement market is so huge,for anything that is not US – because they'vetaken a long look at their portfolios andeverything is in the US! These pretty decentAustralian credits come along, and they getlapped up.”

From an execution point of view, the development of one global market will always be somewhatconstrained by thechallenges of accessing US versus accessingRegulation S financing.

Murray expects the smaller corporate issuersto continue to tap this large demand from US insurance companies. “The Australiancorporate credit is viewed very favourably in the US, for a couple of reasons. One, justgiven the success that the flow has had overthe last two years, there is a kind of a generalperception that these corporates are well-managed. Filtering down into the detail, the credit metrics of corporates in Australiaare very strong compared to their UScompetitors, for a bunch of reasons.

“Secondly, these investors have realised that Australian corporate-land is made up of a lot of very strong monopolies andoligopolies: the bank sector has four majorplayers, brewing is represented by two main companies, telecommunications a few market players, steel is one or twocompanies, the supermarket /grocery sectorthe same and so on. In just about everysector there has been consolidation such that the one or two or three remaining playershave very strong margins, and therefore,strong and sustainable credit profiles. It's not like in the US, where in the steelindustry, for example, you've got 20 differentplayers, any one of which could go bust atany time, because the margin competition isso strong. Airlines over there are the same.”

But corporate issuance is also the great hope for the local primary market: while small compared to the US private placementmarket, the local market needs corporateissuance and it has the money to meet it.“The market is under-supplied and looking for diversification, both by region and byindustry. The Tabcorp US$700 million privateplacement in 2004 was an excellent exampleof this,” says Nicholas Ross, head of debtcapital markets at UBS.

An individual Australian corporate borrowerwould be unlikely to raise anywhere near the

Every year seems to bedifferent, and this year will be different. It was anissuer's paradise last year.

Ross GlasscockExecutive TreasurerGroup Wholesale FundingANZ Bank

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$15 billion-$20 billion a year that the majorbanks do, says Murray. “It's a lot moredisparate funding, too. Companies tend tofund far more in the bank loan market, andsimply the way that they're set up, they havea lot less leverage; they simply don't need the kind of funds that the banks do.

The market is under-supplied and looking for diversification, both by region and by industry.

“You take the biggest issuers on thecorporate side – someone like a Telstra – they only do one or two bond issues a year. The property trust sector has beeninteresting in the way that it has developed,as we saw, with Westfield doing the largestcorporate bond issue last year. Westfield in particular is now a much larger company: as part of that it will look to fund in the majoroffshore markets as well as Australia goingforward.”

But always, the corporate issuers will be lessprolific. “An issuer such as Foster's might doone or two bond issues a year; BHP Billiton,maybe one a year; Woodside, maybe one

a year. It's more strategic for corporates, in that the board gets involved, it's a bigstrategic decision where they should issue,do they time their debt roadshow at the same time as an equity roadshow, the CEOand the CFO tend to go on the roadshow,etc. Whereas in a bank, Treasury has moreautonomy, because that's what they do full-time,” says Murray.

Patience is a virtueLooking at corporate issuance by number of deals is somewhat impatient, says PeterBlock, director of debt capital markets at ABN AMRO. “Sure, there was a relativelack of corporate issuance in this country lastyear – there were really only about eight keycorporate issues – but what people should belooking at is that in that number, there weresome highly notable deals.

Sure, there was a relativelack of corporate issuancein this country last year – there were really onlyabout eight key corporateissues.

“CSR, for example, had tremendous rarityvalue, coming from that BBB band, and washeavily over-subscribed. Wesfarmers,returned to the domestic bond market lastyear (in March, with a $300 million deal) andthat was another good transaction, Tabcorp,while benefiting from the recently announcedindex changes, was also noteworthy, in that it was the largest BBB issuer in the seven-year part of the curve, with $450 million. We also saw new issues from Transurban,Mitsubishi Developments and Telstra in themarket. The market loves to see corporatepaper, for diversification reasons and alsorarity value.”

The wildcard in corporate issuance, saysBlock, is M&A activity. “I think a lot of theonshore activity from Australian corporateswill be driven by that. Already in 2005 we'veseen a couple of major corporate activities– for example Foster's bidding for Southcorp– and the growing activity surrounding the media sector, ahead of the proposedchanges to the cross-media and foreignownership regulations slated for later incalendar 2005.

“We expect that activity to continue; I thinkthe corporate issuance that we see this year will be very much event-driven and to that end, there are a number of things in the pipeline that will influence the amountof activity that goes on,” says Block.

“The absolute demand for credit is so strong, and if this continues, thesupply/demand imbalancewill continue to worsen.

Craig ShapiroExecutive Director TreasuryMacquarie Bank

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Issued in Australia by UBS AG ABN 47 088 129 613 (AFSL* No. 231087). The key symbol and UBS are the registered and unregistered trademarks of UBS. © UBS 2005. All rights reserved. *AFSL means holder of Australian Financial Services Licence UBS7195/FPC/B

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Roundtable – UBS

Ross: I thought it would useful to quicklyreview 2004 and consider some of the keythemes. One of the things that struck us in2004 was the absolute volume of issuance.That came off the back of a very strong 2003where I think it is fair to say that all the banksissued more debt than they had expected toor at least more than they had issued in 2002.One of the things I’d like to ask John is whatdrove some of the increased activity for theCBA in 2004 versus 2003?

te Wechel: In 2004 we, and I guess all thebanks in Australia, saw enormous growth in the housing market and increasedcompetition for deposits. There was growthin excess of 20 per cent for housing, and atone stage during the year we were beginningto wonder how we were going to fund thegrowth, such was the pace that assets werecoming on the book. Fortunately that taperedoff a little but it was definitely housing thatdrove the activity with deposit growth simplynot able to keep up. It made it very exciting by opening up lots of opportunities in termsof the different markets we could start to lookat for funding that growth. In summary, we

saw a year where asset growth outstrippeddeposit growth quite significantly.

Ross: Picking up on that theme of liabilitygrowth, Jeff, have you seen increasedcompetition for retail deposits, particularlygiven Bank West’s aggressive entry into the market, for example?

Sheehan: With these new entrants in theretail deposit market price competition has increased but it hasn’t had a significantimpact on our volumes. As John said wecertainly saw a year where we didn’t haveliability growth out of retail markets matchingthe asset or lending growth. We saw 17.5 per cent growth on the loan side of thebalance sheet and 6.5 per cent on the retaildeposit side. We are holding up pretty well on retail deposits. We have had a long-standing strategy of adopting this ‘highinterest rate at call’ strategy. That goes backto when ING entered the market and I thinkthat has positioned us very well in terms of having a defensive strategy for our retaildeposit base. From our perspective, we seenew players in the market that are certainly

Chairman:

Nicholas RossManaging DirectorHead of Debt Capital MarketsUBS

Participants:

Ross GlasscockExecutive TreasurerGroup Wholesale FundingANZ

John te WechelGeneral Manager, Group FundingCommonwealth Bank of Australia

Craig ShapiroExecutive Director TreasuryMacquarie Bank

Ian McLeanHead of Group Funding & LiquidityNational Australia Bank

Roundtable

Jeff SheehanChief Manager, Capital MarketsSt.George Bank

Gavin GunningDirector Head of Financial Services RatingsStandard & Poor's

Simon MaidmentManaging DirectorHead of Fixed Income Rates & CurrenciesUBS

Matthew TaylorExecutive DirectorRatings Advisory ServicesUBS

David FeldmanAssociate DirectorUBS

Australian Financial Institutions in the International Capital Markets UBS assembled the funding chiefs of some of Australia’s most prolific bank issuers in the debtcapital markets to participate in a roundtable discussion that looked at the drivers behind thegrowth in their debt issuance volumes and how that growth had coincided with developments in the domestic market that enabled it to accommodate the banks’ larger funding requirements.

Discussion then turned to how the global rise in liquidity is changing the way the banksapproach the market. Rather than preparing to tap the markets according to a preordained plan, banks can be much more ‘strategically opportunistic’ to take advantage of particularpockets of investor demand but must be nimble and responsive to do so. In this respect banks’ communications with investors are increasingly shifting from deal-specific road showsto regular, ongoing communication.

The roundtable finished by looking at whether the spread compression on residential mortgage-backed securities, the new accounting standards and looming new regulatory capital guidelineswill change the banks’ view on securitisation as a funding source and whether the US domesticmarket could be the next big investor base after Asia.

For further information on Australian DebtCapital Markets please contact:

Nicholas RossManaging DirectorHead of Debt Capital MarketsUBST 61 2 9324 3943E nicholas.ross@ubs.com

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trying to achieve strategic objectives that are different from ours and so be it. Movingforward we intend to maintain our retaildeposit growth. However, for us profitabilityin terms of our liability base is all-important.

Ross: To get back to the theme of the driversbehind the increased activity last year, theAustralian banks as a group now represent a very significant volume of fixed income andFRN assets in the global market and we haveseen all the banks look to access a broadernumber of markets. Ian I suppose one of thethings we have observed over the last year or so with the National is that it has beenmore diversified in terms of the markets thatit has accessed. Could you comment on that?

McLean: One of the things we have beendoing at the National over the last couple ofyears is moving away from the short-datedarbitrage funding opportunities to do morelengthening out the term of our funding.

Echoing what John was saying in regards to the volume coming through, it surprised us that the volume and housing growthcontinued to stay on longer than weexpected. Even with growth in retail liabilities,the gap between growth in our depositfunding base and the growth in our assetswas widening. The strategy therefore hasbeen to tap a number of markets. We havebeen very surprised by the growth in thedomestic market and the ability to get $1 billion issues away and to do five-yeartransactions. It has been fantastic in thedomestic market given where the bankbill/Libor swap is means the domestic market presents better opportunities andcost of funds. However, our strategy hasbeen to tap the domestic, traditional Euromarket and the Asian investors and getting a good mix in those markets.

Feldman: As Ian alluded to, it is not onlycurrency diversification that we have seen,we have also seen most of the Australianbanks lengthening their maturity profiles. This creates an extra layer of investordiversification as pension funds, insurancecompanies and retail investors prefer longerdated securities, particularly in a low interestrate environment. Interestingly though,Australian banks still have shorter maturityprofiles than many of their offshore peers.

Ross: Picking up on that comment regardingthe domestic market, Simon could youcomment on why we have seen a shift in terms of the liquidity of that market anddemand for tenor?

Maidment: I think when we look back overrecent times one of the key changes for themarket was the change in the withholding tax treatment for domestic bank issuance.For the first time we had an issuance formatthat was unambiguous in terms of the abilityto distribute paper offshore. That coincidedwith a time where we saw increasingdemand for Australian dollar assets fromoffshore investors from both a currency and

interest rate perspective. When we look athow the market has grown and the fact thatbank deals now are easily $1 billion ratherthan the $300 million to $500 million tradeswe saw in the past, you see the benefit of 30to 50 per cent of those deals beingdistributed offshore.

It also gets back to the theme that credit is a global commodity from an investor’sperspective and they are going to look for the best opportunities in various markets.With the basis swap where it has been wehave had offshore investors that have beenhappy to buy Australian assets at notionallyhigher (A$ Libor) levels on the basis they can fund them in Australian dollars.

The other underlying theme is just the excess of domestic demand over supply for Australian fixed income assets. We haveall talked about that for a very long time but it has only been in the last 12 to 18 monthsthat we have seen that played out in terms of the way the market has developed. We’llprobably continue to see that over the courseof this year.

Ross: What about the comment that a number of domestic institutions makearound senior versus subordinated debt. I am sure that everyone at this table has sat in front of domestic institutional investorsand they have said ‘we don’t really want the senior debt – we want the subordinateddebt’. What sort of impact has that had onthe capacity for bank funding in the domesticmarket?

Maidment: The domestic market’s structureis quite different from the offshore markets.The domestic market that we think aboutmost of the time is comprised of institutional-type investors whereas historically when we have looked at the distribution of Euromedium-term note (EMTN) transactions in US$ or Euros it has been more of a bank-investor appetite for that paper outsideAustralia.

One thing that has happened in the last 18 months is that the bank-investor bid forsenior paper has emerged both domesticallyand offshore but clearly the institutionalsupport for the Lower Tier 2 product hasgrown quite dramatically as well. You don’tneed to go back too many years in Australiato see Lower Tier 2 deals for the major banksthat were $200 million to $300 million in sizewhereas last year there were deals easilyprinting $500 million and up to $1 billion.

The feedback is still broadly that institutionalinvestors would rather have subordinatedversus senior debt but as we see the spreadcompression that we have had over the lasttwo or three years, I think people are startingto think about the relative value. Institutionalappetite for senior bank paper is more drivenby swap spreads as the bank paper offersgood liquidity and a good proxy for swap.From a senior debt perspective that workedquite well last year because swap spreads

The Australian banks as a group now represent a very significant volumeof fixed income and FRN assets in the globalmarket and we have seenall the banks look toaccess a broader numberof markets.

Nicholas Ross

Diversification is at theforefront of all banks’thinking; particularlygiven the increasing size of banks’ balancesheets and fundingrequirements.

Ross Glasscock

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were so wide. Over the course of 2001/2002when swap spreads were very narrow, therewasn’t a lot of appetite for paper at lowmargins to swap whereas last year, with swap spreads at 40 to 50 basis points overgovernment bonds, investors were happy to buy bank paper as a proxy to swap. Someof the performance of 2004 is clearly cyclicalbut there are structural adjustments as well in terms of the tax treatment and the offshoredemand that I think will play out again in 2005.

Ross: John when you think about thedomestic market, do you think about it in the same way strategically that you do theEuro, US$ or sterling markets, for example,or is it strategically more important to you to have outstandings in your home market?

te Wechel: I think strategically it is moreimportant to have a diverse source offunding. The issue then becomes engaginginvestors in a number of markets but limitingthat to a number that is actually sustainable in terms of your borrowing requirements.There is no point revving up investors andgetting them to put lines in place if you aren’tactually going to deliver the product. The ideaof trying to remain relatively scarce in thenumber of markets has a certain amount ofappeal from my perspective. The domesticmarket is and always will be very importantand generally does produce a very cost-effective source of funds but it is only part of the equation.

Just picking up on one of Simon’s earlierpoints as well, there is a brand new investorclass in the domestic market and that is the banks themselves. With the changes in the paper that banks can hold for liquiditypurposes, I think that has put a very strongbid into the market, certainly for senior paper.From a borrower’s perspective therefore it now becomes a really interesting balanceas to which market you go. It is cost versusstrategy.

Feldman: Notwithstanding the strategicbenefits of retaining outstandings in thedomestic market, it has provided a clearpricing advantage for issuers in both thesenior and subordinated markets. There has been a tremendous amount of spreadcompression and let’s not also forget thebasis swap. In 2004, the 5-year Aussie/USbasis swap traded in a range of 9 to 14. It was only two years ago that it fell as low as 2 on the back of an extremely high volumeof Uridashi issuance. A slowdown in Uridashiissuance and ever-increasing issuanceoffshore has caused it to widen back outagain. Over the past 6 years, the basis swaplevel has almost never fallen in the first half ofthe year so we can expect it to remain withinthe current trading range in the short term.

Ross: Thinking about the domestic marketversus the international market, MacquarieBank has increased its issuance profile quitesignificantly over the past 12 to 18 months.Craig, you recently executed a largeinstitutional tier one transaction in the sterling

market. Could you talk a bit about the driversbehind that because I imagine the domesticmarket would have been a very compelling and real alternative to that sterling transaction?

Shapiro: We were in the fortunate situationthat all the global markets were in very goodshape at the time we were contemplating thehybrid issue. The main drivers for executing aSterling Tier 1 transaction were a combinationof our growing international activity and our desire to have an instrument that couldhelp fund these activities. We also made anassessment overall of the relative pricing andexecution risk in the domestic market relativeto the offshore markets.

With respect to international activity, byissuing a Sterling-denominated instrumentthrough the Macquarie Bank London Branchwe were able to raise offshore capital that we can use to initially fund activities in the United States and potentially in someother offshore locations. The proceeds were swapped into floating-rate US dollarsfor this purpose.

In terms of execution risk, our preferencewas to issue a perpetual non-call structure.At the time we were assessing the marketsthis structure had not been issueddomestically but it was a well-establishedstructure offshore. That was another factor in the decision-making process. In addition,we were able to achieve more favourablepricing in the offshore markets.

Ross: St.George has been very focused on investor diversification over the yearsfrom its beginnings as a building society tobeing a super regional bank or the fifth major. Jeff, with a rapidly growing balance sheet and increasing demands on your wholesalefunding requirements, how have youmanaged to get the time with relatively limited resources to ensure you are gettingout to meet investors and pioneer in newmarkets to ensure you have that capacity?

Sheehan: Over the medium term we decidedthat it was very important that we havealternatives in terms of sources of seniorcommitted funding. That has been veryimportant to St.George over the years in terms of our liability management strategy.

Certainly in the early days as a buildingsociety, we took the steps towardsestablishing a credit profile for St.GeorgeBuilding Society offshore, initially in the Asian markets. We are talking almost 20 years ago now so this is a medium- to long-term strategy. We then moved up into Europe as our growth increased and our funding needs increased. So we have maintained that strategy. We believe we present the investor with a veryconsistent strategy and with a high level of communication with respect to not onlywhat is happening with the St.George creditstory but also what is happening withinAustralia.

Roundtable – UBS

Offshore people arelooking to chase yield and AAA-rated Aussiemortgages are aboutas safe as you can get.The loss/default rate is basically zero so if you can get a little bit of spread investors areinterested.

John te Wechel

In 2004, the 5-yearAussie/US basis swaptraded in a range of 9 to 14. It was only twoyears ago that it fell aslow as 2 on the back of an extremely high volumeof Uridashi issuance.

David Feldman

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We have found that committing theresources that we do have has been very important. Over the years seniormanagement right up to the Chief Executivelevel has been very committed to taking the time to go to see Asian and Europeaninvestors at least once a year. We have setup a regular routine of road shows to tell thecredit story and each year we try to targetnew pockets of investors and new countrieswhere we haven’t had a high degree ofpenetration. I must say it is still pleasing we are able to bring on new investors andgiven the maturity of our strategy that is a very good outcome. Last year, in fact, in terms of our overall funding, a third of thepaper we issued in senior markets went toinvestors new to St.George. It is importantfor us to continue to push that envelope that the investor base in Europe, in Asia andin the US are well informed and have goodcapacity to take St.George paper becausethe strategy on which St.George hasembarked includes quite strong balancesheet growth and we want to ensure we have got consistent and reliable access to the most cost efficient capital markets that we can.

Glasscock: Diversification is at the forefrontof all banks’ thinking; particularly given theincreasing size of banks’ balance sheets and funding requirements. In ANZ’s case our term funding requirement 4 years ago was $5.0 billion and in 2004 we raised$20.0 billion. Diversification by counterparty,structure and geographical region is critical to ensure we can access this volume and not rely on one market or investor base tooheavily – which protects us from marketdislocation and volatility.

ANZ commenced its fixed rate Euro strategyin 1999 and in the last 6 years we have calledon in excess of 300 investors. This singleEuro currency gave us access to investorswe previously couldn’t access as they tended to buy only local currency. The relationshipswe have made and the credit lines available to ANZ saw the European investor basesupport a major Lower Tier II financing in2003 where markets were shut to otherissuers.

We have also pursued diversification inAustralia and Asia in the fixed rate markets. In A$, the tide in terms of volume and pricingchanged with the 2nd round of changes to Interest Withholding Tax in April 2003when barriers to access offshore investorswere removed and ANZ has documentationin place to capitalise on this. We havesubsequently gone back to the A$ market for $1.0 billion+ deals and consistently sold30-40 per cent offshore. A$ is truly a globalcurrency.

Asia has also been a focus through fixed rateUS$, Euro and A$. Of the last $3.0 billionANZ has raised nearly 20 per cent has goneinto Asia.

Ross: Gavin, there is a lot of talk about thehuge liquidity in the markets, investordiversification and terming-out the balancesheet. If you look at all of the banks’ liabilityprofiles and the number of investors that theyhave and the quality of that investor base, to what degree do ratings agencies give thebanks credit for that and what sort of processdo you go through in terms of score cardingperformance for the banks?

Gunning: On the funding front, there is nodoubt that diversification is given a very highpriority from a Standard & Poor’s perspective.Harking back to some of John’s comments at the start of today’s discussion, the trendsof the Australian bank market over the lastcouple of years has been very strong assetgrowth, largely fuelled by housing, andincreasing competition for retail deposits,whether that is arising from new competitorsor just stemming from a managed fundsmarket that is outstripping growth of the retail deposits market. Our anticipation is that banks will increasingly rely on wholesalefunding and so it is very important that theyhave a large, diversified base of wholesalefunds. It is also very important that they term-out that wholesale funding to ameliorate theirnatural asset/liability mismatch.

Although the Australian banking sectorcurrently is strong, we see some potentialvulnerability for the banking sector becauseof high credit growth and some other macro-economic and industry sensitivities. Giventhis view, and an expectation that banks willcontinue to fund heavily in offshore markets,the matter of increased diversification of funding becomes even more important, as does lengthening the maturity profiles oftheir liabilities. Good liquidity management is also important. If banks are increasinglyrelying on wholesale funding then they need to demonstrate very good liquiditymanagement characteristics. There is stillscope for Australian banking groups todiversify and lengthen funding to a greaterextent. The New Zealand bank subsidiaries of the Australian major banks are more short-funded compared with their parentinstitutions, which is an issue on our radarscreen.

Taylor: I would like to just add the commentthat while diversification of funding isgenerally seen as favourable from a creditperspective, lack of diversification does notpreclude very high ratings. For example, onlythree currencies make up 90 per cent of thewholesale funding of the key AA rated banksin Sweden and Denmark compared with fivecurrencies for the Australian major banks.Furthermore, these Nordic banks have ahigher proportion of wholesale funding in theirfunding mix than their Australian counterpartsand have shorter weighted average life ofdebt on average.

Gunning: The second part of Nick’s questionwas about how Standard & Poor’s factor the banks’ liability profiles – including theirdiversification and term – into our ratings

Over the medium term we decided that it wasvery important that we have alternatives in terms of sources of senior committedfunding.

Jeff Sheehan

While increased use ofwholesale funding placespressure on margins,Australian major banksremain among the most profitable globally on a risk-adjusted basis, particularly when applying the likelyBasel II risk weights.

Matthew Taylor

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analysis. Funding is an important rating factor,along with other financial risk factors, andbusiness risk factors, that are baked into the ultimate rating assigned. With banks,historically the emphasis has been more on analysis of credit risk and asset qualityfactors, in particular commercial loans,property sector exposures, and large lendingexposures and concentrations. Also, withbanks being the highly leveraged beasts theyare, capital is very important. But of all theratings factors, funding is probably the onethat we will be devoting increasing resourcesto in terms of analysis because there is thatincreasing reliance by banks on wholesaleinvestors and, in turn, those wholesaleinvestors are calling Standard & Poor’s askingfor our opinions on the banks. The reasonthat analysis of wholesale funding isimportant is that a bank’s wholesale fundingportfolio, no matter how diversified, is alwaysmore concentrated than its retail depositbase – that is, the average balance of awholesale investor is significantly larger thana retail depositor. Standard & Poor’s is waryof any concentration impacting a bank’sfinancial strength profile. Mainly because of its more concentrated nature, wholesalefunding can move much more quickly thanretail deposits, which can create funding andliquidity issues for banks.

Taylor: Could I just add that while theagencies regularly raise the issue of theAustralian banks’ dependence on wholesalefunding to fund growth, the level of retailfunding as a proportion of the total stillcompares favourably with many similarlyrated European peers. Furthermore, whileincreased use of wholesale funding placespressure on margins, Australian major banksremain among the most profitable globally on a risk-adjusted basis, particularly whenapplying the likely Basel II risk weights.

Ross: Gavin, in terms of analysis, are youactively monitoring the massive increase in liquidity of wholesale funds available tobanks? Five years ago, using CBA as anexample, if it did a three-year US$300 millionfloating-rate note (FRN) in the Eurobondmarket, we might get a book of US$400million. After pricing that they would probablyhave to stay out of that market for at least a week or two, or even a month, beforerevisiting it or else it would have an impact on margins. Now John could probably do US$2 billion in three-years at half the margin and leave a lot of investorsunsatisfied. How does Standard & Poor’sthink about the market depth and liquiditythat’s available to banks now viz-a-vizwhere it was not that long ago?

Gunning: The increasing depth and liquidityof markets is a good thing. That doesn’t applyjust internationally. It applies in Australia aswell. There has been a material deepening ofthe Australian market over the last five years,although it still falls well short of the depth of the US market. As you indicated, moreliquid international markets provide a readysource of funds for Australian banks, and at

much better pricing compared with historicalstandards. The flip side, though, is thatincreased globalisation of markets andtechnology improvements mean that fundingcan also disappear quickly. It is much easierthese days for funds to wash around veryquickly. The implication from a ratingsperspective is that it is important that highlyrated banks manage their funding and liquidityrisks very prudently.

International sentiment can move with speed,with bank-specific issues often morphing intocountry or regional issues. To give a quickexample, the National obviously had a coupleof major risk management hiccups over thelast couple of years and that does impact the whole Australian banking sector becauseif you are an international or institutionalinvestor in a major capital market around the world, part of your mind set is to evaluatewhether this is a country issue or just a bank-specific issue.

Ross: With the issues that the National hashad to confront over the last 12 months, Ian,what would be some of the key takeaways for the institution and how has that impactedyour funding strategy?

McLean: Yes, we’ve had to confront a number of issues starting this time last year with the currency options losses. The strategy from a funding and liquidityperspective was that we deliberately stayedout of the term debt markets until we hadclarity about our ratings position, a firmstatement to say where we were on theratings side of things and we had a clearpicture of what we wanted to communicate to the term debt markets. That saw usstaying out of the term debt markets for a period of three to four months as thingsstabilised. We then went on an activemarketing programme of going around to explain the story.

I’m sure my peers around this table got a lotof questions when they went offshore and I’m sure their opening gambit would havebeen ‘we’re not from the National’. It put a bit more pressure on our short-term fundingand our liquidity positions but with our robustliquidity monitoring we didn’t see any affecton our liquidity ratios. We were obviously in consultation with our rating agencies andour regulator about that and our board so itgot a lot of focus. We were happy with what was happening there, but as soon as the airwas clear, we had designed our marketingprogramme with a clear position about theBoard, what the Board was doing, and whatthe bank was doing and got on the road and spoke to investors given our need for subordinated debt. Given the volume of subordinated debt funding we had toundertake to restore our capital ratios, thelevels we got away were actually coming in. The whole market was coming in and myread of it was that we probably paid a one to two basis point premium given the volumewe had to do.

We are now seeinginvestors coming down to visit us. Particularly in the residentialmortgage-backedsecurities (RMBS) space, previously each of us would have had togo to them and explain the Australian housingcycle but now they’recoming out here to us to do the due diligenceand meet our clearing and collections area which is a healthy sign.

Ian McLean

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I think that was heartening and it showed the depth of the market. I wouldn’t want to go through that again in a hurry but it alsoshowed that we had all three markets open to us at the time with the domestic market,the Asian investors and the Europeaninvestors. All of them were eager to get a bitmore yields by taking the subordinated debtand they were happy to listen to the story butwere satisfied with the fundamental strengthof the group’s rating.

Maidment: One of the themes broadlyacross credit markets, and I guess it is typified by the National deal, is the waythat markets have converged. We have seenspreads in Australia relative to the othermarkets compress and credit is becoming a global commodity that is transferable. Howdoes that affect the way people think aboutfunding? The windows of opportunity thatyou might have had in the past are probablygoing to be smaller and shorter. Does thatmean that you change the way you willapproach the markets and think aboutmarkets, and have to be more nimble?

te Wechel: To be perfectly honest I thinkeach of the banks has a very flexibleapproach to the markets these days. I thinkone of your colleagues coined the term‘strategically opportunistic’ and that iscertainly how we approach our funding. There is an overriding strategy as Jeff wassaying, in the case of St.George and it is nodifferent from Commonwealth Bank, NAB,ANZ and the rest. As the markets you arelooking to continue to develop it is a matter of being nimble enough to tap into thosemarkets when the opportunities presentthemselves. I think it would be a mistake to go into any funding year saying we aredefinitely going to do something in thismarket and that market. You have got to beable to be responsive to the opportunitiesthat come through from the variousinvestment bankers.

McLean: I would echo John’s views. We present to our group executive on ourfunding requirement over the course of thenext twelve months and what markets weplan to tap into in an ideal market situation.However, the actual timing and the executionis fully flexible as to whether we bring thatdeal forward or we do this one compared withthe other. We have got to be fully flexible andhave all our programmes ready to tap intothose opportunities.

Shapiro: I guess in terms of the windows of opportunity, that also raises the issue ofdeal specific or non-deal-specific road shows. To be able to be responsive to the market as the opportunities arise, I think from whatSimon was saying, the chance of doing deal specific road shows will lessen and the strategy of sitting in front of investors on an ongoing, non-deal specific basis isbecoming more appropriate.

te Wechel: I think investors are moreresponsive to those road shows. I can

remember years ago it used to be very much the case that a road show had to be accompanied with a deal otherwise you were unlikely to see all the investors youwere hoping to see. Certainly our experiencethese days is the doors are well and trulyopen just to go in for a chat about the credit.

McLean: We are now seeing investorscoming down to visit us. Particularly in theresidential mortgage-backed securities(RMBS) space, previously each of us wouldhave had to go to them and explain theAustralian housing cycle but now they’recoming out here to us to do the due diligenceand meet our clearing and collections areawhich is a healthy sign.

Sheehan: I was only going to echo what theother guys are saying that we discovered lastyear what ‘strategically opportunistic’ meantwhen we did a US$ deal – targeted Asianroad show and subsequently when checkingpricing in Sterling, Euro and US$ we foundthat the Sterling basis had moved two basispoints in our favour. So it was a case of ‘sorryAsian investors’ that we did a sterling issue.However, we actually sold some of that toAsian investors. That is exactly when welearnt how flexible investors are these daysand that they are more flexible in terms of thetiming when we come to market. We deferredthat US dollar transaction which is theircurrency of choice for about three monthsand subsequently issued over half of it toAsian investors. We have locked in cyclesnow where we go to Europe and go to Asia.Clearly you can’t just lock in your fundingdecision based on those times as Ian said.Markets move and pricing moves and basisswaps move so that we now have aseparation if you like between those roadshows and those transactions.

Ross: One key theme over the last 12 months has been the compression of spreads. I have talked a little bit todayabout Lower Tier 2 particularly – its spreadcompression has been nothing short ofincredible. However we have also seen verystrong spread compression in the RMBSmarket. I would be interested in whether or not that spread compression changes the way that you view securitisation and the efficiency of securitisation. I would alsolike to know what that means for yourmotivation for trying to execute a coveredbond strategy? We know there are someregulatory constraints with this product andsome issues to address. Then thirdly, let’sthrow it back to the ratings agencies aboutthe impact that this huge liquidity in the globalmarkets has, and if at all it changes the waythey think about the banks.

te Wechel: We have just issued a Medalliontransaction and seen spreads come intremendously on that. For us securitisation is a funding alternative. That is basically theonly thing we have viewed securitisation as.Clearly the capital relief you get on it adds to the economics of the transaction but at theend of the day you compare that against

To be able to beresponsive to the marketas the opportunities arise, the chance of doing deal specific roadshows will lessen and the strategy of sitting in front of investors on an ongoing, non-dealspecific basis is becomingmore appropriate.

Craig Shapiro

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your senior debt funding. Because there has also been spread contraction on seniordebt funding, the relativities are still probablyaround the same so the motivation for doingsecuritised transactions hasn’t changed. It isfunding diversification. Providing its cost isnot way out of line with where you can issuesenior unsecured debt, we’ll continue to do it.

Covered bonds were very interesting to us a year or so ago, particularly when therewas such a high spread differential betweenwhere European issuers were getting theirtransactions away versus where we werepricing in senior unsecured land. With thecontraction of spreads I guess it has becomea little bit more of interest in the theoreticalsense not in the practical sense. Theoverriding thing with covered bonds ofcourse is that the regulator in Australia won’tpermit banks to issue them so it is currentlyvery much a passing interest rather than in the forefront of my mind.

Ross: The depth of the RMBS market hasimproved as well. You’ve just printed nearly$5 billion. What has changed there? Why is there so much more liquidity and why is it so much more efficient?

te Wechel: I think it is exactly the same issueas why Australian investors are looking moreat subordinated debt than senior debt.Offshore people are looking to chase yieldand AAA-rated Aussie mortgages are aboutas safe as you can get. The loss/default rateis basically zero so if you can get a little bit of spread investors are interested. Each deal we do we get a wider group of investorsparticipating. In this particular transaction we had $800 million-odd of A$ securities andthey were virtually all sold offshore. Peopleare just chasing yield and chasing diversity.

Ross: Jeff, through its Crusade programmeSt.George has been a very active issuer of RMBS. Has that been your experience as well? Also, could you discuss whether ornot the changes through the IFRS accountingpolicies will have any impact on yoursecuritisation activities?

Sheehan: To answer your first question, yes, our experience has been consistent with John’s. I guess we valued AustralianRMBS as being relatively cheap in terms of global asset-backed securities based onperformance of collateral. In the beginningthe price comparison was US home equity,which is clearly inferior quality. Given theinvestors are recognising the stellarperformance of our collateral we are nowbeing priced tighter and tighter against assetclasses like credit cards and so on. Even latelast year we were pricing about 10 basispoints over floating-rate credit cards. Withthe compression we have had just in the lastcouple of months, that spread is now closingdown to about five or six basis points so it isbecoming more realistic in terms of pricing.

I think it has been a long-standing educationprocess by the whole industry out of Australia

in regard to the way the Australian housingmarket operates with respect to all the kindsof risks that investors have been concernedabout over the years in terms of servicing etc.

Certainly in terms of the way we assesssecuritisation, just to reflect John’scomments there, we probably factor in therelease of the capital a little bit more in termsof the cost saving. From our perspectivecertainly we are influenced by our creditrating that as an Australian bank rated A, we don’t have access to the kind of volumesthat the AA banks have. Therefore from a diversification perspective securitisation ismore valuable to us and so we’ve been doinglarger volumes compared with some otherbanks in the Australian market. When wefactor in the cost of capital that is released, itdoes become a strong economic argument interms of doing securitisation, notwithstandingthe fact the funding cost is slightly higher thansenior. However, that is improving.

In terms of IFRS, certainly we are now lookingat a situation next year where our securitisedtrusts will be consolidated back on thebalance sheet and we’re looking at all theramifications of that.

In terms of Basel II and the change to capitalallocation that is going to be very interestingbecause obviously there is a reduction in theamount of capital that is going to be allocatedto residential mortgages. Therefore we willcertainly need to be reassessing the classesof assets that we securitise. Rather thanbeing 100 per cent residential mortgage, Ican see we are going to be more diversified interms of securitising assets that have highercapital usage. We have already been downthat path in terms of securitising auto loans.

Ross: Craig, just while we’re still on theRMBS/securitisation theme, what are someof the issues that Macquarie looks at whenconsidering its funding mix and how issecuritisation dealt with in that process?

Shapiro: Our securitisation model is a littledifferent from the other Australian banksbecause we don’t use securitisation purely as a funding tool. It is actually a stand-alonebusiness. Our PUMA Trust issuance is donethrough our Macquarie securitised lendingdivision. The mortgage exposure we have onthe balance sheet is through the warehousethat the bank provides to the PUMA vehiclebefore the mortgages are securitised. We are therefore looking to securitise all our mortgages and because of the way thebusiness is run, we don’t really have anydesire to leave those assets on the balancesheet for long periods of time, especiallygiven the amount of capital that they use up. However, while it is a separate businessunit, we do liaise very closely from a fundingperspective. If the warehouse balance is starting to get a little high and we needadditional funding, we will work closely withthe PUMA guys regarding the timing of thenext securitisation.

Our anticipation is thatbanks will increasinglyrely on wholesale funding and so it is veryimportant that they have a large, diversified base of wholesale funds. It is also very importantthat they term-out thatwholesale funding toameliorate their naturalasset/liability mismatch.

Gavin Gunning

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Again with the PUMA Trusts coming back on the balance sheet under IFRS, at thisstage we don’t see that as having any major ramifications for the business model.

Ross: We have seen this huge increase inliquidity and tremendously buoyant marketconditions. We have seen great performancein the bank sector, not only in terms offinancial performance but bond performance.Ian, what do you think could derail that? Whatare the risks? What are the things that keepyou as Head of Funding of the National awakeat night?

McLean: I think the issues from the creditmarkets that keep me awake at night are that spreads continue to crank in tighter andtighter and how much pre-funding do you do. We are four months through our financial year and we have already funded 45 per centagainst our plan for the entire year becausethe levels are good and we’re takingadvantage of those.

It is hard to see what is going to blow thosespreads out on a significant scale, whether it is a global crisis or an Australian bankingissue. We have had a NAB banking issue and it hasn’t impacted senior spreads at all. I just see in the foreseeable future thatspreads continue to crank in tighter andtighter as evidenced by CBA’s MedallionRMBS coming in even tighter. We did thetightest ever level in 2004 and John andLeanne have proved that wasn’t the bestpossible by doing a fantastic deal. So unlessthere’s a systemic crisis – and the ratingsagencies may have a view on that – it justseems steady or somewhat tighter spreads.

Gunning: Issues affecting the banking sectorthat keep people awake at night? Clearlythere are a few macro-economic sensitivitieson the horizon. Australia has gone through a protracted period of the economy bubblingalong. Banks have been growing their booksvery strongly, taking advantage of very goodconditions. The most tangible or foreseeablerisk that would impact bank credit andprobably bank issuance would be higher thanexpected interest rate rises or a reversal of improving employment trends. Putting theissue of some sort of systemic shock to oneside, because they are very difficult topredict, at this stage the indications are thatthe affect is more of a slow down or a softlanding for the Australian banking sectorwhen the economy turns. That is probably the most likely scenario.

Obviously we are talking to each of the banksin some depth and detail regarding their riskmanagement strategies, and how they wouldcontend with a downturn. There is always the possibility of volatility or some big shockcoming from overseas. Who knows what will happen in response to the US currentaccount deficit or higher US interest rates?Having said all that, there has been a lot ofglobal volatility over the last 10 years and

the Australian banking sector has ridden the wave so far, in honesty, probably muchbetter than people would have expected.There has been the Asian crisis, Long TermCapital Management, the US recession, the tech bubble and terrorism. The Australianbanking sector currently is in good shape and is reasonably well placed to handle a moderate downturn. In the short term, the sector is probably heading for anotheryear of pretty strong issuance in internationalcapital markets, but perhaps not as strong as last year.

Ross: Given the massive liquidity anddemand for credit particularly down to BBB,from a AA bank’s perspective, how importantis it to stay a AA given that your access anddepth of funds available in the wholesalemarkets now is so high?

te Wechel: From CBA’s perspective a AArating is carved in stone in terms of the ratingwe are looking to maintain. Notwithstanding a current inclination of investors to movedown the credit spectrum, I think it’s fair to say that the bulk of investors in financialinstitutions tend to weight their portfoliostowards AA rated issuers. I think a AA ratinggives a borrower so much more access,diversity and choice in a real time sense tofunding throughout the credit cycle. I wouldhate to be in a position where I was in a toughcredit environment with a low credit ratingand had to fight for funding. I think the AAcredit rating just gives you that flexibility to source the funds when you do need it.

Ross: To some extent that answers the nextquestion because I think in such positivemarkets and with the world beating a path to your door in terms of wanting to lend youmoney, there is always the risk I suspect ofbecoming complacent or expecting that thecurrent environment will persist. How do youensure that the organisation doesn’t becomecomplacent or expect you to deliver theseconsistently tremendous funding results?

Glasscock: Despite the very strong creditconditions over the last five years there havebeen periods of extreme volatility whenmarkets have deteriorated or closed whetherit be the Russian bond market scare, LTCM,geopolitical or accounting shocks. They are difficult to predict – let alone an unseennegative credit event in your own institution.Capacity and a diversification strategy giveyou the flexibility (and capability) to stillexecute in difficult markets. ANZ seniormanagement is truly committed to a veryprudent funding approach which we also thinkis welcomed by our investor base in terms of performance and the rating agencies.

te Wechel: As we’ve been discussing, it is about having a diverse range of investormarkets available to you, it is about getting in front of investors and making sure they are on top of your specific credit story, the Australian industry and the Australianeconomy, and it is about providing investors

Roundtable – UBS

When we look at how themarket has grown and the fact that bank dealsnow are easily $1 billionrather than the $300million to $500 milliontrades we saw in the past, you see the benefitof 30 to 50 per cent of those deals beingdistributed offshore.

Simon Maidment

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as much information as they need to makeinformed decisions.

Ross: Ian, would you agree with that?

McLean: Yes. Just having all marketsavailable to you at all times is very key.Particularly when we’ve gone through a crisis and been able to get in the fundinghas got a lot of focus internally from thegroup executive and the board. The ability to do a securitisation or issue domestically is a key issue and just having all yourprogrammes up and running and tappingaway at those is important.

Gunning: I think the question oncomplacency is an excellent one. I believethere is a risk in the Australian financialinstitutions sector at the moment ofcomplacency because the sector hasenjoyed such a protracted period of goodconditions. This is really the time wherebanks can invest heavily in their riskmanagement systems before the next hiccup or crisis comes along. Equally, on the funding side, banks can continue to diversify even more in terms of sources of funds, lengthening their maturity profile,improving liquidity and the like. There is a realopportunity at this stage of the economic and banking cycle for banks to safeguardtheir credit ratings. Complacency or over-aggressive strategies now could lead todowngrades later, when the cycle inevitablyturns.

Taylor: From my perspective, the Australianbanks appear weaker in several liquiditymeasures due to the higher utilisation of the balance sheet for lending versus their offshore peers, which tend to hold more liquid securities. However, the ratingagencies derive significant comfort withregards to the liquidity position of Australianbanks on a number of levels includingalternative liquidity (the Interbank DepositAgreement, strong international appetite for mortgage securitisation and supportiveregulatory/political environment), tightliquidity management (foreign exchange isfully hedged, active terming out of wholesalefunding and strong regulatory oversight) anda strong environment (AAA-rated sovereign,consistently strong economic performanceand stable international funding). Theimproved overall liquidity in the market is potentially a positive development from a rating perspective, however, for it to be attributed meaningful credit, the ratingagencies would need to be convinced that it represented a structural permanent changeas opposed to a cyclical upswing.

Shapiro: Just in terms of what Gavinmentioned, I think it is probably fair to say that if you look back at what all the Australianbanks have done over the last 12 monthsthere isn’t really any type of complacencygiven the amount of diversification and thenew types of trades that all the banks have

been doing. I think that is a good sign and agood signal in terms of the risk managementpractices that are being undertaken at all theAustralian banks at the moment.

Maidment: On that theme, we’ve seen over a number of years this sort of diversificationacross currencies and the investor base anda sort of shift, at least on dollar side, out of the European investor base toward Asia.Where is the next frontier? Do we think there is still more appetite to be had in Asia?Where does the US domestic market sit inpeople’s thoughts? Obviously it is still theworld’s largest capital market, but it issomething that hasn’t been largely tappedfrom a senior funding perspective although it has been used for regulatory capital.

te Wechel: Asia has just been such animportant source of liquidity now for a fewyears for the Australian banks and I thinkeach of the banks has a pretty well developedglobal strategy although we each approach itin a slightly different way.

From CBA’s point of view, Asia has been a very important source of funds for us for the last four or so years. We have purposelyremained relatively scarce in other marketssuch as Europe and we certainly haveremained out of the US market. Last yearCBA recommenced repositioning itself. I sayrecommenced because we were quite activein Europe when we were a government-owned organisation but were absent fromthat market post-privatisation. Last year we recommenced building our footprint intoEurope. However, it comes back to a point I made earlier, namely you can develop allthese markets but if you aren’t going toprovide assets to them, you are probablydoing yourself a disservice. So it becomes a factor of where you are in the life cycle of the markets that you are in and your own balance sheet growth. The focus for us continues to remain Asia and we are developing our presence in Europe.Depending on where balance sheet growthgoes over the next 12 months, I would thinkthe US will come into play at some point intime. But it is a question of just when in thatcontinuum do you take the plunge.

McLean: At the National when we went onthe road show through Europe we were quiteimpressed by the continued following we hadin Europe and we just added to that on ourroad show and we’ve been tapping away atAsia. The US market is a bit more a questionof where does it fit into the overall equation. It is a bit more expensive once you add in allthe legal documentation, particularly whendoing a public issue. We have done a coupleof Rule 144A issues there but, as John said,given the depth in each of these markets, ifyou do one deal, there are expectations thatyou will do another and that you will continueto give them supply.

Sheehan: Certainly in terms of marketselection we start out our year with

a funding plan that incorporates what we view strategically as being worthwhilediversification in the markets that we thinkare going to work very well from a cost-effectiveness and from a diversificationperspective, namely markets we can tap into new investors that haven’t participated in St.George and establish new credit limits.As we go through the year obviously pricingis evaluated in all markets for a moreopportunistic approach.

Certainly from our perspective, we have beenlooking much more closely at the US marketthan we have in the past. We have done dealsevery three or four years as our capital needsarise in the US but we have only justestablished a US commercial paper (CP)programme and we have been very measuredin terms of what we do in terms of CP. Wehave also been looking at how we can issuesenior term debt into the US market on aregular basis but without a programme set upthere are documentation and legal issues toovercome and we do feel very comfortablewith the capacity we have in Europe and Asiaand in the domestic market.

I guess in our particular case, thesecuritisation programme we haveundertaken has put us in a good position so we feel that we are not compelled to go back to markets and I agree with John’scomment very much about not over-promising and under-delivering in terms of market activity. That doesn’t get anyoneanywhere. Therefore, we’re generally prettycomfortable the way we are but it is neverneglected and your earlier comment Nickabout complacency is one that we deal withon an active basis all the time with our ALCO.We are constantly providing them withanalysis with respect to how we see ourfunding situation and potentially where wecan take that.

Shapiro: One of the changes for us over thelast 12 months has been the establishment of our non-bank funding vehicle, MacquarieInternational Finance Limited. Historicallymost of MBL’s funding from Europe and Asia has been in the form of FRNs and other banks have been the major buyers of this paper. These banks are unlikely to be interested in buying MIFL paper given it is a non-bank issuer, so when MIFL startslooking at offshore funding markets we willneed to consider different investor bases.That is something we are looking at currently.The other thing that has been floating aroundever since Basel II started being talked aboutis the proposed changes in risk weightingsand the impact on funding levels. As a singleA issuer, the question is whether the banks that currently buy Macquarie Bank paper are going to change their risk weighting to ahigher level and therefore put a higher priceon buying that paper? If that was to occur wemay need to look at tapping other investorsas well. Obviously that is down the track but it is something we are constantly monitoring.

Roundtable – UBS

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To attend or participate, please contact:

Michael DiamondManaging DirectorPacific ProspectT 61 2 9251 1820E mdiamond@pacificprospect.com

Pacific Prospect is pleased toextend you a complimentaryinvitation to attend the AnnualAustralian Credit Forum – whichtakes place on Tuesday 26th July2005 at the Westin in Sydney.

Australian CreditForum 2005

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Kangaroos are anything but an endangeredspecies on the Australian bond market,with issuance almost tripling in 2004 toreach almost $20 billion. Written by James Dunn

The favourable basis swap forKangaroo issuers that had begun in 2003 was maintained in 2004, with offshore issuers lining up to get attractive funding.

Growth & Development of the Kangaroo Market

Wider basis swaps spurs Kangaroo’sPeter Block, director of debt capital marketsat ABN AMRO, says a large amount ofsupply of AAA-rated product from offshorestarted “pretty much from day one” last year.

“We saw a good, steady supply of sovereign,supranational and Landesbank-type papercoming to the market, driven by a number of factors, including relative credit spreads,swap spreads, a favourable basis swap and the changes in eligibility criteria forrepurchase collateral with the Reserve Bank.Generally the offshore borrowers havetended to be extremely price-sensitive, andgiven the favourable circumstances, 2004was the year in which they really came downhere in size.”

Clearly, says Block, the basis swap was favourable, which allowed them toopportunistically meet their funding targets.“That's clearly the number one factor for anymajor issuer in the world. These borrowersare very frequent issuers, in a number ofdifferent markets, and price is the key forthem. Australian credit spreads and relativeswap spreads allowed for investors to take a meaningful position in those bonds; and the basis swap also drove their pricing backto their home currencies, either EURIBOR or LIBOR, so it swapped back effectively the same as it would at home.”

A case in point is the Austrian FederalFunding Agency, which brought the firstsovereign to the Australian market withdomestic documentation when it priced a debut $500 million ten-year Kangaroo inAugust (the Republic of Italy's $1 billion issuein February was in global format). Dr HelmutEder, managing director of the agency, saysthe A$ provided Austria with attractivearbitrage possibilities, which is the reasonwhy the sovereign entered the market.

“To be worth doing, the main thing is that an issue should be cheaper than direct Eurofinancing, and we could achieve that by doingswaps into Euro: it netted out cheaper than a straight Euro issue in our home market. So it was a satisfying final result.

That's what we wanted first of all, a successful bond transaction. Secondly

we wanted the issue to be taken by investorsbecause of scarcity value, because eventhough the Republic of Austria sounds similar to Australia, it is a little bit different – it is a new name in that domestic market.We wanted scarcity value – we wanted to be the first into this market.“

Austria's total funding requirement in 2005 is forecast at €17 billion-20 billion Euro equivalent, so the issue was not a hugepart of the funding task. “We didn't want todo more, we were really testing the market. It would be appropriate to do further issues if we encounter a similar level of investorinterest.“

That's clearly the numberone factor for any majorissuer in the world. These borrowers are very frequent issuers,in a number of differentmarkets, and price is the key for them.

In that regard, Eder says the agency washappy with the broad spread of buyers for its bonds: the paper was mainly taken byAustralian institutions and retail investors – who were looking for a pick-up over semi and government bonds – with someJapanese and other Asian investors alsoparticipating.

There is more to it than thatThere were also factors at work other thanbasis swap and relative spread dynamics. In March, 2004, the Reserve Bank ofAustralia (RBA) announced that it wouldwiden the eligibility criteria for securities used in repurchase agreements with thebank. “Before the change, in their PAR(prime asset ratio) books the bank balancesheets could really only have government and eligible stocks that they could repo withthe RBA,” says Ben Hall, managing director,global financial products, at RBC CapitalMarkets. “The RBA realised that there was a liquidity problem given the lack of

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Growth & Development of the Kangaroo Market

government and eligible paper in the market,so it opened the eligibility criteria to includeAAA-rated sovereign, agency andsupranational names.

“That opened up an investor base that hadnot been a big buyer of Kangaroo credits, and that's the bank balance sheets, which are potentially very large sources ofinvestment. Opening up a wider investorbase increased the volume of demand fromthe domestic market, which in turn opened up a larger category of offshore issuers. The repo-eligibility area was one of the major cornerstones of the market in 2004,”says Hall.

Certainly Landwirtschaftliche Rentenbank,Germany's AAA-rated refinancing agency for agriculture and rural areas, was widelyviewed as reacting to the repo-eligibilitychanges when, on the very day of the RBA'sannouncement, it re-opened its existing $500 million September 2009 tranche(issued in July 2002 and January 2004),taking in a further $200 million and another$300 million the following day; later the samemonth, it launched a $400 million June 2011bond issue into the Kangaroo market, to beincreased in May by a further $150 million.Rentenbank also tapped the shorter end witha $350 million April 2007 bond, which wasalso increased by $150 million, in April.

It was not as if Rentenbank had not issuedbefore: from 2002 it said it was looking at up to $1.5 billion a year from the Kangaroomarket. Stefan Goebel, co-head of fundingand assets at Rentenbank, says the RBA'sdecision had an influence in two separateways.

“Firstly, and most obviously, the bank PAR books started looking at our Kangaroobonds, and thus broadened our investorbase. However, these investors are morelikely to participate in transactions at theshorter end of the curve. Secondly, andprobably more important, is that the RBA'sdecision highlights the nature of our credit,because non-Australian borrowers onlyqualify if they are AAA-rated and have an explicit government support.”

As an issuer, Goebel sees the developmentof the Kangaroo market “very positively”.Just as important as the RBA's decision on repo-eligibility, he says, are the changes in the benchmark UBS Australia Bond Indicesthat took effect in February 2005: the formerUBS Credit Index was partitioned into a Sovereign and Supranational Index (which includes Rentenbank's Kangaroobonds) and a Credit Index to form a new Non-Government Debt Index. But he arguesthat there were good reasons why AAA-ratedoffshore credits were set to increase theiractivity anyway.

“Kangaroo issuance diversifies our investorbase and funding sources because it gives

us access to a group of institutional investorswhich can hardly be reached with any otherproduct available to us. Investors areinterested in all maturities up to ten yearswhich covers precisely the maturity spectrumin which we want to raise funds. Therefore, it was possible for us to build a Kangaroocurve and create liquid transactions.

“There is significant demand for AAA-ratedfixed income assets particularly fromAustralian asset managers. This demandcannot be filled by issuance from Australianborrowers, as the central government runs a balanced budget and the semi-governmentsalso do not issue a lot of new debt. With ourissuing strategy we were able to build a curvein the Kangaroo market and provide liquidityto the market,” says Goebel.

Take your pickIssuers are continually looking to diversifytheir investor base, but they won't issue inAustralia, or indeed any market, at any cost,says Nick Howell, director of debt capitalmarkets at TD Securities. “They've got theEuro bond market, the US bond market,they've got the Asian markets etc. They will always look at a number of differentmarkets, they don't have to do transactions in Australia, or Hong Kong, or Singapore.Frequent borrowers will focus on benchmarktrades in their core markets (US$ and Euro),and a market like Australia will have tocompare with their other non-core newissuance opportunities.”

One of the factors that will drive volumes,says Howell, will be the correlation betweengovernment and semi-government bonds and Kangaroo new issuance levels. “If semi-government bonds tighten up to five basispoints through swap, we won't see the AAAs come. We'll get back to the position of a couple of years ago, where there's littleincentive for investors to buy the paper.

“In all likelihood, the basis swap will remainstrong, with the only question mark beingUridashi volumes : we'll no doubt see acontinuation of domestic corporates goingoffshore – particularly to the US andEuropean markets – and having the effect of pushing out the basis swap levels. With the domestic banks also forced to issue involume offshore, there's going to be moresupply pushing the basis swap out than thereis pushing it the other way.”

Howell says the very strong volumes seen in 2004 “certainly put the Kanagroo marketon the map globally”. Whereas two yearsago, he says, trying to convince a newborrower to come down this road was quite a tough thing, now that there is track recordof continuity of issuance from that sector, it is a far easier story to sell to offshore credits.

Domestic market still lacking diversityBut he warns that the market needs to seemore diversification. “Out of $19 billion this

year, more than 27 per cent were Germancredits: I think a lot of investors here areperhaps getting to their limits, certainly on one or two German names, but maybeGermany in general. We need to see morecountry diversification and some sectordiversification. There has been a lot of bank issuance, Landesbanks, developmentbanks – still effectively financial institutions – and I think what the market needs is moreoffshore corporate issuance, some newerregional names, maybe some Italian names,Spanish names, Portuguese names and non-financial US names.”

The need for diversification has become even more important, he says, following thedowngrade of Germany's second-largeststate Baden-Wuerttemburg by Standard & Poor's (S&P) in December, from AAA to AA+, affecting two Kangaroo issuers,Landesbank Baden-Wuerttemburg (the statebank) and L-Bank (the state agency). Thiswas followed shortly after by the downgradeby S&P of another German state, NorthRhein-Westfalia, from AA+ to AA.

But with the main fixed-interest index, the UBS composite bond index, recentlyexpanded beyond its A- cut-off to includeBBB- grade bonds, there is at least thepossibility that more A or BBB Kangarooissuers may come to the market.

Looking forward“It's too early to say, but all indications arethat that will most definitely have a strong pull on lower-rated credits to this market.Whether they're prepared to do so is anothermatter, but obviously the argument becomeseasier with the level of issuance that we'veseen over the last 18 months,” says Howell.

Frequent borrowers willfocus on benchmark tradesin their core markets.

Nick HowellDirector of Debt Capital Markets TD Securities

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This February, a quiet revolution unfoldedin the Australian fixed-interest market,when a suite of wide-reaching changeswere made to the UBS stable of Australianbond indices. Written by James Dunn

The major change is the expansion of the ratings spectrum of the UBSCredit and Composite Indices from A- to BBB-/Baa3. Approximately $2.7 billion, across about 13 issues,has joined the Composite and Creditindices, in the BBB space.

Changes to UBS’ Australian Bond Indices

The new world – There is a first time for everythingThe Composite and Credit Index criteria hasbeen extended to include step-up callable and step-up soft bullet securities, increasingthe spectrum by some 22 securities, worth$5.1 billion.

UBS is also partitioning the Credit Index into a Sovereign and Supranational Index and a Credit Index, which combined will form a Non-Government Index. The Sovereign andSupranational Index will include supranationalagencies, sovereigns, including provincial orstate government obligations and securitieswith explicit government guarantee or support.

UBS has also stripped semi-governmentglobal/exchangeable outstandings from theSemi-government and Composite Indices (as is the case with the Credit Index),because they are governed by non-Australianlaws. This excludes securities such as theglobal/exchangeable securities issued byQTC and Tcorp, and removes approximately$14 billion of securities from the indices.

Arguably the most exciting change for thefixed-interest markets – the extension of theCredit and Composite Indices to compriseBBB-issues – is the least significantnumerically. “There is only about $3 billionworth of BBB securities out there, and the Composite is a $175 billion index,” says Michael Hendrie, managing director &head of fixed income distribution at UBS. “Themove out to BBB is not overly significant, but ifyou want to benchmark perfectly to the index,you're going to have to hold some BBB, orsome lower-rated credit, at least.”

Why this change is so exciting is the fact that most Australian companies are BBB-rated – for the first time, they will be includedin the main benchmark index, assuring themof demand from Australian institutionalinvestors, who previously could not buy theirsecurities because their investor mandatesdid not allow them to go outside the index.The ramifications for the market's growth are huge.

“In the past, we've seen that BBB corporateAustralia has either had to rely on the banksfor its funding, or it has tended to go offshoreto markets like the US private placementmarket,” says Philip Bayley, head of fixedinterest and credit research at NationalAustralia Bank. “They've done that becausethey've been pretty much of the view thatthere wasn't a viable market for them here in Australia – there wasn't demand here fromAustralian institutional investors for BBB-rated product. But Tabcorp showed thatthat's changing.”

There is only about $3 billion worth of BBBsecurities out there, and the Composite is a $175 billion index.

Michael HendrieManaging Director &Head of Fixed Income Distribution UBS

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Changes to UBS’ Australian Bond Indices

Gaming and entertainment company Tabcorpraised $450 million with its inaugural bondissue in October 2004, the largest BBB bandcorporate issue seen in the Australian debtmarket. “Tabcorp is a BBB+ company that I think at any prior time would have struggledto get such an issue away. Market conditionswere very positive at the time, but thechanges to the index had already beenannounced, and there were very clear signsthat a lot of investors were positioningthemselves for that change. So I think that Tabcorp issue is really going to be abenchmark for the BBB sector going forward,and I think we will see a lot of activity takeplace in that sector as we move through2005. Certainly the potential issuers in theBBB part of the market, that we've spoken tosince then have taken a lot of notice of whatTabcorp was able to achieve,” says Bayley.

More investors arerealising that theconservatism of theAustralian fixed incomemarket had to change.

Peter Block, director of debt capital marketsat ABN AMRO, says there is “no doubt” that the changes to the index will induce moreBBB issuers to come to the market. “It has to increase the universe from where we werein previous years, so it is clearly a good thing.What it will allow, and promote, is for activemanagers to take larger positions to seekout-performance – but for all managers toparticipate for index reasons. Provided thatinvestors follow the index in their funds andthey've been able to change their mandatesto allow them to follow the new index – which we all take as a given – they will be able to participate in those transactionsdown to BBB- and still get an index weightingfor them.”

Time for a wake up callMore investors are realising that theconservatism of the Australian fixed incomemarket had to change, says a capital marketsexecutive at a US-owned house. “The factthat so many issuers are going offshore has definitely woken up a lot of fixed-incomeinvestors that if they don't start to get a littlebit more broad-minded in looking at thecredits right here in Australia, that they couldunderstand very well, they're all going to gooffshore.

“As we've seen from the US privateplacement market, some fixed-incomeinvestors definitely want these credits:they've seen an issuer go to the US market and said 'why didn't you issue here?' Theresponse of the investment banks has been'whenever we've brought you credits likethat, you haven't wanted to buy them'. Someof that conservatism is on a mandate basis,

as in the fund has no choice, it can only buywhat's in the index or close to the index; butsome of it has been simply choice, in thatthey've not been prepared to take a risk and move outside the curve. In both cases,moving the range of the index further downthe credit spectrum is a positive – it willdefinitely help to create a market down the curve from what people are used to,”says the executive.

But greater investor appetite and widerscope for issuers to transact does not meana fait accompli that Australian BBB issuerswill come to the party, says Craig Saalmann,credit strategist, financial markets, at ABNAMRO. “Everybody talks about it as apositive, and quite clearly it is, but theconcern is that you still have to get the otherside of the equation, which is issuers who are prepared to issue in our market, at a costof funding which is competitive compared towhat they could do offshore.

“If you're a BBB issuer, do the index changesmean that you will automatically issue in theAustralian market from now on if at the end of the day the US private placement market is more competitive, whether from a funding,tenor, size or cost perspective? A lot of BBBcorporates go to the US private placementmarket because they get a longer tenor – 12 or 15 years – and they can issue in size.Instead of $200 million-300 million they cando $400 million-600 million. It's such a deepmarket. The US life insurers, who are thetraditional investors in that market, tend to be 'end-account' investors, meaning that thepaper doesn't trade thereafter. Issuers likethe fact that the paper tends to get into theright hands, first up.”

Saalmann also expects domestic banks to react by being as competitive as they can in their funding terms to BBB issuers. “Again, you're a BBB issuer going in to theA$ corporate bond market – but hang on, the banks also want to offer me money, and they're prepared to do it at maybe moreflexible or more cost-competitive terms.That's the other issue. So by the indexchanges alone, it's not a given that we willsee a huge deluge of BBB supply this year, or a huge bunch of BBB corporate issuerscoming to our market.”

Bayley agrees that the Australian market willcontinue to struggle to be competitive interms of tenor. “Anyone who wants to raisefunds with maturities beyond ten years willstill go to the US private placement market.That is something that market can do that the Australian market can't. But I think thecompetitive position of the domestic marketversus the US private placement marketimproved quite noticeably over 2004. Wesaw a number of issues in that market in thesecond half of 2004 where we felt that thevolumes and pricing achieved could havebeen matched by the Australian market.”

Nicholas Ross, head of debt capital marketsat UBS, says that with the addition of LowerTier II and callable securities to the index, theindex extension will provide opportunities forlonger-dated issuance. “And it's importantthat the Australian market is pricing more in line with the international curve, as well, so it wouldn't surprise me if we see somecorporate Kangaroo issuance.”

Everybody talks about it asa positive, and quite clearlyit is, but the concern is thatyou still have to get theother side of the equation,which is issuers who areprepared to issue in ourmarket, at a cost of fundingwhich is competitivecompared to what theycould do offshore.

Craig SaalmannCredit Strategist, Financial Markets ABN AMRO

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rate Eurobond by an Australian issuer to date,so we were more than happy with theoutcome of that transaction. At the sametime we had a £400 million sterling 'floater',which was an opportunistic tranche we added on.”

Rob Thomson, vice-president, debt capitalmarkets at JPMorgan in Hong Kong, saysthere was potential to do more than €800million if ANZ had wanted to. “ANZ hasshown tremendous commitment to Euroinvestors over the past five years, providingthem with product on a consistent basis and regular updates on the performance of ANZ's business. This long-term approachto building a rapport with investors meansthat although an investor may not alwaysparticipate in the forthcoming transaction that ANZ is roadshowing, there is a very highlikelihood that the investor has bought someANZ paper in the past or gains additionalcomfort with ANZ's credit and will participatein a future transaction. Their strategy withrespect to the issuance of senior debt hasbeen to build a Euro fixed-rate curve, whichthey've done very successfully, and this deal

ANZ BankFive years ago, ANZ Bank's wholesalefunding task amounted to $5 billion, a record figure. Last year, it was $20 billion – also a record. And asMark Anwender, senior manager of strategic funding at ANZ BankingGroup, puts it, that just goes to showhow expectations of what is possiblecan change.

“If you'd come to us back then, and said 'you need to raise $20 billion', we'd haveprobably walked out the door and said, 'you try it'. But we did $14 billion in 2003 and here we are, we've had our biggest yearin funding ever, and we've done it ultimatelywith relative ease, I suppose.”

Anwender says ANZ began the year with a budget of $14 billion to raise, $12 billion for the parent company and $2 billion for its New Zealand subsidiary. “But once we included securitisation and hybrid Tier 1issues, we ended up doing more than $20 billion in total.”

One obvious reason for more funding was the acquisition of The National Bank of NewZealand (NBNZ), completed in December2003. “That meant a lot of funding on top ofwhat we'd budgeted for, but really, the assetgrowth was much higher than what had beenplanned for. And also, we decided to make a concerted effort to raise more term debt as we raised the ratio of term assets fundedby term liabilities.”

Importantly, says Anwender, ANZ “didn't hit any constraints” anywhere. “There aren't any markets anywhere that we can't issue into, which is comforting going forward; particularly going into a new financial year where our currentfunding target isn't $20 billion, it's back to the $14 billion we saw in 2003.”

Apart from the record total funding of $20 billion – $3.7 billion of it issued in A$ – Anwender nominates the highlights of 2004 as the largest-ever Euro-denominated fixed-rate EMTN transaction by an Australian issuer €800 million, throughJPMorgan, Morgan Stanley and UBS), andthe first public transaction for ANZ NationalInternational Limited (ANZNIL), the separatefunding vehicle (a wholly owned subsidiary of, but unguaranteed by, ANZ) established to fund the New Zealand operations of ANZ.ANZNIL's debut transaction was a 750million floating-rate EMTN (through Citigroupand JPMorgan), which was taken by morethan 50 investors.

Anwender says ANZ did 130 transactions in total, of which 120 were reverse-enquiry.Of the public deals, he says other majortransactions included:

– £200 million five-year fixed-rate EMTN(RBS)

– £200 million 12 non-call seven fixed-ratesubordinated EMTN (RBS, MorganStanley)

– US$1 billion global RMBS for Kingfisher(Deutsche Bank)

– $1.075 billion five-year fixed/floating TCD(ANZ Investment Bank)

– $730 million ten non-call five fixed/floatingsubordinated notes (ANZ InvestmentBank)

– $1 billion three year fixed/floating TCD(ANZ Investment Bank)

Anwender says ANZ sees itself as a naturalA$ borrower, that wants to support the A$market. “We did a $1.5 billion transaction in May 2003, but that was a effectively a one-off transaction – we weren't sure howmuch capacity the market would still have. So 2004 represented a bit of a challenge, but we started with the $1.075 billion issue in March, followed that with the $730 millionsub debt issue in May and then the $1 billiontransaction in August. Three transactions inthe domestic space was a new frontier againon top of the single transaction we'd done theyear before.”

Over the three transactions, Anwender saysan average of 40 per cent of the paper wastaken by European and Asian accounts.

David Brooks, director of origination at ANZInstitutional Bank, says “there aren't toomany issues” of $1 billion or more that haveoccurred in the Australian market, so to getthree large issues away – including what wasthen the largest subordinated debt deal thathad been done in Australia – showed the levelof enthusiasm for the ANZ name, and majorbank risk in general.

“One thing that ANZ has probably done a bitbetter is building a substantial yield curve:there are now maturities of $1 billion or morein 2007, 2008 and 2009. The other majorshaven't issued anywhere near as much asANZ has over the last couple of years, andhaven't built the same kind of rolling maturityprofile. They haven't supported the Australianmarket quite as much as ANZ has,” saysBrooks.

Anwender says the European issues werealso very important, given that since 2001,Europe has provided about two-thirds ofANZ's funding. “We took our fifth roadshowto Europe in that time. The transaction was a 'flagship' transaction, a fixed-rate Eurobondof €800 million, which was the largest fixed-

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There aren't any marketsanywhere that we can'tissue into, which iscomforting going forward;particularly going into anew financial year whereour current funding targetisn't $20 billion, it's back to the $14 billion we saw in 2003.

Mark AnwenderSenior Manager of Strategic FundingANZ Banking Group

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was a continuation of this strategy, issuing a five-year benchmark fixed-rate Euro, pickingtheir timing very well.”

Thomson says the opportunity for the sterlingadd-on was spotted by JPMorgan's fixedsyndicate desk. “In order for ANZ to meetthe two objectives of a keenly priced fixed-rate Euro issue and a target amount of senior debt in A$ equivalent terms, they were looking for an additional tranche,whether it be in floating Euro, US$ or sterling.We spotted an opportunity in the sterlingmarket, where appetite from severalinvestors was incredibly strong, and we were able to build a sizeable book in a veryshort time, pricing in the afternoon – at anaggressive re-offer level – the largest sterlingFRN issue by an Australian bank.”

“It worked extremely well, and the dual-tranche issue added up to the largest seniordebt raising done by an Australian bank. The other thing was that in terms of havingthe dual-tranche strategy, they were able to create some pricing tension between the tranches, because the Euro fixed-rateinvestors knew that ANZ could walk awaywith €500 million and tap another market in order to meet their volume objectives,”says Thomson.

Nicholas Ross, head of debt capital marketsat UBS, says ANZ's “tremendous fixed-rateEuro footprint” gave it “genuine luxury ofchoice”. “They had an option to do €1 billion at 15 or €800 million at 14, which was twobasis points tighter than they had achieved in the past. They chose to do a smaller deal at a tighter price, and complemented it with a large, very tightly priced sterling FRN.”

ANZ also did excellent work in fixed-ratesterling, says Mark Langsworth, head of capital markets origination at Royal Bankof Scotland, which lead-managed its £200million five-year fixed-rate EMTN and a £200million 12-year non-call seven fixed-ratesubordinated EMTN.

“The sterling market in 2004 was prettyaggressive in terms of providing cost-competitive funding for the banks. It wasreally a case of taking advantage of thoseopportunities when they arose, which ANZdid. Its sterling subordinated deal was one of the longer-dated sub deals that they had done in quite a while - they hadn't really tapped the sterling market before for subordinated debt. When we were doing that ANZ 12-year deal the market was a little bit soft – there was quite a lot of supply around – and that was what wasmost noteworth about it, the fact that theaggressive bid in the sterling market meansthat ANZ achieved pricing that was probably

tighter than any other structure around,whether it be in US$ or Euro, at that time.”

Anwender says ANZ does not see a majorfinancial market into which it could not issue.“We believe we have the highest investorpenetration globally of any Australian issuer.ANZ needs to be able to have access to allmajor funding markets worldwide. Weunderstand the ultimate benefits of buildingliquid yield curves in a number of distinctmarkets.”

One thing that ANZ has probably done a bit better is building a substantial yield curve.

Like Macquarie Bank, ANZ faced a situationin 2004 where it issued from a new special-purpose funding vehicle – effectively bringinga new credit to the marketplace. But a bankerwho worked on the transaction says youwould not have known from the marketreception of ANZNIL's EMTNs that it was a separate vehicle. “Given that it wasANZNIL's inaugural transaction, it was astand-out deal. We had orders for up to €1.1 billion, and 51 accounts participated in the transaction, spread across ninedifferent countries, with most of the papergoing to the UK and Germany.

“The most striking thing about the issue was that no pricing premium had to be givenbecause it was not ANZ itself issuing. It'salways hard comparing secondaries to newissues, but we estimate that investors paidzero premium to ANZ's issues. That was a key performance metric of the company,and they were very satisfied with the result,”says the banker.

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Bank You call them, they promise aresponse within 30 minutes. Mostpeople would be happy with suchalacrity from a plumber or electrician,but this is Commonwealth Bank of Australia (CBA) doing a deal – anywhere from US$2 million to US$100 million or more – with a reverse-enquiry bond buyer,anywhere in the world.

CBA has made an art form of handlingreverse-enquiry transactions, whichconstitute a vital part of the bank's wholesale funding operations.

“They basically have that market almost on their own globally,” says an enviouswholesale funder at a rival Big Four Australianbank. “There's only a handful of players thatreally do big volumes in that market, and theydo more than anybody in the world.”

CBA does not disclose the proportion of its term funding (about $12 billion in total in2004) that comes in through reverse-enquiry,but John te Wechel, general manager, groupfunding, says it constituted easily the majorityof the 1000 or so deals that the bank did lastyear.

“We view it as an important component ofour funding, given the diversification it brings.We'll do any size of ticket, down to US$2million. That allows us to access essentially a high-net-worth retail funding base offshore,through private bank networks and private-client networks.”

Two years ago, says te Wechel, CBA wasdoing about 120 reverse-enquiry transactions- now it is doing close to 1000. Its reverse-enquiry business drives the high number of transactions, which dwarfs that of its BigFour peers. He says the range of accountswith which the bank deals is “enormous”,comprising banks to retail, on a global basis.

This commitment to establishing andmaintaining the widest possible investor basealso drives CBA's public deals. te Wechelsays a “particular highlight” of 2004 was thecontinued development of the bank's globalinvestor base. “This year we have reinforcedprevious years' work in Asia and the UK and expanded our footprint into Europe, all of which has opened up very excitingopportunities across a range of products.”

“Currently our offshore focus is Asia andEurope. In Asia we have built very strongbrand awareness while in Europe we remain a relatively scarce resource, so both provideattractive opportunities. And it goes withoutsaying that the domestic market is highlyrelevant,” he adds.

Commonwealth

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The major driver in the growth of the fundingtask was balance sheet growth, which wasstrong throughout the year, particularly in the first half of 2004, largely driven by thehousing market. But in meeting that fundingtask, says te Wechel, the bank has thecontinued development of its global investorbase as a high priority. “This year we havereinforced previous years' work in Asia and the UK and expanded our footprint into Europe, all of which has opened up very exciting opportunities across a range of products.”

The stand-out deals, he says, were a Sterlingissue in May, a Swiss Franc issue in July –which was CBA's first after eight years'absence from that market – and the dual-tranche Euro and US$ Eurobonds completedin November. “The domestic A$ market alsoprovided us with very competitively pricedfunding in size during the year with four deals,as did the A$ Uridashi market in Japan withtwo transactions.”

The market has beenawash with cash during2004 and it has been a prime time to be a AA-rated financial.

te Wechel says the drivers in CBA's choice of deals range from capital managementperspectives through to investordiversification and cost of funds. “It's a combination of the maturity profileyou've got for outstanding debt, asset growthand where you can raise funds the cheapest.For example, we went back into the domesticsubordinated market after three years,because we're always looking to where the funds are cheaper. Similarly, with Swissfrancs - we hadn't been there since 1996 –but again, that's driven by two things, thefunding costs were relatively attractive, and that market offered diversification.”

CBA raised 250 million Swiss francs in July,at a coupon of 1.75 per cent, maturing inSeptember 2007. The transaction was fixedthree-year, with re-offer priced at mid-swapplus 1.

Chris Barrington, primary markets,Australia/New Zealand at Credit Suisse First Boston, which lead-managed CBA'sSwiss franc issue, says there was asignificant pick-up in issuance by Australiannames in the Swiss franc market in 2004, on the back of a sharp tightening in swapspreads and increased investor focus onasset diversification.

“It's traditionally a AAA market: AAA and AA account for 90 per cent of issuance.

In 2004, says te Wechel, CBA raised about$12 billion in long-term debt, excludingsecuritisation, which raised a further $3.5billion. “Generally speaking that funding taskgrows each year, although we are forecastingthat it will stay about the same this year.There was fairly strong growth in 2004 and2003 as a result of the growth in the housingmarket. It's a truism that asset growth isoutstripping deposit growth, so there's a widening gap that needs to be filled bywholesale funding.”

Three or four years ago, he says, the bank'sfunding task would have been about $8billion. “We didn't think that was a tall order,and we don't think our funding task now is atall order, either. The way we see it is that thisfunding requirement gives us opportunities to explore different markets.”

And CBA has certainly done that.

“The continued development of our globalinvestor base has been a particular highlight.This year we have reinforced previous years'work in Asia and the UK and expanded ourfootprint into Europe, all of which has openedup very exciting opportunities across a rangeof products,” says te Wechel.

“The market has been awash with cashduring 2004 and it has been a prime time tobe a AA-rated financial. While it is becoming a somewhat cliched term, the deals we haveundertaken this year have been 'strategicallyopportunistic'. By that I mean that from therange of alternatives available we have beenable to execute those transactions thatprovide us both cost and strategic benefits.”

But as swap spreads tightened in 2004, it really did squeeze out the foreign AAAissuers – the bond swap curve had tightenedup, and it became very expensive for them to access the Swiss market.”

Barrington says that with investors shiftinglower down the credit curve looking for extrayield, AAA issuance dropped some 40 percent in the Swiss market in 2004: to fill thegap, there was a big push for yield andpositive-LIBOR issuers – a need that AAbanks, including the Australian banks, wereable to meet. “Correspondingly, there was a willingness for investors to move down the credit curve and increase diversification in their portfolios. And really, going down to AA- isn't exactly moving down the curve,compared to other markets.”

Barrington says going into the Swiss marketgave CBA access to a different investorbase. “The Swiss franc capital market is the fifth-largest international bond market in terms of issuance and outstandings, and provides investors with access to both institutional and retail accounts. “CBA returning to that market was a verysuccessful deal - it's a very strong name, avery strong credit - and it was bought downvery quickly.”

Similarly, CBA's dual-tranche Euro and US$eurobonds issue completed in Novembermet “extremely strong” market appetite,says Andy Cairns, head of sovereign andfinancial institutions origination, Asia-Pacific,at HSBC, which acted as joint lead-manager(with Goldman Sachs JBWere) on thetransaction.

“Following a highly successful non-dealroadshow in Asia and Europe, the order book built quickly on both issues, to aroundUS$1 billion and more than €1 billion in just 24 hours. Some 110 accountsparticipated across both offerings,demonstrating diversity by both investor type and geography. The offering achieved CBA's objective of maximising investordiversification: a number of accountsparticipated that were new not only to CBA,but also to the Australian banking sector.”

More than 70 per cent of the €500 millionissue was placed with non-banks, a record for an Australian issue, says Cairns, and thedistribution was notable for the very largelevel of private bank participation. “Given the strong demand for this high-quality credit,CBA was able to price the bonds at the tightend of price guidance and in early secondarytrading the US$ bonds edged tighter,” he says.

CBA's Uridashi forays of $440 million and$270 million were handled by Nomura and Nikko respectively. Gerard Perrignon,

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Currently our offshorefocus is Asia and Europe.

John te WechelGeneral Manager, Group FundingCommonwealth Bank

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director of capital markets at Nomura, says the Uridashi market provides a uniquediversification opportunity for issuers and is an important component of Nomura'sdomestic franchise in Japan, beingessentially a retail market.

It's traditionally a AAAmarket: AAA and AAaccount for 90 per cent of issuance.

“Obviously, the Uridashi market providesborrowers such as CBA with a uniquealternative to other traditional sources ofwholesale funding, be they domestic sourcesin Australia or other Eurobond or US sources.At the same time, transacting in A$ remainsan attractive proposition for Australianissuers, because it allows them to avoidcross-currency basis swaps, which tend to be expensive for Australian borrowers.And the retail investor base also allows themto secure very competitive pricing comparedto that which they might achieve for a similarissue, if they were to direct it to wholesaleinvestors, whether domestically or in otheroffshore markets.”

Perrignon says the attraction for investorsarises from the very low interest rates inJapan. “Interest rates in A$, on a spreadbasis against Yen yields, remain verycompelling for Japanese investors. We tendto find that if investors take either a positiveor neutral view of the A$, then this currencyview, combined with the outright coupon on offer, tends to be the rationale behindinvesting.

“From mid-2000 through to the present, theperformance of the A$ versus the Yen hasprovided Japanese investors with strongcapital upside on their Uridashi investments.The market remains an appealing source of funding for Australian issuers in terms ofpricing, diversification and volume,” he says.

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CSR When sugar and building productsgroup CSR made its domestic bonddebut in March, with a five-yeartransaction of $200 million of 6 percent fixed rate notes, it was knockedover in the rush.

With a relatively small number of bonds on offer – CSR original intended to issue$150 million of its bonds – the leadmanagers, ABN AMRO and NationalAustralia Bank, knew from the start that there was likely to be enormous latentdemand for an Australian corporate issue in the domestic bond market in general,particularly for a lower-rated entity such as CSR (rated BBB+/Baa2).

“It was the first 'true' BBB+ industrial credit in the Australian market for some two years,”says Mark Garrick, head of primary marketsat joint lead manager National Australia Bank.“Because of that rarity factor we were able to achieve the pricing that we did. It was avery successful deal.”

We had that rarity value of having a strong BBB-rated entity coming to the market, but also therarity factor of having a name like CSR.

The deal was taken to the market as $200million, five to seven years, but CSR endedup printing $200 million of five-year bonds.“The pricing that it achieved was more in line with the A/A- rated credit curve than the BBB+, and the reason for that was that – given that there was only ever going to be a maximum of $200 million – we were facedwith a clearly over-subscribed book,” saysGarrick.

“Everyone that we met on the roadshowloved the credit; and because we knew it was going to be vastly over-subscribed if we priced it in line with the BBB+ curve, we would have had the situation where therewere a lot of unhappy investors with minimalallocations after being heavily scaled back, so what we decided to do was ration by price.The pricing that we achieved was swap plus55, which was through the levels which weand ABN AMRO had told CSR we believedthat the deal could get done.”

The pricing would have been even tighter if geopolitics had not intervened, in the form of the Madrid bombings, after whichinvestors were given an extra three basispoints in extremis. “We launched it at 52-55and we were going to price it the followingday. As of the close of business on launch

day, we were over-subscribed at the bottomend of the range,” says Garrick.

“Overnight, the Madrid bombings occurred,and we saw a couple of orders pull out, we saw a couple of people move within therange, and we had to move from a position of being over-subscribed at the bottom end of the range, we ended up printing at the topend of the range with a small over-subscription of about 10 per cent.”

A total of 16 investors participated, including18 per cent from offshore, mainly Hong Kongand Singapore. Distribution by investor typewas 65 per cent to fund managers, with thebalance taken by a mix of banks and otherinvestors.

Peter Block, director, debt capital markets atABN AMRO Australia, says the secret to thesuccess of the deal lay in a number of factors.“One was preparation, in terms of identifyingwho would be interested in buying the credit;two would be the roadshowing and themarketing effort that went in from thecompany – we had high-quality presentationsfrom senior management, the CEO and CFO– and three was the way ourselves and NABran the book-build process. Those threefactors in themselves worked to achieve a highly successful transaction, which theclient was very pleased with.”

Block says most investors were familiar with the name – CSR has been in business in Australia since 1855 – and the fact that it was one of the first BBB deals from anAustralian corporate in some time createdextra attention. “We had that rarity value ofhaving a strong BBB-rated entity coming tothe market, but also the rarity factor of havinga name like CSR. We worked hard to createan investor list that we thought would beinterested in looking at the bonds, and wealso marketed the transaction through anelectronic marketing means using an internalABN AMRO system called Placeware, toallow offshore investors to look at the creditas well.”

The bonds mature on 17 March 2009. The issue, which ran off a concurrentlyestablished $500 million medium term noteprogramme, extends the overall averagematurity of CSR's debt from 3.5 years as at 30 September 2003 to 4.8 years. CSR will use the proceeds to refinance existingbilateral bank facilities and for generalcorporate purposes.

“We were able to take advantage of thesignificant demand by investors for this issueas there have been few comparable issuers in the Australian market,” says WarrenSaxelby, chief financial officer at CSR.

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“We are pleased that we have achieved an attractive price which, on an all-in fixedrate basis, exceeded our expectations. This deal enhances CSR's debt portfolio with additional diversification of our lendingsources and lengthens the tenor of our debt book.”

Saxelby says the company consideredvarious market alternatives including the US private placement market and US 144Amarket. (CSR's inaugural US 144A bondissue in 1994 was followed by US publicbond issues in 1995). “The Australian debtmarket offered a number of advantages over the US alternatives. These includedsubstantially lower issuance costs and add-on costs and less complex proceduralrequirements arising from greater knowledgeof the CSR credit in the Australian marketplace. Ease of implementation was anidentified advantage of accessing theAustralian bond market, versus the USalternatives,” he says.

Foster’sGroup Beverages giant Foster's GroupLimited returned to the 144A marketin September 2004 for the fourth time,tapping it for US$300 million throughthe issue of 4.875 per cent notes dueOctober 1, 2014.

The ten-year offering was priced at a spreadof 88 basis points over the benchmark ten-year US Treasury or a re-offer yield of 4.884per cent.

The net proceeds from the offering of thenotes was used to repurchase, through a tender process, US$118.7 million of the company's US$200 million of 6.75 percent notes due November 2005 and up to €120 million of the company's €300 million of 5.75 per cent medium term notes, dueMarch 2005.

The new securities were rated Baa1 byMoody's and BBB+ by Standard & Poor's.

Suzie Ewart, vice-president group treasury at Foster's Group, says the note offering was a further step in the group's previouslyannounced intention to restructure a portionof its interest rate and debt maturity profile.She says the refinancing transaction wasundertaken at an opportune time in themarket from a pricing and liquidityperspective.

“Borrowing US$ is in line with our hedgepolicy - to match assets with liabilities in thesame currency - and as a consequence, the144A market provided us with efficient andeffective execution given its depth. OurBBB+ rating allowed us to issue to a broadinvestor base at attractive pricing.”

Ewart says that the company's alternativesincluded bank debt, the US private placementmarket, Euro market or Australian market.But she says the investor response from the144A market was very pleasing, the pricingwas good and the issue was executed veryprofessionally.

“Executing a tender at the same time meantthat we had to manage this process and theinvestors who both tendered and purchasednew bonds. It simply meant that we had toremain flexible and make quick decisionswhen required.”

Natalie Vanstone, head of debt capitalmarkets at joint bookrunner JPMorgan, says the highlight was the speed of executionof the deal. “The way we accelerated thetransaction, pricing and completing thetransaction within 24 hours of launch, is notexactly rare, but shows how an issuer suchas Foster's, who is well-known to USinvestors, can tap the 144A market.”

Vanstone says the issue demonstrates that144A market can be quicker for establishedcredits than the US private placementmarket. “A private placement is pretty quick,too, but it's still a longer process: for aprivate, you're still going to be on the road for one or two days, and you'll price a fewdays later. It really does minimise theexecution risk for an issuer if you can get in and out of the market in a 24-hour period,as Foster's did.”

The paper was bought mainly by insurancecompanies and asset managers in the US.Just under 80 per cent of the issue was soldinto the US and the balance went to accountsin the UK, continental Europe and Asia.

In the US, large, stablecredits like Foster's areable to effectively pre-fund their maturities. It's a moreefficient process thansimply refinancing.

Where the issue was out of the ordinary froman Australian perspective, says Vanstone,was that Foster's did a combined tender offerand announced the bond issue at the sametime. “You don't see that all the time. Theybought some bonds back in Europe and theUS, and then raised the $300 million, with the proceeds used to repay those bonds. The whole process went very smoothly and I think the key to it was that investors knewthe credit well.”

John Gerli, managing director and head of debt capital markets at deal joint leadmanager Citigroup, says a note issue andsimultaneous bond repurchase is a commonfinancing arrangement in the US, but has notbeen seen much from Australian companies.

“In the US, large, stable credits like Foster's are able to effectively pre-fund their maturities. It's a more efficient process than simply refinancing: it allows companiesto take advantage of attractive fundingalternatives, and because they'rerepurchasing their debt at the same time,they can minimise their all-in expenses.Foster's was able to get it done because it has accessed the market on multipleoccasions, and is a very sound credit with a broad-based following in the US.”

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It was the first 'true' BBB+ industrial credit in the Australian market for some two years.

Mark GarrickHead of Primary MarketsNational Australia Bank

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MacquarieBank Like any funding head, Craig Shapiro,executive director treasury atMacquarie Bank matches funding to asset growth. But unlike his peers at the major trading banks, Shapiro does not start the year with a defined funding task – and the asset growth he is funding is not predominantly in home loans.

“We view our funding in a slightly differentvein to the majors: they typically have afunding task each year based on forecastasset growth, whereas we're more driven by actual asset growth. Our asset mix is quite different: we don't have a traditionalloan book, and while we do have residentialmortgage assets, these are 'warehoused' on the bank's balance sheet prior to beingsecuritised through Puma. This creates a 'saw-tooth' effect on the balance sheet,with funding needs changing on a regularbasis,” he says.

“It may spike up in a short-term period, so we'll raise some shorter-term money to fund those assets until they're securitised. It's a different funding taskbecause mortgage securitisation for us is a stand-alone business, as opposed to being purely an additional funding tool,which it is for the majors.”

A change to the funding of the Macquariegroup occurred during 2004 as a result ofcertain regulatory changes imposed by theAustralian Prudential Regulation Authority(APRA) on all Authorised Deposit-takingInstitutions (ADIs) in Australia. Macquarie'sresponse to these changes was theestablishment of a separate funding vehicle,Macquarie International Finance Limited(MIFL).

MIFL was created in July in response to a new regulatory requirement by APRA that limits the level of intra-group exposurewhich Macquarie Bank may have tosubsidiaries that are not eligible for inclusionin the Macquarie Bank “extended licensedentity” (ELE). MIFL will be responsible formeeting the funding requirements of non-ELEsubsidiaries including funds management,securitisation management and stockbroking– some of the group's most profitable andsuccessful businesses.

“While MIFL won't have a defined fundingtask, it will be more liability-driven rather than asset-driven due to the finite amount of funding available to it,” says Shapiro.

“If an asset is going to come on to thebalance sheet in the name of MIFL, we haveto raise the money first. We won't be funding

The securities were designed to receiveequity treatment on Macquarie Bank'sbalance sheet according to InternationalFinancial Reporting Standards (IFRS), whichtook effect in Australia in January 2005. Thisis a fundamental requirement from APRA forsecurities to be eligible for inclusion in theTier 1 hybrid capital limit of 25 per cent.

Cynthia Whelan, head of debt capital marketsat Barclays Capital, joint lead manager (withJPMorgan) of the issue, says Macquarie wasthe first bank to adapt to APRA's post-IFRSchanges by issuing Tier 1– eligible securitiesthrough an offshore branch. Not only that, it was both a new structure for Macquarieand the first time the bank had raised Tier 1capital in the offshore markets.

“Given the accounting and regulatorychanges, the structure was an innovativemeans for an Australian bank to meet theAustralian regulator's requirements for Tier 1capital, as well as achieve equity accountingtreatment under Australian GAAP and IFRS,as required by APRA. Macquarie is always a great credit to take to the offshore markets,because while it is a unique business forinvestors to understand, it's such a strongcredit to sell.”

MIFL on forecast asset growth, so the modelis still slightly different to the majors. MIFLwill have a small pool of excess cash floatingaround, so that if a deal comes up at the lastminute, we will be able to fund it. But if a verylarge transaction came along, we'd have tosay 'we've got to go and raise that moneybefore we can create that asset'.”

MIFL is funded through a $400 million capitalinjection from Macquarie, a series of bankbilateral lines from friendly banks and – inDecember – MIFL's debut domestic issue, a $250 million floating-rate note paying aninitial margin of 38 basis points over bankbills. “MIFL was created as a result of a regulatory change: it's not something wedid because we wanted to do it. From a riskmanagement perspective, we continue toview the businesses that MIFL funds as beingpart of Macquarie Group risk,” says Shapiro.

Paul Bide, head of debt markets division atMacquarie Bank, which lead-managed theMIFL issue, says investors did a lot of workon the deal and were very well aware of thereasons why MIFL was the issuer and notMacquarie, and what businesses it wasfunding. “It was a well-accepted deal – in factit was over-subscribed – and it went to a mixof offshore, middle-market and domesticinstitutions.”

“Basically, investors saw it as a proxy forMacquarie Bank subordinated debt. It hasactually traded tighter than MBL sub debt in the post-market, which shows you well it was accepted,” says Bide.

Including the $250 million for MIFL, Shapirosays the treasury's funding task in 2004 was$4.25 billion.

Regulatory considerations also played a part in another Macquarie issue in 2004, the £350 million ($900 million) offering in September of Tier 1 capital-eligibleMacquarie Income Preferred Securities(MIPS), which represented the bank's debutoffshore Tier 1 capital raising and also itsmaiden fixed-rate sterling issue.

The issue was initially sized at £250 million of guaranteed non-cumulative step-upperpetual preferred securities, with a marginof 140 basis points over the 8 per cent 2021Gilt, but strong investor interest enabled thebank to upsize the transaction to £350 millionand tighten the margin to 135 basis points.

At the outset, the securities pay a 6.177 percent semi-annual non-cumulative fixed ratedistribution, with the margin on the couponstepping up by a further 100 basis points to a spread of 235 basis points over the thenprevailing five-year Gilt if the securities arenot called on 15 April 2020.

We view our funding in a slightly different vein to the majors: theytypically have a fundingtask each year based on forecast asset growth,whereas we're more drivenby actual asset growth.

Craig ShapiroExecutive Director, TreasuryMacquarie Bank

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Whelan says the MIPS roadshow team “did a fantastic job” positioning the creditand highlighting the diversity of Macquarie'sbusiness profile, the growing focus oninfrastructure finance and the priorityafforded to risk management within the bank,as well as the strong management team and remarkably consistent track record. “The transaction was incredibly well-received, the book was significantly over-subscribed; we were able to bring the pricerange down, and the conversion rate forinvestors seen on the roadshow was verygood. All in all it was a very positive story,”says Whelan.

Shapiro says other “strategically important”transactions for Macquarie in 2004 includedthe bank's debut senior sterling transaction in February, a £200 million three-year seniorfloating rate note; and one month later, itsdebut senior €300 million five-year floatingrate note. “Consistent with Macquarie'sfunding strategy, the senior funding issueswere undertaken to meet the ongoing fundingrequirements as well as diversifying theinvestor base, currency mix and instrumenttype on issue,” he says.

Whelan says Macquarie was looking todiversify its funding sources, including Euroand Sterling-denominated investors, whichrepresent a “very deep pool” of investors.“These issues highlight the increasingreceptivity to Macquarie's credit within the European investor base,” she says.

In the domestic market, Macquarie printed$185 million of lower Tier 2 fixed and floating-rate notes. Shapiro says the issue was very well-received by Australian investorsand was fungible with the 11-year non-call six-year A$ subordinated issue undertaken in September 2003.

Shapiro says the Macquarie strategy is simple – to diversify its funding acrossproduct, currency, maturity, investor type and geographical location. “While all marketsare important to Macquarie, the European,Asian and Australian capital markets havebeen most relevant for us during the last 12 months. However, we assess all globalcredit markets on an ongoing basis.

“Consistent with Macquarie's fundingstrategy, the investor marketing was across a wide investor base. The main participants in our transactions were a diverse selectionof banks, asset managers, pension funds,insurance companies and other fundmanagers,” he says.

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MayneGroupThe appetite of investors for non-investment grade Australiancorporate credit – combined with a very positive response to the Mayne Group (BB/Ba1) credit story – was shown in November when thediversified healthcare group priced a US$200 million offering of 5.875 per cent senior notes due 1 December2011. The seven-year offering waspriced at a spread of 170 basis pointsover seven-year mid swaps, or a re-offer yield of 5.994 per cent.

Strong demand from debt investors,particularly in Asia and Europe, resulted in the issue being almost four timesoversubscribed. The demand was set by“anchor” Asian/European investors, whocovered the book after only the second dayof marketing. Fund managers accounted for almost 80 per cent of the issue, withEuropean investors taking 41 per cent of the issue and Asian investors accountingfor 34 per cent.

Peter Kopanidis, group treasurer at MayneGroup, says the issue was undertaken tomitigate re-financing risk associated with thematurity of the company's US$ Yankeebonds due in February 2006, while takingadvantage of favourable market conditionsduring an available “disclosure window”.

“The available 'window' for Mayne was either October-November 2004 or October-November 2005 when Form 20F financialstatements (a requirement for SEC-registered companies such as Mayne) areconsidered 'fresh' and available for inclusionwithin an information memorandum. Waitinguntil November 2005 to issue into anunknown market with only three months prior to maturity of Yankee bonds was notconsidered an option given current marketconditions,” he says.

Proceeds of the notes were used to replacecommitted US$ bank debt that matchesUS$-funded pharmaceutical assets of thegroup, allowing Mayne to redraw committedrevolver funding (which matures in 2009) to repay the Yankee bonds in 2006.

Kopanidis says that taking into accountMayne's desire to match-fund foreigncurrency assets with foreign currency debt (without the need for long-term cross-currency swaps) and the company'scurrent non-investment grade rating, the144A/Regulation S market was chosen.“Notes with no registration rights gives us sufficient term, mix of investors and an acceptable level of ongoing disclosure.The 144A market also gave Mayne access

to longer term debt (seven years) than whatis typically available for non-investment gradeissuers in the current bank debt market.”

Andrew Edwards-Parton, vice-president,global capital markets, at Morgan Stanley,sole underwriter to the deal, says the 144Amarket provided the best balance of investorappetite and disclosure requirements. “Theextremes were a fully registered or a 144Awith registration rights deal, but both of thosewould have had higher initial – and ongoing –disclosure requirements for Mayne; or at theother end of the spectrum, going to a pureEurobond deal, which would have had lesserdisclosure requirements than the 144A route,but would have offered access to a reducedinvestor base.”

The extremes were a fullyregistered or a 144A withregistration rights deal, but both of those wouldhave had higher initial –and ongoing – disclosurerequirements for Mayne.

Edwards-Parton says the four-day roadshowthrough Singapore, Hong Kong, London and New York produced an “impressive”conversion ratio of more than 80 per cent.“The book closed almost four times over-subscribed with more than 60 high-qualityaccounts coming into the book. Based on our experience and strong position in the Asian high-yield market, we built themarketing around the Asian investor baserather than the US. Asian investors' appetitefor Australian issuers provided the core of demand, and allowed more aggressivepricing and a more flexible covenant package,which was modified from standard non-investment grade to better reflect Mayne'sstrong credit profile.”

The final distribution split was Asia 34 percent, Europe 41 per cent and US 25 per cent, with fund managers being allocated the largest proportion. In keeping with thefocus on the Asian investor base, the notesare listed in Singapore.

“In terms of that kind of Australian industrialcredit going in to the 144A market, it was avery noteworthy deal,” says Edwards-Parton.“There have been very few non-investmentgrade issues ever done, and it was certainlythe first non-investment grade corporate dealfor a long time.

“But the deal showed that there is asignificant number of investors, particularly in Asia, who have a very strong appetite

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NationalAustraliaBankFrom early in the year, NationalAustralia Bank's funding team knewthat 2004 was going to be a year outof the ordinary: it would be a year in which the bank would become, in effect, a forced issuer.

From early in the year, National AustraliaBank's funding team knew that 2004 was going to be a year out of the ordinary: it would be a year in which the bank wouldbecome, in effect, a forced issuer.

In the wake of the bank's announcement inJanuary that it had identified pre-tax losses of up to $180 million relating to unauthorisedtrading in foreign exchange options – an amount subsequently increased to $360 million – the Australian PrudentialRegulation Authority (APRA) imposed a capital compliance regime on NAB,including the requirement that the bank raise additional Tier 1 and 2 capital.

The dividend reinvestment plan for the March 2004 interim dividend was fullyunderwritten by Merrill Lynch, raising $1.2 billion of additional Tier 1 capital, and thebank went to the debt capital markets for afurther $2 billion of Tier 2 subordinated debt.

“We certainly found ourselves doing capitalraisings that were not planned for,” says IanMcLean, head of group funding and liquidityat National Australia Bank. “The $2.6 billion in subordinated MTNs and EMTNs done in May and June 2004 were undertaken toincrease the bank's regulatory capital ratiosto 10.2 per cent by June 2004, as required by APRA following the FX options losses.”

“But regardless of the need for subordinateddebt funding, I think we would have done that volume of funding anyway, just reflecting how the balance sheet had grown, mainly on the back of growth in housing loans. The subordinated debt funding meets twoobjectives – it meets the capital objective plus the funding objective – and we also tookthe opportunity to switch our funding out ofsenior into subordinated to meet that fundingobjective,” says McLean.

“Being a 'forced' issuer in a sense wascertainly not reflected in the market'sresponse to the large subordinated debtraising,” says Nicholas Ross, head of debtcapital markets at UBS, which was a jointlead-manager of the multi-tranche, multi-currency subordinated MTNs and EMTNs.

(The transaction comprised $670 million of ten-year non-call five-year domestic

subordinated MTNs [via National AustraliaBank and UBS]; US$750 million of ten-yearnon-call five-year floating-rate subordinatedEMTNs [via HSBC, Merrill Lynch, Nomuraand UBS]; and €500million 12-year non-callseven- year fixed-rate subordinated EMTNs[also via HSBC, Merrill Lynch, Nomura andUBS).

George Polites, director of debt capitalmarkets at National Australia Bank, saysthere wasn't a great deal of differencebetween the A$ tranche and the offshoretranches, reflecting the demand for sub-debtpaper in the domestic market. “In terms ofpricing they closely matched up on a swap-back basis. The market knew there was a need to raise Tier 2 capital but we priced in line with where secondary market spreadswere at the time on the outstanding ANZ andWestpac sub-debt issues.”

Ross says the deal was notable because“outside of some acquisition finance”, a public three-tranche deal, including an A$ trade, has not been seen from anAustralian bank. “But what really focused the market's attention was the quality of the execution, given some of the corporate 'noise' around the credit.”

Ross says the marketing phase was “a critical roadshow” for the funding teamand for NAB, to explain some of the issues to investors and outline what the bank wasdoing to address them and what its strategy

for Australian credit. A number of the Asianfunds have specific weightings for Australianissuers, and generally Asian investors look very favourably on Australian names,especially ones that come in the non-investment grade space and therefore offer a little bit more yield.”

The covenant package was modified from the standard for non-investment gradeissuers. There were a number of areas offlexibility, both in respect of where levelswere set for the financial covenant package,but also more specifically around some of thebehavioural covenants and around covenantadministration; where we were able tonegotiate significant flexibility for Mayne."

Kopanidis says the documentation process for non-investment grade issuers is intensive and “shouldn't be under-estimated”, particularly in a heightened global regulatory/control environment from both an accounting and legal perspective.

“For any non-investment grade issuerscontemplating a similar deal, my advice would be to give yourself as much time as possible to negotiate an indenture thatprovides the issuer with sufficient financialand operational flexibility to 'run theirbusiness'. This requires working closely with your foreign legal counsel (Mayneengaged Sullivan & Cromwell LLP) tounderstand what other recent issuers were able to negotiate in their indentures,particularly for similarly rated credits.”

Being a 'forced' issuer in a sense was certainly notreflected in the market'sresponse to the largesubordinated debt raising.

Nicholas RossHead of Debt Capital MarketsUBS

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St.GeorgeBankSt.George Bank may be referred toincreasingly as Australia’s so called“fifth major”, but its annual fundingtask is very different to the fourincumbents.

St.George raises more under its Crusadesecuritisation vehicle than it does in seniorand subordinated debt under its own name.The total funding requirement in 2003-04 for senior and subordinated debt was $5.3billion; whereas the total amount issuedunder Crusade was $5.7 billion.

“We’ve used securitisation as a form ofwholesale funding more than the other banks,which means we haven’t seen the same levelof growth that they have in term fundingrequirement,” says Jeff Sheehan, chiefmanager, capital markets at St.George.

St.George Bank established its Crusadesecuritisation vehicle in 1997, which is now a regular issuer in the Australian, Europeanand US markets. To date it has securitisedmore than $20 billion of its residentialmortgages and $500 million of its auto loans,making it one of Australia's leading banks inthe securitisation industry.

“Over the last two years in particular we have been a more frequent issuer of securitised notes than term fundingstructures. Our overall funding strategy is to remain predominantly funded by retaildeposits, supplemented by diversifiedsources of wholesale funding. Our wholesalefunding strategy is to maintain access tovarious global markets in order to providecost effective, flexible and reliable funding,” says Sheehan.

He adds that St.George has directedsubstantial effort towards establishing a strong profile for St.George in the majoroffshore capital markets to complement its strong domestic presence. The bank’sstrategy for public issuance generallyrevolves around establishment of a yieldcurve of liquid, actively traded “benchmark”issues, in US$, sterling and Euro. He says thehighlights of the bank’s year in 2004 were:

– £200 million three-year FRN issued in March;

– US$500 million three-year FRN issued in June;

– €750 million five-year FRN issued in August;

– launching the bank’s first unsecured US Debt Program with a US$2 billion US CP Program, in June;

was going forward. “The market was verykeen to hear from NAB, which hadn't been a regular debt roadshow issuer. This was animportant step in developing its relationshipswith some of the world's largest investors.

“What was significant was that the domesticissue came only a week after the $730 million deal for ANZ, and despite NAB'sunfavourable news flow, and the success of the ANZ transaction, the NAB issue priced at the bottom of price expectations.”

Ross says the A$ tranche set a very tightbenchmark for the subsequent Europeanissues that were part of NAB's strategy, the pricing of which was comparably good.“Actually, NAB achieved some of the bestlower Tier 2 pricing it has ever secured. Sowhat did that tell us? It was a well-executedtransaction, the market liked what NAB had to tell it, and the reception demonstratedthe very strong appetite of domestic andoffshore institutions for lower Tier 2.”

Gerard Perrignon, director, debt capitalmarkets at Nomura, says the success of theroadshow and the positive reaction to NAB'sdebt investor relations work resulted in 48investors participating in the US$ tranche and 46 accounts in the Euro tranche. TheUS$ deal was predominantly driven by strongdemand from the UK, with Asia/Middle Easttaking 12 per cent of the bonds. The Eurotranche was evenly split between the UK andIreland, with asset managers and insurancecompanies the main drivers of demand.

Perrignon says the issue furthers NAB's core strategic funding objective of extendingits investor diversification. “While NAB has previously issued fixed-rate Eurosubordinated debt, it is a relatively newsector for Australian banks, which have more traditionally turned either to the US$ ten-non-call-five market or to targetedUS domestic demand.”

Other funding highlights for the year, saysMcLean, were the $2.5billion National RMBSTrust 2004 – 1 issue in September 2004 (via Deutsche Bank, JPMorgan, Citigroup,NAB Limited and SG Corporate & InvestmentBanking) and the various retail targetedEMTNs the bank issued, particularly theC$750 million fixed and floating rate EMTN(via RBC).

“The RMBS deal was the second RMBStransaction for the National (the first beingthe Homeside Trust issue in 2001). Thecollateral was the highest-quality ever seenout of Australia and the pricing was two basis points inside our domestic peers andcomparable to UK issuers,” he says.

“The retail targeted issues saw the paperplaced not only into the traditional Asian and

European retail accounts but also, for the C$-denominated issue, into the Canadianretail market. That was a market opportunityshown to us by RBC, that there was the retail investor demand for it to be worthwhilefor us to issue into that market.”

Bill Measday, vice-president and head ofstructured finance at JPMorgan, says the“obvious highlight” of the RMBS Trust 2004-1 issue was the pricing. “The US$ leg camein at 11 basis points over LIBOR and the Euroleg came in EURIBOR plus 12, and in bothcases that's the tightest pricing we've seenyet from an Australian deal.

“There were a couple of reasons for this:credit spreads had come in over the last yearor so; it was a very good pool of mortgages – NAB had chosen it about three years ago,and it had seasoned nicely – and the timingwas good, as the market was very hungry for paper at the time,” says Measday.

Ben Hall, managing director, origination andsyndication, at RBC, says NAB's C$750million EMTN was part of a surge in issuancefor Australian banks in C$ on the back of theattractive basis swap in Canada. “If you lookat the Aussie basis, which is pretty high,Canada is one of the few markets where the basis is actually higher than Australia. So you were able to offer high double-digitsover Canadian LIBOR (Canadian bankers'acceptance swaps).”

“For investors, the Aussie banks are AAissuers, a similar rating to the Canadianbanks, but offering a decent spread pick-upover the Canadian banks in the domesticmarket, so it worked well. The NAB paperwas bought by a mixture of internationalinvestors, Canadian funds, Europeaninvestors, Asian investors and NorthAmerican investors,” says Hall.

McLean says the size of the funding task has increased dramatically in recent years.“I've only been in this role for a couple ofyears, but when I started we would have done $6 billion-$8 billion, but we've increasedthe funding quite significantly as the balancesheet has expanded. During 2003-04 we did $16.2 billion, of which $9.6 billion was in senior debt form, $4.1 billion was in subordinated debt form and $2.5 billion was in RMBS.”

But this year, McLean is expecting to raiseless. “We're forecasting to do about $11billion plus another RMBS issue, which wouldtake it up to about $13 billion,” he says. “All markets are important to us, but wherewe see strategic funding opportunities are in the domestic market and the fixed rateEuro market.”

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The St.George story was well-received by the investors we met and we wereparticularly pleased to see how little time it took for these new investors to set upsizeable limits and start actively supporting our program,” he says.

On the $A front, the motivation behindregularly issuing in A$ through 2004 was to maintain a pattern of regular issuance infloating-rate notes and build up the size of St.George’s benchmark fixed-rate issues. IanHamilton, head of debt markets trading andsales at St.George Financial Markets, saysthe transferable deposits are straight seniordebt issues put into the bank’s institutionalcustomer base, onshore and offshore.

“We’ve had a policy of building strongbenchmark lines with plenty of liquidity in them, and we just continue to add to them. We don’t have enormous needs in thedomestic market for these style of securities,but what we try to do is put them into thesebenchmark lines and that provides liquidity for customers. We try to put one large lineinto each year, and investors can move theirportfolio allocation not only to St.George, butalso move up and down the curve dependingon where they want to be best positioned.”

– $300 million four-year 6.25 per centTransferable Deposits issued in August;

– $350 million SAINTS perpetual non-callten-year issued in August; and

– $450 million 15 September 2009 floating-rate Transferable Deposits, issued inSeptember.

Michael Malone, senior manager, capitalmarkets at St.George bank, says the US$benchmark was aimed at increasingSt.George’s investor profile across the Asianinstitutional investor base and also re-established a senior debt pricing reference in US$ for the bank. “We targeted thatUS$500 million three-year FRN issue atAsian investors, and the reception that we got made that one of the key highlights for 2004. After completing an extensiveroadshow in Singapore, Hong Kong, Beijing,Shenzhen and Shanghai and having met with52 investors, it was very pleasing to see 56per cent of the final order book placed withAsian investors,” says Malone.

St.George has tremendous namerecognition in Europe,they’re very committed to increasing their investor base andbroadening their investor reach.

“Pleasingly many of the Asian investors that participated in the deal were new to the St.George name. Given that the US$-denominated FRN market was under-supplied throughout 2004, the deal also saw strong demand from European investorswho helped provide price tension.”

The Euro benchmark issue was a furtherextension of St.George’s commitment to developing a liquid yield curve in Euros.“Having consistently adopted a strategy ofannually updating European debt investorsand offering benchmark sized Euro-denominated issues, we were rewarded with increased issuance capacity in the Euro markets in 2004,” says Sheehan.

“Having issued €650 million earlier in the year, we went back to the Europeanmarket in July. Following a week of investormeetings, a €500 million five-year FRN issue was launched and the order bookquickly grew to €900 million of orders at the indicated price range. “The deal becameour largest-ever single unsecured financing: it was increased to €750 million and delivered

over $1.2 billion in term funding. A total of 41 investors participated in the deal and newinvestors were a key feature with 31 per centof the deal going to new accounts,” saysSheehan.

The transaction was the largest-ever EuroFRN issued from an A-rated bank and one of the largest ever FRNs issued out ofAustralia, by any bank (including the majors).

Nicholas Ross, head of debt capital marketsat UBS, which joint lead-managed the EuroMTNs, says St.George was very much “in the zone” in 2004. “They were an A-ratedbank with a lot of characteristics of an AA bank, so they provided a little bit ofadditional spread in a very tight interest rate environment, and a name that investorswere very comfortable with. So it was a verypopular transaction.

“St.George has tremendous namerecognition in Europe, they’re very committed to increasing their investor baseand broadening their investor reach. Theywere responsive and actually got a number of fixed-rate investors into their FRN,” saysRoss. “Also, one of the things they did wasvisit their UK investors for the first time inquite some time, and that gave them theflexibility around sterling or Euro.”

Sheehan agrees that the sterling issue was opportunistic. “It was timely in that there were opportunities that presentedthemselves in the sterling-US$ basis swap at the time of issue, while we did not have any outstanding debt in sterling, whichcreated a scarcity bid,” he says.

Cynthia Whelan, head of debt capital marketsat Barclays Capital, which lead-managed the March issue, says sterling investors really liked St.George’s credit. “St.Georgewanted to maintain the diversification of theirinvestor base, so with the attractive pricing atthe time, completing the sterling issue madesense – and the reception they received fromsterling investors validated the strategy.Australian banks in general are well-receivedin that market, but St.George particularly so,because of its focus on residential lending,and rarity value for sterling investors.”

The bank’s debut foray into the US CPmarket was also rated a major success.“Given that the US CP market offers thesingle largest available source of wholesalefunding, it was strategically important for us to establish access to this deep andreliable market, and further diversify ourfunding options,” says Malone.

“The feedback from the program roadshowwas that investors were focused on issuerdiversification and were attracted to bankswith strong financials and a clear strategy.

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We’ve used securitisationas a form of wholesalefunding more than theother banks, which meanswe haven’t seen the samelevel of growth that theyhave in term fundingrequirement.

Jeff SheehanChief Manager, Capital MarketsSt.George Bank

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Australian investors, whereas there wasmuch more overseas interest in the ten and11-year tranches, which went about 70 percent offshore. “The longer-dated tranchesappealed more to the European and Asianinvestors. Some of the offshore buyers,particularly out of Asia, were repeat buyers,and so were a lot of the Australian investors;but we got a lot of new investors into thelonger-dated tranches from offshore. We hadvery large life insurance company interest,and surprisingly, we even had large hedgefund interest, due to the high level of activitylast year.”

Martin says the credit wrapping allowed for a significant increase in the size of issuecompared with a size of issue that could beachieved with Sydney Airport’s underlyingrating. “In addition the NPV benefit of thesum of the wrap fees and the AAA issuemargin was greater than the NPV benefit that could have been achieved through anunwrapped issue,” she says.

Graham Metcalf, managing director Asia-Pacific at MBIA, says MBIA’s model oftenworks well for large-volume borrowers with medium to long-term borrowingrequirements.It has worked with a couple of the toll roads, in the utilities and with the

While St.George is keen to grow its businesswith all the major institutional investors inAustralia and offshore – particularly in Asia – who have A$ requirements, Hamilton saysthat at the end of the day the lion’s sharegoes to the domestic market, mainly fundmanagers. “They’re the guys who support us strongly at the short end of the market as well. We do enormous amounts of fundingfor the bank in the local NCD and bill markets– depending what we have in the portfolio – because they’re happy with our name, and they’re prepared to invest out along the curve.”

St.George was also the first issuer torespond to the draft ruling given by theAustralian Prudential Regulation Authority(APRA) in April 2004 that it would onlyapprove Tier 1 securities that were treated asequity both under the existing standards andunder the International Financial ReportingStandards (IFRS) that took effect in January2005. In July, St.George announced an offer of non-cumulative, redeemable andconvertible preference shares called SAINTS(Subordinated Adjustable Income Non-refundable Tier 1 Securities) to raise $300million of Tier 1 capital, subsequentlyincreased to $350 million.

The SAINTS represented the first everperpetual non-call ten-year structure issuedby an Australian bank into the domesticmarket. They pay a preferential fully frankedfloating-rate dividend until the first reset dateof 20 November 2014: on the reset date, at St.George’s discretion, the securities can be exchanged into ordinary shares and/or bought back or redeemed and cancelled. A one-time step-up margin of 100 basispoints per year will kick in if the bank does not exchange the SAINTS by 20 November2014.

SydneyAirportThe market’s largest credit-wrappedbond issue of the year arrived inSeptember when Sydney Airportpriced $1.57 billion of medium-termnotes as part of a $3.2 billionrefinancing of senior debt.

SACL offered $1.42 billion of notes in five-year, ten-year and 11-year tranches, as follows:

– $420 million of 20 November 2009 (non-call 2008), at 34 basis points over BBSW

– $700 million of 20 November 2014 (non-call 2013), at 49 basis points over BBSW

– $300 million of 20 November 2015 (non-call 2013), at 49 basis points over BBSW

The multi-tranche transaction was single-handedly managed by Goldman SachsJBWere. The underlying BBB/Baa2 seniorsecured ratings for the borrower wereenhanced or “wrapped” to AAA/Aaa by MBIA.

In addition, Macquarie Bank arranged andlead-managed an issue of $150 million of3.76 per cent capital-indexed bonds (CIBs),maturing in November 2020.

Ruth Martin, chief financial officer at SydneyAirport, says of the total $3.2 billion fundsraised, $2.5 billion refinanced senior bankdebt facilities due to mature in 2005 and2007 with the remaining $655 million wasused to increase liquidity and working capitalfacilities and an increased capital expenditurefacility.

Martin says Sydney Airport embarked on the refinancing with the key objectives ofbetter pricing, increased flexibility, improvedmaturity profile and certainty of execution.She says all of these objectives were met,with other highlights of the transactions beingthat Sydney Airport and its advisers wereable to achieve financial close well within thetime limits that were required for refinancing,and the resultant reduction of SydneyAirport’s banking panel from 36 to nine.

The MTN paper was bought by a range of both domestic and overseas investors. “In total, more than 60 per cent of the MTN issue went to Asia and Europe. Thegeographical diversification of investors plusthe market-leading margins indicated that thecombination of Sydney Airport as an assetand Australian denominated paper made it a highly attractive investment,” says Martin.

Simon Rothery, managing director ofGoldman Sachs JBWere, says the five-yeartranche was taken almost exclusively by

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Since the federalgovernment suspended its inflation-linked issuanceprogram, there’s been a lack of long-duration and high-quality issuance;so investors saw this as a chance to pick up both.

Paul BideHead of the Debt Markets DivisionMacquarie Bank

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obtained, with no covenants; the margins, which were “at the tight end ofexpectations”; and the fact that the entiretransaction was done at the company’spreferred tenor of seven years.

The paper was bought by 26 accounts, all domestic fund managers. WestpacInstitutional Bank was sole lead manager on the transaction, and Elmslie says ANZ and NAB were included as dealers to get thebest distribution coverage. A comprehensiveroadshow was undertaken prior to the issueand Elmslie says the company’s ongoingrelationship with the noteholders is importantfor future issuance.

Jason Lee, global head of market sales at Westpac Institutional Bank, says there was “rarity value” for the issue, because the public debt markets rarely see issues out of the gaming sector. “Notwithstanding that, investors appreciated the strength

Australian airports, where they’ve wantedseven-to-ten-year money and the price isreasonable.

“The Sydney Airport transaction was a goodsize as a AAA issue, but would have beenunmanageable as an unwrapped BBBexecution. Although corporate deals such as Tabcorp’s $450 million BBB+ issue provethere is increasing demand for unwrappedBBB-type paper, the deal sizes still fall away as you go down the rating spectrum.For Sydney Airport, the idea was cleanexecution in size at a good price, and that’swhat Goldman and Macquarie delivered as arrangers of the MBIA-wrapped issues.”

Rothery says the pricing of all three tranches“clearly re-priced the AAA-credit-wrappedmarket” in Australia, and all of the issues that have come to the market subsequently – for example Lane Cove Tunnel Finance –have benefited from where Sydney Airportwas priced. “We priced the five-year trancheinside where Sydney Airport’s existing paperwas trading in the market, which is unheard-of. We were able to do that was that we hadsignificant offshore demand for this type of asset, and because for once, Australianinvestors thought the paper was going to be scarce. A lot of people didn’t think thatvolume was available in the Australianmarket.”

He says the attraction was partially the asset,and partially due to the wrapping. “Peopletook a lot of comfort from the asset – it was a much different story to two years prior,when they did their first financing, just afterthey bought the asset. As a credit SydneyAirport has had to get through a couple of things like September 11, the SARSoutbreak in Asia, and people had to look atthe asset closely, but they got a lot of comfortfrom it. But also I think MBIA is the preferredwrapper in Australia, so the combination ofasset and wrapper went down pretty well.”

Paul Bide, head of the debt markets divisionat Macquarie Bank, which handled thecapital-indexed bond component, says the issue was significantly over-subscribed.“Since the federal government suspended its inflation-linked issuance program, there’sbeen a lack of long-duration and high-qualityissuance; so investors saw this as a chanceto pick up both. The deal hit a sweet spot forinvestors and delivered attractive long-termfinancing to Sydney Airport.

“It went to a completely different investormarket to the rest of the deal – the CPI-linkedmarket is a unique group of investors, andissuing this kind of bonds taps into themwithout reducing demand for other tranchesbeing issued. It was good value for investors:they got a good underlying credit story fromthe issuer wrapped by a solid AAA insurer. It was a very popular deal,” says Bide.

TabcorpFor a first-time issuer, gaming andwagering heavyweight Tabcorp (theformer Victorian Totalisator AgencyBoard) was seen to have hit thejackpot in October 2004, when itsinaugural bond issue, totalling $450million of medium-term notes due in2011, became the largest BBB bandcorporate issue in Australian debtmarket history, eclipsing the previousrecords set by Snowy Hydro’s $170million ten-year transaction two yearsearlier, and CSR’s $200 million five-year deal in March 2004. The Tabcorptransaction was also the largestseven-year deal seen in the Australiandebt capital markets.

But that was only a curtain-raiser forTabcorp’s real scene-stealer for 2004: itsUS$700 million issue of guaranteed seniornotes in the US, settled in December. This,Tabcorp’s debut issue in the internationalcapital markets, was the largest ever US private placement transaction by anAustralian issuer, and the second-largesttransaction completed in the US privateplacement market in 2004.

The issue was initially launched as US$150million, but was oversubscribed seven times, and increased to the US$700 million. It comprised four tranches, three in US$ andone in A$, with maturity dates spanning ten to 15 years. The notes were placed entirelywith US investors.

David Elmslie, chief financial officer atTabcorp, says the Australian MTN was thefirst step in refinancing a bank bridge loanused to acquire TAB Limited (the former New South Wales Totalisator Agency Board)in July 2004. “The alternatives were bankdebt, the US private placement market or a Euro MTN, but we thought it was importantto tap the domestic capital market beforegoing offshore, given that the local marketwas familiar with the Tabcorp name andcredit. It was also an opportune time to tap anew source of funds given the developmentsin the market in respect of BBB credits andindices.”

The domestic deal broke all size and maturityrecords for the BBB band in the domesticmarket (Tabcorp was rated BBB+, negativeoutlook, by Standard & Poor’s). Tabcorpinitially set out to raise $250 million, but the deal was initially launched with a volumeof $400 million and was increased by $50million because of substantial investordemand. The deal comprised $385 million of fixed-rate notes and $65 million of floating-rate notes, added to meet investor demand.

Elmslie says the highlights from Tabcorp’spoint of view were that volume exceededexpectations, with the deal significantlyupsized; the favourable funding terms

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Notwithstanding that,investors appreciated the strength of Tabcorp’scredit standing and marketposition. It provideddiversity, growth potentialand a strong balance sheet. The deal, and themarketing leading up to its completion, providedthe ideal platform forTabcorp’s subsequent foray into the US privateplacement market.

Jason LeeGlobal Head of Market Sales Westpac Institutional Bank

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“Telstra is one of the more highly rated globaltelecom companies: at A+/A1, it is right at the top of the spectrum. Investors werevery attracted by Telstra’s business focus and strategy, and its strong and stable cashflows. Investors greatly appreciated theopportunity to meet with managementfollowing the company’s recent capitalmanagement initiatives.”

Vanstone says the bond achieved a widedistribution throughout Europe, being placedwith 87 high-quality investors, including the ‘who’s who’ of European institutionalinvestors, spread widely across investortypes and geography. She adds that the final pricing, of mid-swap plus 45 basispoints, provided Telstra with an attractive ‘all-in’ cost of funds after swapping to A$.

Cliff Davis, corporate treasurer of Telstra,says the highlights from the issuer’s point of view were the very strong support – as shown by the bids and pricing – and the degree of comfort that seemed evidentamong investors following the downgradesassociated with Telstra’s announcement onits new capital structure initiatives, to stablerating levels from the rating agencies.

of Tabcorp’s credit standing and marketposition. It provided diversity, growthpotential and a strong balance sheet. The deal, and the marketing leading up to its completion, provided the idealplatform for Tabcorp’s subsequent foray into the US private placement market.”

Elmslie says Tabcorp had been ‘monitoring’the US private placement market for a coupleof years. “We didn’t really expect to get thewhole US$900 million away over there – we were expecting about half of that – but as it turned out, our credit story was very well accepted.”

“In both deals, we wanted longer tenor. We focused on raising seven-year funding in the local market and 15-year money in the US market, and we wanted to keep theone-to-five-year space for domestic banks.We probably could have done the whole thingwith domestic bank debt, but that would havebeen at five years or less, and would have leftus with refinancing risk going forward, whichwe wanted to avoid,” he says.

Cynthia Whelan, head of debt capital markets at Barclays Capital, joint lead-manager (with UBS) of the placement, says US private placement investors found Tabcorp an “extremely attractive”credit, particularly because of its diversifiedbusiness model, and history of successfulacquisitions.

(Apart from TAB, in 1999, Tabcorp acquiredthe Star City hotel and casino in Sydney, andin 2003 the company merged with Jupiters,the owner of hotel and casino complexes inBrisbane, Gold Coast and Townsville.)

“In the gaming and entertainment sector, USinvestors typically have access to Las Vegascasino-style credits, which are generally low BBB or borderline sub-investment grade.With the Tabcorp transaction they had accessto a strongly rated credit that also delivered a diversified exposure. Tabcorp is akin to a regulated monopoly in its casino business,and has gaming and wagering cash flows that are annuity-like income. As the businesscontinues to grow, and with Australia’schanging demographic profile, Tabcorp is well-positioned to maintain its history of strong cash flows. US investors thought it was a fantastic credit to want to invest in.”

Elmslie says Tabcorp did not think it “paid too much of a premium” for the tenor it got, in either market. “Investors saw us as agood, sound issuer with healthy long-termprospects, and obviously they saw valuethere as well. We were certainly happy;everybody’s got to win out of these things.”

TelstraIn July, Telstra announced thesuccessful completion of a €500million ten-year fixed-rate bond issue, marking the telco’s return to the capital markets after anabsence of three years, having issued a €1.5 billion ten-year fixed-rate note in 2001.

Absence had definitely made the heart growfonder: hefty demand for the deal enabled the book to be built in just over 24 hours, with an order book of more than €1.3 billion – meaning the deal was 2.6 times over-subscribed.

Mark Adams, head of Asia-Pacific debtcapital markets at joint bookrunner BNPParibas (which worked with JPMorgan andDeutsche Bank), says the transaction was“an interesting one”, given the changes thathad occurred since Telstra’s last Europeanroadshow.

“The deal followed very closely after thecompany’s announcement in June of its new capital management strategy, whichincluded the return to shareholders of $4.5billion over the next three years throughspecial dividends and share buybacks, and a resultant credit rating downgrade.Effectively Telstra announced that henceforthit would be much more utility-like, and theoperational focus was going to be firmly onAustralasia. The company was downgradedfrom AA-/Aa3 to A+/A1. Given that, and the fact that they’d been away from the Euro market for some time, the deal wentexceptionally well.”

“John Stanhope (Telstra CFO) and CliffDavis (corporate treasurer) did a very goodjob on the roadshow (a three-day affairthrough London, Paris and Frankfurt) to position the credit with investors. The last time Telstra roadshowed a Euro issue the company was still affected by its forayinto Hong Kong, with a question mark overTelstra’s acquisition strategy. This timearound, they positioned the company quitedifferently and emphatically, and investorsloved it,” he says.

Not only was there substantially moreappetite for the bonds than the amountissued, Adams says the pricing action wasvery keen. “When we went into the marketwe gave a price range, and 84 per cent of theorders we got came in at the low end of theindicated price range. Investors were veryhappy to buy at the lower end.”

Natalie Vanstone, head of debt capitalmarkets at joint bookrunner JPMorgan, says the most important thing that investors learned from the roadshow was how attractive Telstra is compared to other European telecoms.

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Telstra is one of the morehighly rated global telecomcompanies: at A+/A1, it is right at the top of thespectrum. Investors werevery attracted by Telstra’sbusiness focus andstrategy, and its strong and stable cash flows.

Natalie VanstoneHead of Debt Capital MarketsJPMorgan

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“To address this, Westfield conducted anextensive marketing effort, which included a number of physical and telephonicmeetings, a Bloomberg roadshow and aglobal conference investor call. Through this,Westfield were able to effectively educated a broad investor base on the name and thecredit – in a very short time period – and as a result, generated an extremely high-qualityand diverse order book.”

Domenic Panaccio, deputy chief financialofficer at Westfield Group, says Westfieldsaw its relative anonymity as an opportunity.“We were a new name with a strong creditstory and our challenge was in educating the US investors in a very short time frame,and in this regard we had two teams on the roadshow. We found there was a lot of interest and the market had the depth and capacity for our volume and tenorrequirements.”

A-rated REITs and propertycompanies are rare in theUS, and this deal reallygave US investors a greatopportunity to invest in ahigh-quality company, andthey jumped at it. And fromthe issuer point of view itpriced excellently.

Panaccio says the US market was theobvious choice for Westfield in its foray into the international debt markets. “About50 per cent of our assets were denominatedin US$ and we had the capacity to absorb a significant issue as we refinanced existingdebt into the new group borrowing structure.Elsewhere, in Europe for example, there didnot appear to be the level of market depth to match our funding requirement. It wasimportant to us that our inaugural issue wassuccessful, helping us to establish a trackrecord and giving us the opportunity to returnto the market in the future, as investorsbecome more familiar and comfortable withthe name.”

Prior to the Westfield merger, says Panaccio,the three individual entities had not accessedthe US bond market. “Previously we hadthree independent entities fundingthemselves on a different basis. WestfieldAmerica tended to fund itself on a securedbasis using CMBS-type facilities; WestfieldTrust funded itself on an unsecured basis,mainly through bank debt and a medium-termnote program in Australia; and WestfieldHoldings was bank debt-funded on anunsecured basis. The challenge for us, as a result of the merger, was to put in place a

A further highlight was the strength of theafter-market and strength of pricing forinvestors.

“The main alternatives for a borrowing of that size were the domestic market and the US market. Taking all aspects into account, the Euro borrowing best suited Telstra’s objectives at that point.Subsequently we have undertaken verysuccessful domestic borrowings of $500million and NZ$200 million undertaken,” says Davis.

Telstra does not normally specifically link a borrowing to a particular purpose, so thefunds raised went into our general purposefunding account. Apart from meeting thegeneral cash flow requirements for businessoperations, funds for maturing debt, dividendpayments, buybacks, etc. are paid from thisaccount.

Davis says the deal went smoothly, but –perhaps mindful of the reassurance Telstrahad to provide to investors on its roadshow – he says the main piece of advice for issuers contemplating a similar transaction is to “do everything possible to inform andbrief the potential investor base.”

“While electronic platforms are very effectiveand helpful in this regard, be prepared toconduct a roadshow headed by a seniorexecutive – for example, the CFO – directedat key investors who require one-on-onebriefings,” he says.

WestfieldIn recent years property companieshave been mainstays of the domesticbond market, but it was to the giganticUS markets that the newly constitutedWestfield Group – the “stapled” entity into which Westfield Holdings,Westfield Trust and Westfield AmericaTrust combined in July – looked for itsfirst funding foray in October.

In recent years property companies havebeen mainstays of the domestic bondmarket, but it was to the gigantic US marketsthat the newly constituted Westfield group – the “stapled” entity into which WestfieldHoldings Limited, Westfield Trust andWestfield America Trust combined in July – looked for its first funding foray in October.

The shopping centre heavyweight’s Yankeedebut was announced as a US$1.25 billionraising, but an order book featuring 100investors with orders in excess of US$3.7billion allowed the issue to be increased to US$2.1 billion of fixed-rate seniorguaranteed notes issued, comprising:

– A ten-year tranche of US$1.4 billion of notes priced at a spread of 115 basispoints over the ten-year Treasury, with a coupon of 5.125 per cent, and

– A six-year tranche of US$700 million of notes priced at a spread of 100 basispoints over the six-year Treasury, with a coupon of 4.375 per cent.

Added to the deal a day later – based onreverse inquiry – were US$500 million ofthree-year floating-rate senior guaranteednotes at a coupon of three-month LIBOR plus30 basis points, taking the total transactionsize to US$2.6 billion. Proceeds from theissue were used to refinance existing debt.

Natalie Vanstone, head of debt capitalmarkets at joint bookrunner JPMorgan, says the deal brought up several landmarks: it was the largest US bond issue by anAustralian corporate; the largest unsecuredproperty deal ever done; the largest FRNever from a property company; and one of the largest 144A deals ever. “Given all that,it was a fantastic result,” she says.

“A-rated REITs and property companies arerare in the US, and this deal really gave USinvestors a great opportunity to invest in ahigh-quality company, and they jumped at it.And from the issuer point of view it pricedexcellently,” she says.

Vanstone says the outcome was even moreimpressive given that Westfield was relativelyunknown to US bond investors. “They hadn’tissued debt on an unsecured basis and theywere a new name for US investors.

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but they stay within their mandates,” saysBannister.

Andrew Edwards-Parton, vice-presidentglobal capital markets at Morgan Stanley,which arranged the issue, says the productwas developed to provide term financingwhile still meeting the requirements of the2a7 funds, which have a limit as to the legalfinal maturity of their investments.

“It makes sense for banks to tap the 2a7market, because it is massive, something like US$3 trillion-4 trillion of liquidity. In mostsituations – certainly in Morgan Stanley’sexperience – these transactions continue to extend to maturity, which means that theissuer gets five or six-year term funding atvery close to money market pricing, while the investor gets a money market instrumentat a more generous spread.”

In this way, he says, Westpac managed to get US$1.75 billion of five-year money at low single-digits over LIBOR – when a similarfive-year transaction at the time in theEuromarkets would have been done at about12 over LIBOR at best. “Because every 12months the coupons step up, what you do istake an average of the coupons over the life,and in this case they averaged out in the lowsingle-digits,” says Edwards-Parton.

Bannister says the diversification aspect isalso a big plus. “We were able to place paperwith a group of investors who have severaltrillion dollars between them. Unless we have some kind of major credit event whichchanges the way that Westpac credit isviewed, it is likely that investors will keep thebonds outstanding and will choose to extendat each extension date. We fully expect that the paper will behave like term funding, but pleasingly it has come at a concession to five-year bullet funding levels.”

Edwards-Parton agrees that the penetrationthe deal gave Westpac into the US investorbase as a whole was noteworthy. “Westpacis seeing good ongoing follow-throughinterest in CP and MTNs from that investorbase as well. We think it’s a very compellingtransaction for anybody who has a decentfunding requirement. It was a major success,and we certainly hope that there will be otherissues like it!”

Westpac’s US$1.5 billion dollar 144a (withregistration rights) floating-rate note (donewith JPMorgan, Nomura and HSBC) actuallystarted life as a fixed-rate and a floating-ratedual-tranche transaction, but Bannister saysmarket volatility at the time made the fixed-rate piece difficult to execute at the bank’spreferred levels. “So we concentrated on the floating-rate note and it turned out to be a really successful deal.”

WestpacFor Westpac Banking Corporation,2004 was a year of doing fewer deals,but of a lot larger size. And as ChrisBannister, head of global funding atWestpac, puts it, the year was one inwhich the banks bonds “truly becameglobal”.

For Westpac Banking Corporation, 2004 wasa year of doing fewer deals, but of a lot largersize. And as Chris Bannister, head of globalfunding at Westpac, puts it, the year was onein which the banks bonds “truly becameglobal”.

“We’ve put in place a global credit curve, andour capacity has increased, particularly in theUS. On the other hand, we haven’t managedto issue into Australia, which is adisappointment but something that we hopeto fix pretty soon,” says Bannister.

Previously, Westpac found access to the USmarket in term borrowing difficult, on thegrounds of differential pricing. “What’shappened over the course of the last year,somewhat driven by supply-demandimbalances and also by the fact that investorsare looking to diversify, is that our globalcredit spreads have aligned, so we’re nowable to effectively place floating or fixed ratepaper into the US on the same kind of termsthat we would expect in Europe. Because thesize of the US market is just so immense,that’s greatly added to the bank’s fundingcapacity,” he says.

A case in point is Westpac’s pioneering –among Australian banks and Asia/Pacificissuers – use in February of “extendable”bonds, a technology developed by MorganStanley in 2000 to allow issuers to tap the“2a7” market in the US (Rule 2a7 defineswhat a money market fund is in the US).

“We’d been looking at the structure for abouta year prior to dealing. Basically we issued anote for 13 months, which meant it waseligible for the 2a7 or money market funds tobuy, and then embedded an extension rightand a step-up to incentivise them toperiodically extend,” says Bannister.

Every three months thereafter, the investorcan elect to extend the transaction, and itbecomes a 13-month final maturity again.Effectively the paper will never be extendedbeyond 13 months, but will not roll downbelow ten months if the extension option istaken up. For Westpac, the paper has a finalmaturity of five years.

“We step the coupon up annually, so itmeans the money market investor can getaccess to Westpac paper, whereaspreviously they found our CP and short-datedpaper too expensive. They get a pick-up thelonger they keep the bonds with Westpac,

new global borrowing structure for the groupwhereby all lenders to the group would rankequally, irrespective of in which jurisdiction, or to which entity, the underlying borrowingresided.”

Westfield achieved this by establishingfinance subsidiaries in each borrowingjurisdiction, which cross-guarantee eachother and have the benefit of guaranteesfrom each of the stapled entities. “Hencelenders to the group now have the strengthand support of Westfield’s combined balancesheet. This has given the group moreborrowing capacity and better access to the global capital markets,” says Panaccio.

“That was the basis on the ratings agenciesassesses the credit rating of the Westfieldgroup, and a rating of A/A2 was assigned by Standard & Poor’s and Moody’srespectively.”

John Gerli, head of debt capital markets atCitigroup, says Westfield was helped by thefact that US REITs do a lot of financing in theUS market. “While the issuing structure wasunique to this transaction, the US marketsees a lot of REIT offers. The sector itself is generally a BBB asset class in the US – they tend to be a bit more leveraged thanthe companies in Australia.”

What is truly significant, says Gerli, is thatWestfield was able to complete the largestREIT transaction ever. “The opportunity for Westfield lay in the fact that the marketwas quite robust at the time of the issue, and allowed them to raise more money thanthey anticipated, and at lower costs.”

Gerli does not believe the fact that Westfieldwas a first-time issuer was a hindrance at all. “It was a large deal for Australiancredits, in fact the largest ever from Australia,but the market evaluated the transaction on its merits and made its decision quickly.Westfield was able to access the market as if it had accessed the market before.”

Most of the paper was taken by USaccounts, with just under 60 per cent of both tranches going to asset managers,and 20 per cent to insurance companies. The transaction was launched on a Friday and priced on the Tuesday afternoon: even with what Panaccio says was a “record-breaking” pile of documentation for investors to digest.

“You’ve got these three individual entitieswhich are stapled together, and explaininghow the structure works, why the creditstructure is robust and sound, took a little bit more time. “In terms of paper used, I’msure our documentation set a size record in the 144A market, because most of it had to be repeated three times,” he says.

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platform for the St.George deal, whichfollowed, and benefited from a similartheme.”

Bannister says the most important insightthat Westpac picked up into floating-ratemarket was that “there’s more and more real money” in the market. “That’s certainlytrue in the US, where because of thedirection of rates, a lot of buyers have beenbuying floating-rate notes. That’s a huge stepforward for the market because in the olddays as a LIBOR-based borrower, your staplewas always Europe, where you’d have FRNbuyers and you’d wait for the right time to do a fixed-rate deal. Now the same thingis beginning to apply in the US.”

“To us, that means the market becomesmuch more sustainable. In Europe, it’s thesame. Increasingly, fixed-rate buyers arebuying floaters as well, and it’s a reallypleasing change in the market,” he says.

Westpac’s total term funding was again more than $10 billion in 2004, but Bannisterdoes not expect to raise the same amount in2005, because the “very compelling” spreadenvironment means the bank has beenslightly pre-funded across term markets.

Bannister says he can’t remember when the market has been so favourable for theAustralian banks. “I can’t remember a timewhen so many investors have been open toWestpac in so many markets. Even Samuraibonds are beginning to price close to ourtargets these days. Investors are looking todiversify, capacity feels good and the fact thatAustralian banks are viewed very favorablyunder Basel II is helping that, I think.”

“Basel II allows for greater ‘granularity’ of detail with regard to asset quality, with the result that Australian banks look very attractive versus their global peers,” he says.

“The deal was priced at six basis points overLIBOR, which was as tight as any three-yeardeal done this year. It really seemed to hit thesweet spot of the market, and the volumewas just incredible.” Bannister says thepaper was taken by about 60 investorsspread across Asia, Europe and the US; a mixture of banks, money market funds,securities lenders and asset managers.

Alertness to opportunities in the floating-ratemarket was also a characteristic of the bank’s€750 million FRN transaction in December,which was done through Deutsche Bank andUBS. Nicholas Ross, head of debt capitalmarkets at UBS, says it was the largest EuroFRN from an Australian bank.

“It was the first time in 12 months thatWestpac had roadshowed in Europe, andthey got a tremendous response frominvestors. One of the things that Westpacpicked up on was the uncertainty at thatparticular time around interest rates, and a lot of investors said they preferred floatingto fixed. They got a very strong price andwere seen as being very responsive, whichenabled them to drive a larger transactionthan would normally have been the case foran FRN. I think the Westpac issue set the

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I can’t remember a timewhen so many investorshave been open to Westpac in so manymarkets. Even Samuraibonds are beginning toprice close to our targetsthese days.

Chris BannisterHead of Global FundingWestpac Banking Corporation

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IssuerTrendsMark Wormell, David Clifford, andJason Lee of Allens Arthur Robinsontalked to Pacific Prospect (PP) aboutthe issuer trends they are seeing inresponse to some of the regulatoryand accounting changes and how theysee issuance conditions in domesticand offshore markets shaping up in2005. Their discussion also coveredthe difficulties of further developingAustralia's retail debt market, whetheror not the US private placementmarket will continue to attract somany Australian corporate borrowersand likely developments in structuredcredit.

PP: There have been a lot of regulatoryaccounting changes within securitisation and hybrids that have affected the way that people issue. Outside of hybrids andsecuritisation though have there been anychanges in the issuing environment becauseof the developments last year?

Wormell: One thing that is definitelyhappening with the changes in the accountingstandards is that there is much greaterpressure on people to actually get deals off balance sheets, in securitisations inparticular. I think is only going to put greaterpressure on interest rates because you arenot going to fund something on balance sheetat the rates that people have been paying foroff-balance sheet deals. You are simply justnot going to do it.

A lot of authorised deposit-taking institution(ADI) financing is going to have to come back on balance sheet because of problemswith accounting standards. So if anything,interest rates are going to get skinnierbecause people will not be securitising asmuch, particularly the big ADIs. I think we willsee a real drying up of their activity because it is uneconomical for them to securitise atthe moment. They do it as much to keepinvestors happy and to prove that they can do it and for funding diversification and thattype of thing but once it is all back on balancesheet, I think they will just forget about it.

Lee: The changes in the accountingstandards will have an impact on the futureshape of CDO issuance. For exampleInternational Accounting Standard IAS 39 will require holders of financial instruments to mark-to-market those instruments. Thiscould lead to a greater issue of products that mitigate such volatility such as ConstantMaturity CDS.

Clifford: It is worth mentioning the changes in the tax rules between debt and equity andsome of the nice points that have to be dealtwith to ensure your instruments are not

equity but are debt. That may affect some of the issuance by some of the ADIs and the like. There are some subtle issues andinterplay between the tax, prudential andaccounting rules that raise some interestingquestions.

Lee: Other new developments are the new directives issued by the EU. We haveseen in the last year the Transparency andProspectus Directives being issued thatactually make it more onerous for non-EUcompanies to list their debt on exchanges in the EU. I think there is some possibility that non-EU companies will maintain theirdebt listing outside the EU to avoid having to comply with those directives. I thinkSwitzerland is trying to promote itself andsome Asian issuers are contemplating listingon the Singapore and the Cayman Islandsstock exchanges. Following from this I think it is only natural that some Australian issuersthat are infrequent issues in the Euro marketmight consider moving their listing to a different exchange to avoid the full impactof the Prospectus and the TransparencyDirectives.

The changes in theaccounting standards will have an impact on the future shape of CDO issuance.

Wormell: One other regulatory change thatmay see a development of a whole newproduct from an Australian point of view is the long expected response fromAustralian Prudential Regulation Authority(APRA) to submissions on covered bonds.My view is that currently under the prudentialstandards covered bonds would not becapital-effective or permitted. The AustralianSecuritisation Forum has made a stronglyargued submission and it will be interesting to see how APRA responds. To date, APRAhas been very negative on covered bonds but I know there are a number of investmentbanks that are talking to ADIs aboutstructuring deals in the expectation thatAPRA will at least go some of the way topermitting some forms of covered bonds.That will be a whole new asset class from an Australian point of view. I think it is yet to be decided if they will be able to attract the German investors who have been themajor investors but certainly there would be interest in other countries in Europe,particularly France, in the type of productsbeing considered.

PP: As you look back on what has happenedin the debt capital markets in Australia arethere any transactions that you have workedon that have been typically notable?

Clifford: I suppose the particulardevelopment in the market over the last

couple of years has been the boom in USprivate placements. The number of Australiancorporates that have gone to the US privateplacement market has been very significant in the last several years. That is becauseCFOs have looked at the refinancing risk and pushed out the maturities of theirliabilities by accessing the seven-, nine- and 12-year deals that are available in the US market. The kind of success you can getwith these deals is indicated by some of theprivate placements that have just closed.One was 10-times oversubscribed and theissuer was looking for US$75 million andended up taking US$160 million. While thatmultiple of oversubscription may not alwaysbe achieved, I think the fact is that there isjust an avalanche of money in the UnitedStates that is looking for Australian creditsand is very happy with Australian credits.

Some of the deals that we have worked onhave been secured deals. Even with complexsecured structures, such as in Transurban’srecent refinancing and in ETSA’s transactionthe US investors seem to be able to get their minds around them and work very well with them so that market seems to be a bottomless market for Australian issuers.Of course if there is ever a default, then theexperience of issuers dealing with foreignlenders may change their attitude but at themoment it is a tremendously successfulmarket.

I think the other area where you have seen a bit of activity is in various capital issues by the prudentially regulated entities such

Q&A – Allens Arthur Robinson

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One of the things that I have really noticed in the last six months is thewillingness of banks tofund assets on balancesheet.

Mark WormellPartnerAllens Arthur Robinson

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Q&A – Allens Arthur Robinson

I think the other area where you have seen a bit of activity is in various capital issues bythe prudentially regulatedentities such as the banks,the insurance companies,the health funds and creditunions.

David CliffordPartnerAllens Arthur Robinson

as the banks, the insurance companies, thehealth funds and credit unions. That type ofactivity will continue as well. There has beenissuance at various levels by the banks rightdown to credit unions issuing at levels of $15 million to $20 million.

Some retail structured debt securities willface resistance over the long term. As thestructures get more complex, the degree ofresistance from commentators and the likewill increase. I think we have reached a fairlyhigh level of complexity already with some of the products and I think that will militateagainst it. That said, for very very good globalhousehold names that might come here,there might be some ability of those entitiesto issue straight debt that goes down to theretail level even though large amounts of it may be taken by wholesale entities. They may be able to get away significanttranches of straight retail debt if the name is significantly recognisable. That may besomething that can be used by very very well known entities to diversify their funding.The cost levels and other issues such as regulatory issues will be a factor thatoperates there as well, but investmentbankers are very keen to tap this marketbecause they see it as a way of broadeningthe investor base and maybe getting someprice tension between wholesale and retail,and fee income for themselves.

Credit for the simplification of theprocess has to be given to all the participantsadopting a sensibleapproach to thedocuments.

Wormell: I would like to add a couple of other things on that. Firstly, I think that the growth into the US private placementmarket will see new entrants into that area. I think the large listed property trusts, in particular, will have a very close look at that as an alternative to the commercialmortgage-backed securities (CMBS)programmes or bank debt that they havebeen using up until now. I think that theopportunity to move away from securedborrowings to long-term unsecuredborrowings in the private placement marketwill be very attractive to them. Now that therehas been so much consolidation in the listedproperty market, with the number of playersreduced substantially through consolidationsand takeovers, we may well see them withcorporate ratings that would support the typeof issuance that can be undertaken in the US.

The other point is that there is anotherstructural change that supports the growth of a retail domestic bond market. That is theway the Australian Stock Exchange has got

on board with listing debt securities. It hasbeen very supportive and the costs are notsubstantial and are not a barrier to it. I thinkpeople are used to having listed securitiesand to have listed corporate debt issomething that does help the growth of themarket. I think the biggest area of tensionthere is just going to be the difference inexpectations between what retail investorswant in terms of a return and what corporateissuers are prepared to pay.

Clifford: It is interesting that Mark mentionsthe listed property trust sector because wehave just been working on a transaction forDB RReef. It is an unsecured transaction and again the appetite in the United Statesfor their debt seems to be very greatnotwithstanding that it is an unsecuredtransaction and it is a listed property trustregistered management scheme. Thestructure is therefore a little bit different froma straight corporate issue because it is a truststructure but it has gone very smoothly andwithout complex security. DB RReef has setitself up for a broad range of issues, bothdomestic debt and offshore issuance.

Our Melbourne office acted for Tabcorp andthat was a very substantial transaction interms of the volume. It raised in the vicinity of US$700 million and we also acted inconnection with Amcor’s issuance in 2002,which again was very substantial at US$500million. Those were unsecured transactions.Again when you are talking about corporatesof that quality, the demand in the US is veryhigh. However, as I say, the market alsoseems prepared to deal with Australiansecured issues which are more project-styleor moving to corporate-style issues from a project-style.

Clifford: 2004 was a banner year for theKangaroo market. Favourable swap rates and the attractiveness of top rated foreignnames ensured that there a strongresurgence in the Kangaroo market. One of the main attractions of this market is theturnaround time to close deals. Due to theincreased standardisation of documents bythe law firms involved heavily in this market,documents can be produced, negotiated and finalised quickly if need be, particularly if based on existing EMTN documentationrather than stand alone programmes. This means clients are in a better position to launch and close deals without adocumentation delay.

Lee: Credit for the simplification of theprocess has to be given to all the participantsadopting a sensible approach to thedocuments. The focus has been on thepricing and distribution of the bonds and not on anachronistic legal arguments. Clients appreciate such a practical approachwhich is sometimes absent in other markets.We should also point out that the expertise in cross border activities of key staff atAustraclear facilitates these transactions

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as efficient clearing systems areindispensable in these Kangaroo Bonds.

PP: You have talked a great deal about thefavourable issuing conditions in the domesticand different international markets. Can you think of anything that would structurallychange or anything else that would make it more challenging at any stage in the futureto issue bonds?

Wormell: The reason it is so good at themoment is there are a lot of high qualityassets about that support the issuance. In Australia we have not really had a dip in the credit cycle for 13 years so right theway across the spectrum, whether you’retalking about securitised debt, which istrading at historically low margins, orwhatever type of security, it is tremendous.However, all you need is a slight change in the credit cycle and you will see marginsblow out again and investors being far morecautious about where they put their money.

Clifford: Maybe Jason Lee can comment on this too but with the US obviously a significant issue is the difference between US and Australian interest rates.Notwithstanding the swap costs, Australianissuers into the US can get extremelyfavourable long-term fixed pricing. They canalso do quite favourable floating-rate deals

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although they are much more rare. However I suppose if US interest rates were to moveand the US exchange rate moved againstAustralian issuers that may be negative. At the moment though the US dollar isweakening so things are pretty favourable.

Lee: As David mentioned the US privateplacement market or Reg D market is fairlyattractive for Australian issuers to lock-in long-term competitive pricing for their debt.However changes to the US/Australian dollar cross currency swap rates mightrestrict further private placements in the US.This will not act as a deterrent for Australiancorporates (particularly those unrated or subinvestment grade) that are naturally hedgedagainst the US dollar, for example companieswhich have US dollar revenues andexpenditures. People also have to appreciatethat a lot of the private placements in the USover the last couple of years have taken placein a relatively benign issuing and creditenvironment. In an environment where thereis a deterioration of credit quality, investorsmight demand higher rates and then it’s more difficult to issue into the Reg D market.I believe that the appetite for high-qualityAustralian paper (in particular ABS) will notstop in Europe. The increasing demand therewill in turn drive rates down making it moreattractive to issuers and I expect the marketto continue to grow there, particularly oncethey get more used to Australian names.

The US private placementmarket or Reg D market is fairly attractive forAustralian issuers to lock-in long-term competitivepricing for their debt.

Asia is or course another strong market forAustralian paper. Traditionally Asian investorshave preferred US treasuries or US dollarissues but with investors there looking forasset diversification, there are opportunitiesfor Australian corporates to provide analternative asset class at favourable rates.

In terms of the domestic market, yes it isflush with cash. Superannuation funds areworking to invest around $1 billion a monthand this money needs to go somewhere.Even domestic credits that are further downthe credit spectrum will be able to get goodterms of funding here.

My gut feeling is that there will be increasingdemand for Australian paper from theEuropean and Asian markets in the comingyear.

Clifford: It always comes down to maturities.As corporate borrowing maturities come up they have got to replace the debt and it is a question of which market they go to –

the local bond market or offshore or banks.There are only so many places you can raisecapital, particularly if you are not going to raise equity. You can see a range of possibilities. The talk about the localcorporate bond market has always been that it is going to expand and they are goingto have to go below BBB+ which traditionallyhas been the limit in the local market andwhich is a higher rating than operates, forexample, for investment-grade in the UnitedStates. Maybe we will see some issuancealong those lines domestically as people getmore used to doing credit analysis. It hasn’thappened much yet but maybe it will have to happen on a weight of money argument.

Clifford: The US private placement marketabsolutely runs on rails more than any othermarket I have ever seen. People like thatmarket because of the speed with whichinvestors can access certain products. It is very much a market where people arewell used to looking at individual companies,learning about them and backing them overtime. It isn’t a market that is so based onprospectus disclosure or general disclosurebut it is bespoke with the focus on investoranalysis, individual due diligence and backingmanagement. It is based on that kind of bespoke, bilateral analysis that is verydifferent from how the Euro markets havebeen traditionally.

Wormell: One of the things that I have really noticed in the last six months is thewillingness of banks to fund assets onbalance sheet. We are actually seeing a swing back from disintermediation, which is obviously all that we have been talkingabout to date, to banks actually recognisingthat they are in the business of lendingmoney, that they do have a balance sheetthat needs to have good quality assets on it and recognising that the advantages thatthey can bring to some corporates throughthe range of products that they can offer is more advantageous to corporates then to have them disintermediating, securitisingor going directly to the capital markets.Therefore, I have seen much bigger lendingexposures from big banks to good qualityborrowers than I have ever seen before. You are now seeing unrated entities, perhapswith a shadow rating of just about investmentgrade, with borrowing lines of $500 millionfrom a bank. That is something that wehaven’t seen much of in Australia since themistakes that were made in the late 1980s.

I think the other thing that we are seeing is banks just saying we will securitise yourassets but we won’t put them through avehicle and we won’t put them throughconduits or anything like that. Rather thebanks will just buy the assets and put themon their balance sheet because the actualcosts of securitisation outweigh the savingsof going to that market. That is thereforeanother alternative source of funding forissuers. Going back to your point, issuers

really do have a whole range of opportunitiesand they are able to pick and choose whatthey want.

PP: Turning to the area of structured credit,have you seen interesting transactions ordevelopment?

Wormell: The most interesting transactionhas been the Obelisk transaction for SG. It is the largest collateralised debt obligation(CDO) that has been done in Australia. It isalso a very interesting one because it is aCDO of a CDO and ABS. It is therefore ahighly structured transaction. The investor in this case is an offshore investor, namely a Singapore-based investor, albeit throughthe Cayman Islands. I think the type ofenquiry you get from that type of investor forthat type of product is very interesting. Thereare a number of other investment banks inAustralia that are very interested in that typeof technology and that type of productparticularly aimed at the institutional investormarket in the region so I think that not onlywas the asset backing and structure of thedeal interesting, the focus upon the type ofinvestor was also very interesting part of thattransaction so I think in terms of the next yearwe’ll see a lot more work in that type of area

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Traditionally Asianinvestors have preferredUS treasuries or US dollarissues but with investorsthere looking for assetdiversification, there are opportunities forAustralian corporates to provide an alternativeasset class at favourablerates.

Jason Lee Senior AssociateAllens Arthur Robinson

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Q&A – Allens Arthur Robinson

because it’s a product that really meetspeople’s needs and is structurally veryfeasible.

PP: You also saw very recently the Calyonproduct that was distributed through NationalAustralia Bank. It had a dual distribution withhalf of it finding its way to middle-market typeclients in Australia and the other half sold to investors in Europe. In terms of this morediverse distribution of product and with theObelisk transaction, are these a very goodindication of how things will go next year?

Wormell: I am not really convinced that thesplit focus is the way that some people willwant to go. Maybe for some it is but I thinkthat the amount of money that needs to find a home is very very substantial and there arequite a few people that are just not interestedin small ticket deals. I know we are not talkingabout securitisation but we did a deal recentlywhere it had to be upsized because one of the main investors in previous tranches of the issue said that they had increased theirminimum investment. The transaction washeavily oversubscribed so it looked as if oneof the key investors for the last three dealswas going to be squeezed out just becausethey had increased the minimum investmentsize.

The amount of money that needs to find a home is very very substantial and there are quite a fewpeople that are just notinterested in small ticketdeals.

I think that at the institutional level we are going to see more of that. We haveseen it in securitisation where deals are nowregularly over $1.5 billion and I think that we are going to see a continuation of theupsizing of transactions. Therefore I think thefocus will be largely on institutional investorsrather than splitting transactions between thetwo investor segments. I don’t know how thatwent from a pricing point of view and therewill certainly be some types of securities,particularly I suspect hybrid securities, wherethey will want a mix of retail, namely high networth individuals, and institutions. I think thatwill continue in the hybrid area but I think inthe more structured area, people may focusmore upon really making very substantialbespoke products for big investors.

Lee: To follow from Mark’s point, thecomplexity or the shape of the syntheticCDO market in the next year will be alsodriven by the reduction in yield. I am going out on a limb here but I think yields willcontinue to tighten and that will result in a couple of things.

The complexity or theshape of the syntheticCDO market in the nextyear will be also driven by the reduction in yield.

Firstly structurers will have be moreinnovative. They will have to consider usinghigh-yield credits and emerging market debtas underlying collateral to increase yield. In the last few months there have been dealsusing derivative products such as commoditytrigger swaps, such as in the Barclays Apollodeal to generate higher yield. It’s a matter of time before such structures migrate toAustralia. Secondly I think that people will be more comfortable investing lower downthe capital structure. If you look at Obelisk, it was single tranche AAA, and the mostjunior tranche in the Calyon deal was AA.Investors will have to go lower down thestructure just to increase yield. To an extentthis is already happening in retail CDO deals. Thirdly, I think you will also find moretransactions are going to be leveraged up,and CDO squared deals will proliferate. In fact some arrangers are contemplatingCDO-cubed deals and others are issuingnotes that are referenced not just to yourLibor index or your bank bills rate but to theDJ iTraxx index or to inflation indices, simplyto increase yield. Therefore in 2005 the CDOmarket will see more innovative transactionsthat are designed to increase yield.

I also foresee that there will be a greaternumber of managed synthetic deals goingforward. Recently, we saw a managedsynthetic EDO for the first time in theproposed SG Goya transaction. This reasonfor this is that there is a perception among new entrants to the market that activelymanaged credit leads to an out-performanceof credit portfolio alpha, despite the leakagein management fees.

I believe a lot of the activity will happen in the wholesale market itself because I thinkthat is where the level of sophistication is and these products are also extremelycomplicated.

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For issuersof all sizesGrange Securities is well known as a broker, however as managingdirector Glenn Willis relates in a Q&A session with Pacific Prospect(PP), in its first decade, the group'scapabilities have expanded to cover a wide range of investment bankingservices. Grange differentiates itselfby its hallmark placement capability to sub-wholesale investors and its complementary ability to tailorcapital-raising solutions across the capital spectrum for issuers of all sizes.

PP: What is Grange Securities and what is its history?

Willis: Grange is an investment bankingbusiness. We commenced in January 1995 when sub-wholesale investors, for want of a better description, didn't have a wide choice of fixed interest investmentoptions, and weren't receiving meaningfuladvice, research or service in regard to theirinvestment portfolios. We focused on thisinvestor market segment, delivering fixedincome and yield-based, capital-secureinvestments, as it wasn't, at the time, a well serviced sector.

We also wanted to build a business inoriginating new debt/sub-debt issues to bring to market, focusing on two broadareas – governments, aside from the Stateand Commonwealth, as well as banks andADIs, other than the major trading banks. In growing the business initially, we built a complementary client base on both the demand and supply side.

We've built a culture whereour people genuinely focuson delivering the highestquality service with theobjective of buildingrelationships based ontrust. I believe our successto date is founded on theteam's sense of urgencyand collaborativeapproach.

Moving forward to the late 1990s, we foresaw the emergence of the listeddebt/equity hybrid sector, and as suchbecame a participating organisation of theASX. This facilitated our growth and standingin this sector. By this time we had built a substantial client base that was seeking

an equities service, and consequently we built an equities capability. Our propertybusiness has grown over time, as many of our fixed income investors have a naturalappetite for quality listed and unlistedproperty investments. And, we've always hada strong structured finance capability, whichin recent years has emerged in the structuredcredit area. Today, we play a prominent role in this market domestically, more specificallyin Australian dollar collateralised debtobligations (CDOs) for retail and wholesaleinvestors.

PP: Where is the business now?

Willis: We would describe Grange as afinancial intermediary that provides a widerange of investment banking services. Our services for issuers and investorsencompass equity capital markets, equitiestrading and advisory, fixed income (whichincludes the debt capital markets, high-yieldand hybrid equity, structured credit, andstructured finance businesses), corporateadvisory, private investor (IMA) services,funds management and a number of principaltrading businesses.

We've grown steadily over the decade andnow operate from four centres - Sydney,Melbourne, Perth and Brisbane, providingservices nationally and into the Asia-Pacificregion. We started the business with a teamof five people, two in Melbourne and three in Sydney, and have grown to a total of over100 employees.

PP: How would you describe the culture at Grange Securities?

Willis: We've built a culture where ourpeople genuinely focus on delivering thehighest quality service with the objective ofbuilding relationships based on trust. I believeour success to date is founded on the team'ssense of urgency and collaborative approach.We strive to deliver consistently high qualitydeals, research and advice to our clients. This is imperative as a large part of ourinvestor base rely heavily on our researchand analysis.

We are fortunate that our client base andmarket position has grown strongly over our 10 years of operation. I believe this is because we have continued to deliver a service that is first rate. We have builtmeticulous processes to deliver positiveresults for our clients.

PP: Within your culture, you attract smartpeople. Why do you think they want to joinGrange as opposed to other organisations?

Willis: We have a fantastic team of qualitypeople, and we continue to attract people, I believe, due to our unique and positiveculture, and our growing position within themarkets in which we operate. Whilst we havegrown from a team of five to 100-strong, we

are fortunate in that we enjoy exceptionallyhigh staff retention rates, which I believe isdue to a strong co-operative ethic that existswithin our business. We go to great lengthsto maintain that co-operative spirit andeveryone who joins us clearly understandsour focus on developing client trust andeverything that means in terms of how we do business. We are growth minded but weall understand that we will be more effective if we do this in a co-operative manner. Co-operation is very effective if you can puttogether a team of quality, driven and cleverpeople who get on with each other and get on with the job. It has worked for us to dateand remains a priority as we continue to growinto a much larger business.

PP: You talk about Grange's focus on providing quality deals and service. How does this work?

Willis: Whatever we bring to market mustrepresent value. That means our offeringsmust provide a superior return for the risk of the investment. Before we undertake anytransaction it must pass our rigorous duediligence process. Within Grange we have a real concern about presenting our clients

Q&A – Grange Securities

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We remain committed tobringing only the highestquality deals to ourinvestors; deals thatsatisfy our risk/returncriteria and we simply will not compromise ourstandards.

Glenn Willis Managing Director Grange Securities

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Q&A – Grange Securities

with deals that may go awry, and it is on this basis we reject a significant number of transactions.

Coming back to the concept of value, mostmarkets are very strong. For example, credit spreads are historically narrow so it is increasingly difficult to find value in this sector - it is in these times that qualityconcerns must be maintained. We havedeveloped our deal selection disciplinesassiduously, and we know that some of thedeals we reject will go to market and performwell and that our investor clients will querywhy we declined to participate. Our responseis that we remain committed to bringing onlythe highest quality deals to our investors;deals that satisfy our risk/return criteria andwe simply will not compromise our standards.

PP: Which transactions are you particularlyhappy with?

Willis: It's difficult to pinpoint one transactionthat stands out. Over the last 10 years, I havebeen proud of the many quality issues that we have either participated in or brought tothe market ourselves. Also, I'm particularlypleased with the results that we have beenable to deliver to our investor clients, eitherthrough our IMA service, our managed fundsor general investment advisory.

PP: How do you see the middle marketdeveloping over the course of the next few years?

Willis: The middle market is a significantinvestment sector, and is very different whenit comes to investment service requirementscompared to either institutional or privateclients. We have dedicated 10 years tounderstanding these requirements. Investorswithin this sector will be increasingly offeredmore complex investment offerings and willtherefore continue to rely heavily on trustedadvisors. We are making every effort to bethe preferred trusted investment advisor inthis sector.

PP: How do you balance protecting yourleadership position in the middle market with growing the business?

Willis: I am hopeful that our efforts to grow the business without compromising ourservice standards will be positive for us, and our objective is to not only maintain ourleadership position, but to enhance it. On thesupply side, we continue our commitment todelivering innovative, leading edge capitalraising solutions. Our in-house capabilitiesenable us to look at capital structures in a sophisticated way. This means we have the ability to look across the whole financingspectrum to determine the optimal capitalstructure for an issuer and design theresulting securities, and importantly raise the capital efficiently. On the demand side,the deal selection process I spoke of earlier,

and our due diligence is designed to ensurethat we only bring the highest qualityinvestment opportunities to our investorclients. We will continue to listen and deliverinvestment advice and solutions tailored toour clients needs.

For Grange it can be summarised as: we willcontinue to bring leading-edge capital raisingservices and structuring capabilities to ourissuer clients and the highest quality issuesto our investors – this is how we have and will continue to build our business.

We've always had a strong structured finance capability, which in recent years hasemerged in the structuredcredit area. Today, we play a prominent role in thismarket domestically, morespecifically in Australiandollar collateralised debtobligations (CDOs) for retail and wholesaleinvestors.

PP: In Australia we have an ageingdemographic that is overlaid by a hugeamount of liquidity and a lot of investmentproducts. How do you see these macrotrends developing through the next few years and what opportunities do they present for Grange?

Willis: The growth in super' has seen strongdemand for quality issues and investments.Our investor base will continue to growstrongly. This will present opportunities for Grange and other market participants to bring quality investment opportunities to our investor clients. We also believe that at some stage our capabilities in hybrid equityand mezzanine financing will come to the foreas issuers, particularly corporates, see themerit in this form of capital financing whenequity markets are less buoyant.

PP: Which of your competitors do you seekto emulate?

Willis: We are always looking at competitororganisations, as well as other businessesthat operate outside of the financial markets,that we believe are doing clever and qualitythings that deliver great results for theirclients. There are many businesses we takelessons from, and we will always look to learnfrom the activities of others just as we seekto innovate from within.

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PP: In the next year what is important to you in terms of building the business?

Willis: To achieve our growth ambitions, it is critical for us to not only attract qualitypeople, but to also retain the first-rate teamthat we have, so we can continue to deliverpositive results for our clients in all marketconditions.

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What’s onthe horizon?Stephen Maher, head of debt marketsresearch, Macquarie Bank talks withPacific Prospect (PP) about some of the main developments in theAustralian debt markets during 2004, and his expectations for 2005.

PP: 2004 was a very busy year for the debtmarkets in Australia. What do you think werethe main developments that occurred in themarket?

Maher: Yes. Last year was another strongyear for the Australian wholesale debt capitalmarket and it capitalised on solid marketgrowth in 2003. The debt markets continuedto expand - particularly securitised and credit- at a healthy pace and debt on issue nowstands at over $280 billion.

The positive performance was again driven by ongoing growth in the corporate andsecuritisation markets. However, a keychange within the Australian market over2004 was that asset demand drove supply.This phenomenon is global, not just local.Demand for securitised assets, and creditassets in general, has roared ahead of supplythroughout the world. It has been reflected in tighter margins – for senior, subordinatedand mezzanine debt. And the naturalresponse for issuers in the face of tighterpricing was to increase supply to takeadvantage of the favourable conditions. We expect this trend to continue in 2005 with solid investor appetite for credit drivingfurther issuance. Moreover, infrastructuredebt, a small segment of the market atpresent, should be a strong contributor to growth over the next few years as under-investment in Australian infrastructure isaddressed.

PP: Before we start discussing differentsectors of the market, could you elaborate on what your expectations are for 2005, and how you think this will impact on issuersand investors?

Maher: We expect demand for credit to remain strong, and coupled with ashortage in assets, this should continue to foster innovation in both the credit and securitisation markets. We see:

– Investor appetite for yield broadening their risk appetite and stimulating demandfor investments with higher risk/return

– Issuers facing competition in theirtraditional credit/securitisation spacesmore likely seeking alternative orcomplementary products to grow or maintain market share and/or easemargin pressure, and

– Continuing innovations in structures and techniques, including selling unratedequity tranches, interest only strips andsynthetics.

PP: I would now like to get your thoughts on a few different areas of the market. Can we start with your outlook for theinfrastructure sector and how projects are likely to be funded?

Maher: Investment in infrastructure will be make or break in 2005. Budget surplusesat the State and Federal levels over the last decade have been at the expense ofinfrastructure. Australia desperately needs to boost infrastructure investment – to buildroads, rail, hospitals etc – and will not be ableto fund this without accessing the privatesector.

The current pipeline of planned and potentialprojects from various governments aroundthe country is large – around 40 projects arecurrently listed by the Australian Council forInfrastructure Development. While many ofthese projects, if they proceed, will be fundedthrough the bank market, we expect that anumber will be funded through the capitalmarkets during 2005. The diverse nature andsecurity of the asset cash flows should proveattractive to investors increasingly seekingdiversification.

PP: One of the big talking points throughout2004 has been the growth of theCollateralised Debt Obligations (CDO)market. Can you give us some insights into which investors have been buying CDOsand why?

Maher: CDOs cemented themselves as afeature of the Australian debt markets over2004. But the real surprise was the sharpdichotomy in risk preferences. Wholesaleinvestors had a preference for the higherrated senior notes while retail investors weretargeting the lower rated mezzanine notes.

Retail investors are yield hungry and haveincreasingly sought the high returnsassociated with these instruments –particularly where the reference portfolio has contained familiar names. But despite the demand, retail has not thrown caution to the wind. With the rise of global referenceportfolios there has also been a high level of interest in more recent 'combo-note'structures which offer a degree of principalprotection. The greater level of principalprotection is often associated with a higherrisk (and potentially higher return) on thecoupon.

In the Generator Income Notes transaction,investors were offered a triple-A rating on theprincipal component of the seven year notesissued. Investors were protected against thefirst 10.3 per cent of losses on a 'principalportfolio' of 142 global credits. In a first for

a retail transaction, the transaction featured a portfolio manager, a positive for investorsgiven the term of the transaction and thedynamic nature of global credits.

Australian wholesale investors are just nowstarting to show an interest in the lower ratedtranches of CDOs tailored for Australianinvestors. This should prove to be an avenuefor significant development in this marketover 2005.

PP: Another one of the success stories for 2004 was the continued growth in thesecuritisation market, particularly for homeloans. Just how big is the ResidentialMortgage Backed Security (RMBS) market now in Australia and can the current level of issuance be sustained?

Maher: The Australia RMBS marketcontinued to set new records in 2004. Over $50 billion was issued and the markethad the highest level of take-up by offshoreinvestors ever (estimated at around threequarters of the total volume issued).

RMBS will remain the mainstay of theAustralian securitisation and credit markets.Issuance levels this year will remain robust,though whether they reach the levels seen in 2004 remains to be seen. To the extent

Q&A – Macquarie Bank

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The debt marketscontinued to expand – particularly securitisedand credit – at a healthypace and debt on issue nowstands at over $280 billion.

Stephen Maher Head of Debt Markets Research Macquarie Bank

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Q&A – Macquarie Bank

that current demand persists, opportunisticissuance, particularly by the major banks, will offset lower mortgage origination ratesdue to the cooling property market.

PP: The state of the property market seems to be debated daily in the press, with forecasts ranging from an impendingcollapse to moderate increase in values.Which view should investors and industrypractitioners believe, and should they beworried about the RMBS market?

Maher: We see a lot of headlines screaming“…Australian house prices, like theirinternational counterparts, are expensive…”.Indeed, these headlines have been floatingaround for more than 2 years. But does thistell us anything?

The housing market is not a headline. It is a dynamic, evolving market. And right now,house prices are down around 10 per centfrom their peak in late 2003/early 2004. The move has been steady, without fright r surprise – this is positive.

The fact that we have had an easing in pricesallows the market some breathing space andlets fundamentals catch-up with valuations.Further, a more detailed analysis on a sectorby sector basis shows that supply-demandfor housing is generally near equilibrium.Some sectors are clearly overexposed to price slumps – inner-city high rise forexample. But these sectors are massivelyunderrepresented in RMBS.

So the reality for investors is that RMBSshould continue to perform.

A key change within theAustralian market over2004 was that assetdemand drove supply. This phenomenon is global,not just local. Demand forsecuritised assets, andcredit assets in general,has roared ahead of supplythroughout the world.

PP: I would like finish by getting your viewson the current level of credit margins andwhether you expect any change in 2005?

Maher: Credit margins to swap are clearlytight (i.e. expensive), but that is only onevaluation measure. If we look at creditmargins to Government bonds (the “term”risk free asset), margins have not movedover the year. By this measure they areneither cheap nor dear. What I'm trying topoint out is that ultimately cheap or expensive

is really a function of your reference points –relative valuations are a moving feast.

If you are a balance sheet and your liabilitycosts fall with no corresponding move inasset prices – then assets are now relativelycheap. And as long as we remain in thecurrent virtuous (vicious?) cycle of ongoingasset/liability spread compression – creditwill remain relatively cheap and hence well-bid.

Investment ininfrastructure will be make or break in 2005.Budget surpluses at theState and Federal levelsover the last decade havebeen at the expense ofinfrastructure.

But the story is not as simple as mycomments might indicate. Relative valuationshould also include some focus on the speedwith which price adjustment could occur – particularly where we have perceptions of a price bubble.

And I think that this is the key issue for credit:there may be some form of price adjustmentduring 2005 that results in significant mark-to-market losses from spread adjustment.But I don't think that credit will be the primemover. I see another market driving valueshifts in credit. For example, if we look atequity markets, we are witnessing goodrallies and low volatility – and this has beensustained for some time. A reversal offortune in the equity market, or maybe a breakdown in currency or commoditymarkets, will impact credit valuations and disrupt credit demand. And given the pressure on prices from current demand,we could see some reasonably significantprice moves.

Will this happen? Almost certainly not. I see this as a very low probability event, but if it does happen, it will be a significant“valuation” event.

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A positiveoutlook on creditStandard & Poor's (S&P) positiveoutlook on credit fundamentalssupports the contraction of creditmargins that occurred in 2004 and fund managers' expectations of stable credit quality over 2005. The ratings agency's positive view is based on the fact that there were more rating upgrades thandowngrades in 2004, a turnaroundfrom the pattern that had prevailedover the past decade. In this Q&Adiscussion with Pacific Prospect (PP), S&P's managing director, Chris Dalton, also outlines theagency's plans to expand its productsand services in the coming year.

PP: What does Standard & Poor’s see as the highlights of 2004?.

Dalton: Looking at the big picture, 2004 wasa largely positive year for the Australian andNew Zealand financial markets, and reflectsthe fact that we are 12-18 months into an improving credit cycle. Over the course of 2004, Standard & Poor’s upgraded 19companies and downgraded five; the firsttime upgrades have exceeded downgradesfor nine years.

The turnaround in credit quality was driven by ongoing improvements in financialoperating performance of companies andsustained economic growth. This created

a platform of strong underlying creditfundamentals, and is in line with favourablecredit quality trends witnessed globally. The one potential “blot on the copy book” is the number of companies on CreditWatchwith negative implications at the end of 2004,largely as a result of M&A activity.

Despite the large number of companies onCreditWatch, underlying credit fundamentalsremain sound. At the end of 2004, 91 percent of companies rated by Standard &Poor’s were on stable outlook.

As we head into 2005, we therefore see apredominately stable outlook in credit qualitywith less downside risk than what would havebeen the case in previous years. With decenteconomic growth, and with it satisfactoryoperating cashflow, we expect that Australiancompanies will remain under pressure fromthe equity markets to maintain efficientbalance sheets. For those companies notseeking growth through M&A, capital returnswill be an option. We don’t anticipate ratedissuers will put ratings at risk from suchcapital restructures.

PP: S&P recently restructured its operationsin the Asia-Pacific region, including Australia.How do you plan to develop the business inAustralia going forward?

Dalton: Australia is a significant market forStandard & Poor’s globally. S&P’s strategy inAustralia is to provide a comprehensive suiteof products and services to the local financialmarkets. Our aim is to be seen as more thanjust a credit ratings agency.

A major step in expanding our offering wastaken in 2000 when we acquired the indicesbusiness from the ASX. Since then we haveadded value to the indices by introducing free float and adopting a globally consistentmethodology, which has given offshoreinvestors greater confidence to invest inAustralia and for a number of index-linkedproducts to be spun off the S&P/ASXindices.

Standard & Poor’s has also established a solid business providing credit riskmanagement services under the banner of Risk Solutions. Over the last couple of years we have been working closely with the major financial institutions as theyprepare for the introduction of Basel II in2007. One of the most exciting projects hasseen us working with seven Australian bankson the establishment of a loss-given-defaultdatabase that captures all exposures above a certain threshold where banks have hadborrowers that have defaulted. We have then tracked the recoveries against thoseexposures, and the timeframes over whichthose monies were recovered.

This is a first for the Australian market. It establishes an empirical database ofinformation that will be integral to the banksworking with APRA to establish accreditation

under the advanced IRB method for capitalallocation under the Basel II Accord, so wehave been pleased to facilitate that within the market. We think this is a product andservice which will become valuable not onlyto Australian banks but also to other financialinstitutions that have Australian exposuresthat want to look at what has been theempirical history of loss and recoveryinformation in the Australian market wherethey may be participating in syndicated loansor whatever from their Singapore branch orEuropean offices.

The other reason for our reorganisationis to position S&P to provide services to new sectors of the market. We’ve embarked on a strategy over the last 18 months to build a greater presence in the retail market,providing research, ratings and data tofinancial planners, independent dealer groupsand other intermediaries. Ultimately, we wantto be as well known in the retail market as weare in the institutional market.

PP: You talked about the fact that generallyaround the world credit quality has beenimproving in recent times. What are some of the scenarios that could potentially occurthat might cause credit spreads to blow outor cause there to be a deterioration in creditquality? And is that likely?

Dalton: While the global credit picture islooking positive, the unexpected can alwayshappen and cause disruption in financialmarkets, such as flare ups in terrorismactivity around the world. With the US andthe Australian elections now behind usthere’s a little more clarity about the futuredirection of those economies and the likelydirection of interest rates. The interest raterise that was widely forecast to come intoplace after the Australian Federal election has largely dissipated, and our view is a small likelihood of a rate rise in the early part,if not the second quarter of 2005 in Australia.A key issue that can influence economicdirection is where oil prices go and that caninfluence some sectors more than others,particularly the airline sector for example as to their profitability and cost structures.There seems to have been some easing ofthat in recent weeks but looking forward into2005 it is probably tied with geopoliticalstability and what happens in terms of Russiaand whether they can get their supply morecertain and guaranteed.

We see the Australian market as very much a part of the global market in which itoperates. An example is the RMBS sector.For many years the residential mortgagebacked issuers here were issuing into a localdomestic investor base. Over the past coupleof years they have been very successful inestablishing investors around the world, andagain we have seen a change in the issuanceprofile of those issuers. In 2003 domesticdeals represented about 64 per cent of the residential mortgage backed deals that were done. In 2004 that volume has dropped

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While the global creditpicture is looking positive,the unexpected can alwayshappen.

Chris DaltonManaging DirectorStandard & Poor’s

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Q&A – Standard & Poor’s

31 per cent as that sector has really becomepart of the global capital markets. Overseasinvestors are now quite familiar with theAustralian residential mortgage market and are attracted by the performance of thesecurities. Also many international investorsare wanting to diversify and have someexposures in currencies other than US$ orEuro.

In 2004 we saw a lot of companies inAustralia access the private placementmarket for funding, to take advantage ofpotentially longer tenors and keener pricing.In some cases we think that some of thecompanies that have issued in that marketmay find some constraints in 2005 that maycause them to go back to some of the publicmarkets, including the 144A in America whichcould give them similar tenors but maybe notthe same sort of advantages that they’veenjoyed in the private placement market.Domestically the bond market should benefitfrom some fairly large amounts of debt thatare going to be maturing in 2005 and that will have to be refinanced. That will providesome activity in the local market althoughthe current strong cash position of manyAustralian corporates is probably going toconstrain the new issuance. The likelihood of new names coming to the market is alsosomewhat constrained.

One of the key issues we have to address inthe Australian market, to enable us to developa deeper and broader capital market, is for theinvestment managers and asset consultantsto accept investment in sub-investment gradecredit quality in Australia, or to greater acceptinvestment at the BBB and BBB- rating levelsto create a wider and more diverse universe of names in which asset managers can invest.

PP: Do you see 2005 being a good year for the hybrid market?

Dalton: Tax and regulatory changes havebeen well flagged and we have seen a number of new styles of hybrids come out including the new wave of perpetualhybrids, with step up hybrids being issued by corporates. First cab of the rank was the Santos fuels followed by Multiplex new hybrid. These are flavour of the monthbecause they are classified as equity underIFRS, whereas the resets will be classified at debt.

Equally we have seen some companies suchas Coles Myer leave their reset preferenceshares in place, even though these will be reclassified as debt under the newinternational financial reporting standards.Even Woolworths still have their IncomeSecurities outstanding.

The hybrid space will continue to be active in2005, as the first of the resets will reach theirfirst reset date, e.g. Coles Myers in Nov 05.

In the infrastructure world this year there hasbeen a lot of merger and acquisition activity

and sale of assets and now that has beencompleted we expect the new owners ofthese assets to look at how they want to fundthose assets in a more medium to long-term.This could see some issuance in the bondmarkets, but hybrids may also play a role inthat long-term financing strategy.

Overall, we don’t think that the introduction of IFRS in itself is going to impact ratings, but it will be interesting to see what extradisclosure comes about as the result of theintroduction of the new reporting standards. It may also give an indication as to whethercorporates will change their risk managementbehaviour as a result of taking a view thatfinancial instruments accounting is tooarbitrary or complex to justify, and newfinancial risk management instruments or approaches are taken.

PP: What are your thoughts about thebanking sector in Australia?

Dalton: The Australian banks are maintainingstrong ratings. We did upgrade the ratings of a couple of banks in 2004, most notablyAdelaide Bank. We still see good assetquality in the banks and we anticipate that will remain the case, but there could be someweakening with respect to an increase insome non-performing loans. We have beensaying for a while that this is probably asgood as it gets for the banks in terms of assetquality. We see that there is some sensitivityand we, among others, are focused on thehigh level of household indebtedness and therisk that contains for banks and also capitalmarkets more generally. We think that thebanks have being issuing large amounts ofdebt to finance and fund what’s been strongloan growth over the last three to four years.We think their financing will continue atstrong levels because we don’t believe therewill be a large inflow of money into the banksbecause certainly the Australian stock markethas performed strongly this year and we alsosee the managed funds sector will competewith money that may have otherwise goneback into the banks if investors had been in a more cautious frame of mind.

We have seen through the years some issuesof corporate governance arise. CertainlyNational Australia Bank has had its difficultiesthat have resulted in some wholesalemanagement changes. But underpinning the maintenance of the rating on NAB hasbeen its strong capital position. Thereforewhile there have been some corporategovernance issues arise, and more recentlyAMCOR, they are mitigated by the strongbusiness and capital structures that some of these organisations have. The issues thathave come about from our point of view havedemonstrated that Australia is dealing in an appropriate manner with governanceissues, that boards are taking governancevery seriously and that, while these incidentsand problems will arise from time to time, we believe both the Australian regulatoryframework with the ASX principles for

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governance and the greater focus andawareness and the experience of boardsgenerally will see these matters are dealt with appropriately so that investors are notadversely impacted where these things doarise.

PP: What are the implications for AustralianIssuers with regards to Basel II?

Dalton: We don’t believe this is going to be a major issue for the Australian market. Webelieve that the major banks will continue to work on it and APRA is indicating that itexpects them to qualify for the advanced IRBmethodology. This will mean that they willprobably still continue to invest in investment-grade credits or take those exposures on. It may mean they look to moving off and using technology such as collateralised debtobligation (CDO) structures to manage someinvestment grade-risks or where the capitalrequired to hold those exposures is notjustified by the margin that they receive onthe facilities. While we would think that themore granular approach to capital allocationunder Basel II would lead banks to recalibratethe pricing for their exposures, we see that itis a very competitive marketplace with bankscompeting for few financing opportunitiesbecause corporates don’t have largeborrowing requirements at the present time.An increase in margins leading up to theintroduction of Basel II is therefore probablynot something that we would expect to see in that competitive pressures will see bankscontinue to provide financing on a similarpricing basis as they currently do.

We are not negative about the impact ofBasel II on securitisation by banks. We wouldexpect to see banks continue to securitiseconsumer assets particularly residentialmortgages as a funding strategy anddiversification of funding. It probably has not been something they have been doing as a capital management tool in the past to a great degree. It has evolved to be more a way of diversifying their funding and wewould continue to see that to be the caseeven though under IFRS some of thesecuritisations could come back on banks’balance sheets.

PP: Can you highlight any other areas of interest as we head into 2005?

Dalton: One other area that we are focusedon, and where we expect to see an increasingdegree of activity, is in Public PrivatePartnership (PPP) financing. WesternAustralia has recently announced its firstPPP, and New South Wales and Victoriacontinue to promote PPPs as an appropriateand responsible way for governments tofinance social infrastructure. During 2005 weshould see an increasing variety of structuresand financings put in place. Overall thereseems to be some political groundswell forgovernments to focus on the infrastructureneeds of Australia looking forward into thenext decade.

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Outlook2005Stephen Koukoulas, chief strategist,TD Securities talks with MichaelStanhope from Pacific Prospect about the outlook for the bond marketin 2005.

Stanhope: 2004 was a good year for bonds.What were the main drivers of the solidperformance in fixed income?

Koukoulas: With bond yields rallying andcredit spreads narrowing, the past yearshould have been a good one for fixedincome fund managers. It was a reasonablystraight forward equation: the economy wasslowing, the house price decline was hurtingconsumer spending and inflation was falling.This is a great environment for lower yields.

Credit, at the same time, was benefiting froma greater investor appetite for risk and yield.The fact that the global economy wasgrowing at a solid pace only enhanced thedesirability of credit.

Stanhope: What can the market look forwardto in 2005?

Koukoulas: It seems the fixed incomemarket is on the cusp of a divergence in performance within the various sub-components of the fixed income spectrum.Credit spreads are incredibly tight and somewidening is likely – even inevitable – in 2005.A slower rate of economic growth, some riskaversion and a practical limitation to theextent spreads can tighten all suggest scopefor credit under-performance through 2005.

Government bonds, on the other hand, cancontinue to rally as the market absorbs theidea that official interest rates might be cut as the economy slows, house prices fall and inflation tracks lower. While the market is anticipating a bout of weaker economicgrowth into the new year, it is only juststarting to embrace the notion that ratesmight be cut. If this turns out to be the case,government bond yields can rally.

Stanhope: What are the issues that arebehind this growth slowdown. After all,official interest rates were left unchangedright through 2004 and the governmenteased fiscal policy with the election inOctober?

Koukoulas: The slowdown has a number of facets, but they link back to the inter-playof house prices, household debt andconsumer demand. The massive imbalance in this sector of the economy started tounwind during 2004 and towards the end of the year, there was a run of very weak datasuggesting that house prices falls, a record

debt servicing burden and record debt levelswere dampening demand and inflation.

Not only have we seen retail spending slowabruptly, but the number of building approvalsare down more than 25 per cent from peaklevels and growth in credit has easedsignificantly. If the momentum continues to the down side, there is a risk that GDPgrowth will dip towards 2 per cent. This iswhere the RBA would feel the need to stepup, cut rates and work to minimise the risksof a hard landing.

These are the circumstances where the bondmarket can rally.

Stanhope: What about global influences?Monetary policy is being tightened in the USand inflation pressures look to be building. Is Australia immune from such pressures?

Koukoulas: As a relatively small andrelatively open country, Australia is pushedand pulled by what happens in the globaleconomy. The broad global trends areundoubtedly reflected in the momentum ofthe Australian economy. If the US and globaleconomy are strong in the year ahead, theslow down in Australia will be moderated witha robust export sector and a positive dose ofconfidence. This will limit the bullish outlookfor bonds.

With bond yields rallyingand credit spreadsnarrowing, the past yearshould have been a goodone for fixed income fundmanagers.

That said, there seems to be some divergenttrends between the Australian and the USeconomies in recent times. Most notably, the housing cycle is clearly on the down turnin Australia while the upside momentum in US housing continues. At the same time,the US cash rate is still several hundred basispoints away from neutral – in Australia, ratesare already slightly restrictive. Interestingly,the US economy has been growing at a fasterpace than Australia for more than a year.

If economic circumstances and monetarypolicy settings ‘normalise’ through 2005, the differential between Australian and USinterest rates will continue to narrow.

My hunch is that the US growth momentumwill consolidate and the Federal Reserve willhike the cash rate to around 3.5 per cent nextyear, while the Australian economy will slowand the RBA will be forced to cut officialinterest rates a couple of times during 2005.

Stanhope: So you really think that the nextmove in Australian interest rates will be

down? What factors are you looking at thatwould allow or even force the RBA to takesuch action?

Koukoulas: It’s pretty simple. A mix wherethe economy grows well below its long runtrend – say 2.75 per cent, with inflationtracking at the bottom of the RBA targetrange – say 2 per cent and with a gradual uptick in the unemployment rate, say towards 6 per cent, and the RBA will have all theinformation it needs to justifiably cut officialrates.

What’s more, the risks that are brewing areskewed firmly to the down side. House priceshave been falling for a year and there is nosign that the price falls are starting to slow. At the same time, consumer demand isweakening and inflation is threatening to fall below the bottom of the RBA targetrange. Add to that a dismally weak exportperformance and a vastly over-valued A$ andthe pressure has and is likely to continue tobe towards interest rate cuts.

The timing of any such move is open todebate. While ever business confidence andconsumer sentiment are high and upsidewage risks remain, the RBA will be reluctantto cut. But if there is evidence of a turningpoint in these matters and growth keepsslowing, the RBA will deliver interest raterelief.

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It seems the fixed incomemarket is on the cusp of adivergence in performancewithin the various sub-components of the fixedincome spectrum. Creditspreads are incredibly tightand some widening is likely– even inevitable – in 2005.

Stephen KoukoulasChief StrategistTD Securities

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Q&A – TD Securities

Stanhope: I’ve noticed that the yield curvehas recently inverted. Is the market signallinga hard landing for the economy in 2005?

The key issues are theglobal economy and someupside wage pressures.

Koukoulas: It is rare for the whole yield curveto trade below the cash rate. When it does, it is usually signalling the near certainty of weaker economic growth, maybe arecession. It was quite amazing that inDecember, the short dated bonds weretrading 25 to 35 basis points below cash,even though the RBA had signalled a biasthat the next move in interest rates may be up. In other words, the market is looking at the recent data and events independentlyof the RBA rhetoric and is anticipating weakergrowth, low inflation and in time, interest ratecuts.

Stanhope: Where could your forecast gowrong?

Koukoulas: The key issues are the globaleconomy and some upside wage pressures.If we find that the world upswing continuesinto 2005, commodity prices stay high andthere is some genuine demand driven pricepressures coming through, the RBA will notcut rates. Similarly, if the low unemploymentrate of recent months allows for someacceleration in wages growth, the RBA will be discouraged from cutting rates and itcould even be inclined to hike.

In my view, this is unlikely but these wouldseem to the only major and serious threats to what otherwise looks to be a favourableoutlook for bonds.

Stanhope: The government has said it willkeep new issuance at low levels given it is running budget surpluses. Is there a risk of reduced liquidity in the CommonwealthGovernment Securities (CGS) market?

The slowdown has a number of facets, but they link back to theinter-play of house prices,household debt andconsumer demand.

Koukoulas: The total amount of CGS onissue has remained around $50 billion for fouror five years. This to me looks a little too low– some of the bigger global investors arestarting to shy away from this part of themarket because of the reduced liquidity. Thisis especially so with the pool of funds undermanagement growing, not just in Australia,but around the world.

Not that it is a big issue at this stage, butthere are occasions when some of thechunkier trades have a significant marketimpact, simply because extra demand is emerging at a time when the supply of bonds is fixed.

Stanhope: So this drop in the relative size of the government bond market opened thedoor for other issuers?

Koukoulas: Very much so. We have seen the amount of Australian dollar non-government bonds on issue rise from around $20 billion in the middle of the 1990sto around $170 billion at present. This hasbeen made up of kangaroo and corporateissuance, while mortgage backed paper hasgrown enormously.

We have the heady mix of weaker economicgrowth, low inflation andthe prospect of monetarypolicy easings.

If the government keeps its commitment to keep the budget in surplus and keepsissuance of CGS to a minimum, a broadcross section of other issuers can enter the market and take up the slack. We wouldexpect to see a raft of new corporate andkangaroo issuers to come to the market in2005. Investors want exposure to Australiandollar debt and the lack of CGS issuance willallow this to occur.

Stanhope: So it looks like a fascinating yearin the fixed income markets?

Koukoulas: No doubt at all. We have theheady mix of weaker economic growth, lowinflation and the prospect of monetary policyeasings. That’s the starting point. Overlayingthat is the very real threat of a blow out incredit spreads, huge currency volatility and a diverse mix of issuers eager to tap theAussie market.

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Use ASW and CDSD to examine trades inthe credit default swap and debt markets. Credit default swaps originated in the early1990s to help bondholders transfer the riskof a debt issuer's default to another party.Today, CDSs also offer a range of tradingstrategies that can provide investors witharbitrage opportunities. In a CDS, the buyermakes payments to the seller in exchange for a payout if the issuer of the underlyingdebt experiences a default or other creditevent, such as bankruptcy. The CDSpremium, or spread, is the cost to the buyerexpressed in basis points. (A basis point is 0.01 percentage point.)

The CDS and cash bond markets are twodifferent markets that trade the same creditrisk. Prices in the two markets should reflectthe same level of risk for a particular credit. In theory, the CDS spread should trade in line with the bond's spread over the swapcurve. The relationship between the bondmarket and the CDS market can diverge,creating a variety of trading opportunities.The divergence can result from a number of factors, including illiquidity in the bond or CDS market. Market participants usingeach market for different reasons can alsocreate discrepancies in credit pricing. Traderscan take advantage of these divergences byusing the CDS market to obtain higher yieldswhen buying an issuer's debt-called goinglong a credit-or to set up a cheaper way tobet against a credit.

A method of quantifying this divergence is called the CDS basis, which is the CDSspread for a particular bond issuer minus the asset swap spread for a bond from the

Finding Credit Market Arbitrage OpportunitiesBy James Mahn

same issuer. A bond's asset swap spread is the number of basis points you wouldreceive over the three-month Londoninterbank offered rate for swapping a fixed-rate bond into a floating-rate obligation. For example, if a five-year Ford Motor Credit Co. CDS has a spread of 210 basispoints and a Ford Motor Credit bond with a five-year maturity has an asset swap spread of 200 basis points, the CDS basis is 10 basis points.

The most common trading strategies to takeadvantage of a positive basis are arbitragetrades and the creation of higher-yielding longcredit positions. Using the same Fordexample, you may take advantage of thepositive CDS basis through an arbitragetrade: You'd sell the CDS, earning 210 basispoints, and also sell the bond short and pay200 basis points, locking in the 10-basis-pointdifferential either to maturity or until the CDS basis falls. Selling short involves sellingborrowed bonds and repaying the lender ofthe securities.

This trade may not be as profitable as itappears: If the bonds are difficult to borrow,that could offset the 10 basis points of profit.Other risks include maturity mismatch, which results from the CDS and the bond not maturing on the same day, and mark-to-market risk, in which the spread widens andcreates a negative day-to-day valuation of the trade.

You may also take advantage of a positivebasis by creating higher yields, or a cheaperlong position, for a particular credit andmaturity. Using the same Ford example,

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Focus: Credit Derivatives

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The Credit DefaultSwap SpreadCurves FunctionType CDSD <Go>to find CDS spreadsfor a specific debtissuer.

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Credit Default Swap BenchmarksBy Christopher Braun

you could simply sell the CDS and earn 210 basis points, rather than buying the bond and earning 200 basis points for thesame credit and maturity.

A negative CDS basis also creates arbitrageopportunities and the ability to create cheapshort positions. A negative CDS basis occurs when the CDS spread is less than the asset swap spread for a particular creditand maturity.

Let's look at debt issuer R.J. ReynoldsTobacco Holdings Inc. Type RJR 7.8755/15/09 <Corp> ASW <Go> and select the bond with REGS in the SERS column to use the Asset Swap Calculator function to find the asset swap spread for a five-yearR.J. Reynolds bond. The asset swap spread,which was 248.2 basis points on April 13,appears in the red box on the right side of the screen.

To find the spread for a five-year CDS basedon R.J. Reynolds's credit, type CDSD <Go>.Tab in to the Corporate Ticker field at the topof the screen, enter RJR and type <Go> 99<Go>. Click on the senior debt under theSearch Results heading, and the currentcomposite price for a five-year R.J. ReynoldsCDS appears.

In mid march, with a spread of 286 basispoints and an asset swap spread of 299 basispoints, the R.J. Reynolds CDS's basis wasminus 13 basis points. To exploit thearbitrage opportunity between the bond andthe CDS, you would buy the bond, earning299 basis points, and also buy the CDS andpay 286 basis points, locking in 13 basispoints on the same credit and maturity.

If you want to create a short position in the credit, buying the CDS gives you acheaper way to do that than shorting thebond. A narrower spread results in a more favourable short position, so buying the CDSin this example gives you an additional 13basis points on the same credit and maturity.

Those two trades could involve risks similarto those you might incur in the positive CDSbasis trades. In addition, there's counterpartyrisk: the possibility that the seller of the CDSmight not honour its commitment to pay inthe event of an R.J. Reynolds credit event.„

JAMES MAHN is a fixed-income and credit derivativesapplication specialist in the Bloomberg Salesdepartment in New York.jmahn@bloomberg.net

Type CDSD <Go> to find a CDS indexand CDSW <Go> to value it.As the credit default swap market matures,participants are realising the need for liquid,tradable benchmarks for CDS pricing. CDSindexes let you track credit markets the sameway you would use the Standard & Poor's500 Index or the Nikkei 225 Stock Average to monitor stock markets in the U.S. andJapan. In a single-name credit default swap,the buyer pays the seller a premium-quoted in basis points per year-in exchange forprotection against the default of a particulardebt issuer for a specified period of time.CDS indexes aggregate the prices of single-name CDS prices according to the issuers'credit rating or industry. You can access datafor iBoxx, Trac-X and Morgan Stanley TracersCDS indexes by typing CDSD <Go> 12<Go>. Click on one of the choices to see theentire list of indexes for that family and thematurity date for each index. You can thenclick on one of the specific indexes to see its latest bid and ask spreads and the tickersymbol used to find historical pricing for thatindex. Type <Help> <Help> for assistance inusing CDSD to identify spread relationshipsfor more than 1,200 credit curves.

You can also tab in to the ContributorPreferences fields at the bottom of theContributed CDS Spreads screen andchoose from the list of pricing sources to use them as your default source for the index. If you do not specify a pricingprovider, the index will be calculated by usingthe Bloomberg composite price. You can usethis index ticker and the Description (DES)function to find more-detailed descriptiveinformation on the index.

For example, type IBOXUENE <Crncy> DES<Go> for information on the U.S. dollar iBoxx Diverse Energy CDS index maturing on March 20, 2009. The index measuresCDS spreads for U.S.-energy-company debt issuers. Type ALLQ <Go> to list pricesfor the index from various pricing providers.

Now you can type GP <Go> for a graph of historical spreads. To graph the historicalvalues of multiple CDS indexes or single-name CDSs on a single chart so that you can make relative value assessments, first type G <Go> for the Graph Worksheetfunction and then 1 <Go> to create a newworksheet. Type 3 <Go> for MultipleSecurity Historical, enter a name in the Graph Title field and press <Go>. Tab in to the Period fields, enter 12/31/03 and04/13/04 as the start and end dates and press <Go>. Type 1 <Go> for Add a Security. To compare CDS levels for energycompanies in general with CDS spreads for Duke Energy Corp., for example, tab in to the Security field, enter IBOXUENE<Crncy> and press <Go>. Type 1 <Go>again, enter CDUK1U5 <Index>, which is the ticker symbol for a five-year Duke CDS,in the Security field and press <Go>. Press<Menu> to display the graph. You can findtickers for single-name CDS spread indexesby typing CDSD <Go> again. Tab in to theCorporate Ticker field, enter the tickersymbol for the issuer's corporate debt andtype <Go> 99 <Go>.

Graphing cds spreads using G lets you makecomparisons between issuers in differentindustries or between specific issuers andrelevant CDS benchmarks, so that you can

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Finding CDS IndexesType CDSD <Go>and select CDSIndices. Click on the name of an indexprovider to list thetypes of indexes andtheir maturity dates.Click on an indexto find its ticker.

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<Go>. You can also type 23 <Go> from the main CDSW screen to list the index'sreference entities, or constituents. The iBoxx energy CDS index's members includeAnadarko Petroleum Corp., ConstellationEnergy Group Inc. and Halliburton Co. Press<Menu> to return to the CDSW calculator.The Spreads section of the screen showscurrent pricing for the index along with theprobabilities of default implied by thoseprices. To use your own prices in the CDSW calculations, tab in to the fields in the Spreads (bps) column and enter yourspreads for the respective times to maturity.Press <Go>, and the Calculator section of the screen displays the current marketvalue for a position in the CDS index from the protection buyer's point of view.

Whether you're trading CDS products tohedge or speculate in the credit markets orusing the CDS market to measure relativevalue within industries and credit ratingcategories, credit default swap indexesprovide useful transparency for the CDSmarket.

CHRISTOPHER BRAUN is a fixed-income and credit derivatives application specialist in theBloomberg Sales department in New York.cbraun2@bloomberg.net

see how the CDS market perceives creditrisk associated with an individual issuer or a group of issuers. For the Duke Energyexample, the graphs show that CDS spreadsfor Duke's debt roughly followed trends in CDSs for energy companies in general in 2004 through April 13.

The Credit Default Swap (CDSW) functionprovides a calculator that enables you to value your CDS positions. The pricingdefaults that you established using CDSD for a particular debt issuer or index apply to calculations in CDSW. To value a CDSindex, first use its ticker symbol to accessDES. For the iBoxx energy CDS index, let's again type IBOXUENE <Crncy> DES<Go>. Then type 1 <Go> to select CDSIndex, and type CDSW <Go> for thevaluation calculator. You can also type CDSI <Go> to find CDS indexes to use for valuation in CDSW.

The CDSW screen is divided into threesections: Deal Information, Spreads andCalculator. Most of the data in the DealInformation portion of the screen is fixedaccording to the parameters of the CDSindex, called the index rules. To see the rulesfor the iBoxx energy CDS index, type 24

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The Credit Default Swap FunctionTo value the five-year, U.S. dollar iBoxx Diverse Energy CDS index, type IBOXUENE <Crncy>DES <Go> 1 <Go>. Type CDSW <Go>, and the value of a position in the index appears in thelower left part of the screen. Type <Menu> 24 <Go> to see the parameters used to calculatethe index. Type 23 <Go> to display a list of the debt issuers that make up the energy CDSindex. To change the CDS spreads used in the calculations, enter new values in the Spreads(bps) column.

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In 2004, property trust credit spreadsunderperformed relative to similar ratedcorporates (refer to Chart 1). While some ofthis underperformance can be traced back toTelstra’s migration into the A rated corporatesector in June, there is little doubt that theproperty trust sector has been out of favour.

The property trust sector’sunderperformance against true corporates(including triple B rated) acceleratedsignificantly from August 2004. This followedthe recommendation by IndependentDirectors of General Property Trust (GPT) of the ultimately unsuccessful merger withLend Lease (LLC) to unitholders and wasalso fuelled by Westfield Property Group(WDC) debt funding further acquisitions in the second half of the year (refer Chart 2).

On a headline basis, this underperformance is largely being fed by investor scepticismregarding the sector’s prospects for creditrather than any actual credit migration. By and large, headline credit quality hasremained broadly static for the major trusts(refer Table 1). That said, Standard & Poor’s(S&P), however, currently has the WDC andGPT A category credit ratings on review forpossible downgrade (Credit Watch Negative– CWN) while Stockland Trust Group (SGP)remains on review for upgrade (Credit WatchPositive – CWP).

Investors warySector consolidation has solidified an overallperception amongst debt investors thatproperty trusts will continue to push theenvelope in terms of boosting unitholderreturns at the expense of credit quality by acquiring higher yielding assets,incorporating riskier development incomestreams and/or increasing their gearingthresholds. This perception is not withoutsome merit given recent history, with gearing thresholds edging up across thesector and the use of stapled structuresincorporating varied development activitiesnow largely the norm.

For instance, GPT has expanded itsinvestments in higher yielding assets such as the Homemaker retail centres and theP&O resorts, and, in addition to adopting a stapled structure, WDC has progressivelyincreased its gearing policy from a peak of 35 per cent to 40 per cent and now 45 percent. In its proposed bid for GPT, SGP hasalso indicated that it will increase its peakgearing from 30 per cent to 35 per cent.

In most cases, however, what is not beingaccounted for is that there has been littlecredit migration among the major trusts, withmost increases in gearing, initiation of stapled

structures, and investments in higher yieldingassets mitigated by much improved incomediversity. By way of example, despite a substantial lift in gearing, WDC’s A/Stablecredit rating was affirmed following thecreation of the largest shopping centre owner in the world.

At the other end of the spectrum, recentconsolidation would most likely have resultedin upgrades to credit ratings if not balancedby gearing thresholds. In S&P’s view,increased diversity for WDC, particularlyfrom the inclusion of Westfield Americaassets and associated cost savings,mitigated a rise in peak gearing from 40 per cent to 45 per cent and inclusion of associated development activities. WDC has since had it’s A credit rating from S&P placed on CWN following theacquisition, in concert with two other bidders,of UK shopping centre owner/developerDuelguide. Moody’s has affirmed WDC’sA2/Stable rating.

While the major property groups have to date been relatively successful in walkingthe tightrope of maintaining credit quality andsimultaneously increasing unit holder returns,the corporate bond market is predicting that this may not be the case in the future.Viewing all investment vehicles in the samemanner, however, is unrealistic as not allproperty groups are expected to evolve at the same pace and in the same way. Over time, differentiation of investmentphilosophy and capital management willemerge, with some trusts remaining moredefensive than others.

Evolution to generate greater differentiationThis evolution is likely to include furtheroffshore expansion in some cases. Most of Australia’s property investment assets are now concentrated among fewerinvestment vehicles. Obviously, WDC will have a heavy emphasis on offshoreexpansion. By contrast, the proposedSGP/GPT merger has committed to remainfocused on the Australian market, with SGP concentrated on boosting its domesticresidential development activities instead. In December 2004, SGP purchased theLensworth property development businessfrom Fosters for $846 million.

Further investment in lesser quality/higheryielding assets and development activitiesare also expected to remain a feature of the market. SGP and other trusts haveincreasingly focused on sub regional retailoutside of the major metropolitan markets.For example, GPT has invested in residentialmaster planned communities with jointventure partner LLC. continued over page

Event risk stalks property trusts in 2004

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Finally, to fund the next wave of expansion,further increases in gearing threshold cannot be discounted. But will this next wave of acquisition activity provide a similardividend of income diversity to mitigate the credit migration priced in to creditspreads at present? If not, what other fundingalternatives are available to the trusts?

Domestic market no longer the primary source of debt fundingAfter peaking at $2.8 billion in 2003, propertytrust issuance in the Australian corporatebond market effectively halved in 2004 (refer Chart 3). Looking ahead, property trustissuance in the domestic Medium Term Note(MTN) market is likely to remain at reducedlevels, with pricing considerations and theinternationalisation of the sector providingproperty groups with enhanced access tooffshore markets. For instance, in addition to a number of property groups accessing the US Private Placement Market, WDC late last year sold US$2.6 billion of 3-year(US$500 million), 6-year (US$750 million)and 10-year (US$1.4 billion) bonds in the US public capital markets late last year.Similarly, a merger between SGP and GPTwould also be expected to enhance itscapacity to access offshore public markets.

At these credit spread levels and includingthe higher establishment and servicing costs,some A rated property groups may also intime find the secured Commercial MortgageBacked Securities (CMBS) market a morecost effective alternative. At the longer end of the curve, A rated property groupstrade around 20 basis points wide of theAAA rated CMBS curve (refer Chart 4). Most property groups, however, would prefer to retain the capacity to issue on anunsecured basis and pay a slight premium for the flexibility that entails.

Moving into the triple Bs reduces operational flexibilityThe investment community continues to anticipate further increases in gearingthreshold over the medium to long term.However, this increased gearing is stillexpected to be accompanied by improvedincome diversity. Credit migration willultimately be dependent on the quality of the assets, the income diversity on offer to the vehicle overall and management’s track record in delivering on expansion /development plans.

In relation to WDC specifically, perceptionamong bondholders at present seems to favour a continual ramp-up of leveragefrom management.

National Australia Bank

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Table 1: Major property trusts – S&P credit ratings

December 2003 December 2004S&P rating Outlook S&P rating Outlook

Westfield Property Group A Stable A CWNGeneral Property Trust A+ Stable A+ CWNStockland Trust Group A- Positive A- CWPCFS Gandel Retail Trust A Negative A Stable

1 2 3 4 5 6 7 840

50

60

70

80

90

100

110

CorporatesPropertyTrusts

Modified Duration

Spr

ead

To T

reas

ury

1 2 3 4 5 6 7 840

50

60

70

80

90

100

110

CorporatesPropertyTrusts

Modified Duration

Spr

ead

To T

reas

ury

Chart 1: A rated corporates and property trusts – spread to bond

December 2004

December 2003

3032343638404244464850

Jan-

04

Feb-

04

Mar

-04

Apr

-04

May

-04

Jun-

04

Jul-0

4

Aug

-04

Sep

-04

Oct

-04

Nov

-04

Dec

-04

Jan-

05

Spe

ed t

o S

wap

Date

Prop

CorpNoPTWR

Chart 2: True corporates and property trusts – spread to swap

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National Australia Bank

121

0

500

1000

1500

2000

2500

3000

1999 2000 2001 2002 2003 2004

Chart 3: Property trust issuance in the Australian corporate bond market (A$ million)

1 2 3 4 5 6 7 820

25

30

35

40

45

50

55

60

AAA rated CMBSA rated property trusts

Modified Duration

Spr

ead

To T

reas

ury

Chart 4: Modified duration spread to swap – A rated property and CMBS

1 2 3 4 5 6 7 850

60

70

80

90

100

110

120

Modified Duration

STOCKLAND2007

Spr

ead

To T

reas

ury

GPT2013

GRT2010

APPF2009

QIC2009

GRT2007

GPT2007

WESTFIELD2007

WESTFIELD2008

STOCKLAND2013

STOCKLAND2008

WESTFIELD2010

Chart 5: A rated property trusts and corporates – spread to CGS

While this cannot be ruled-out, part of thesynergistic fit for the newly formed WDC was the reduced cost of debt to fundoffshore acquisition and developmentactivities. Every dollar of this cost effectivedebt will be needed to fund WDC’s multi-billion dollar development pipeline. Certainly,a one notch downgrade in WDC’s creditrating to A-/Stable should not endanger this,but the more extreme move into the triple Bcategory currently priced in to spreads may reduce the financial flexibility intrinsic in unsecured funding; something WDCmanagement may be reluctant to foregogiven WDC’s acquisitive and portfoliorebalancing philosophy. In the longer termhowever, successful developments andacquisitions may indeed allow a furtherincrement to the gearing threshold withminimal credit migration, as exemplified last year with its Australian trust.

Other specific retail trusts such as CFSGandel Retail Property Trust (GAN) is publicly targeting a niche position amongststapled peers by maintaining clean defensiveearnings. Whether equity investors recognisethis by valuing GAN on a risk versus returnframework rather than purely return remainsto be seen.

The demise of A rated property is prematureIn time, it is expected that investors will adopta more selective overall approach to propertytrusts, such that groups specialising in thegeneration of more defensive earnings suchas GAN will outperform those with moresignificant exposure to higher risk earnings or those operating more aggressive financialprofiles. Provided GAN’s management sticksto its focus of differentiation throughconservatism, GAN’s bonds shouldoutperform other property trusts.

For the more speculatively minded, there mayalso be value in the GPT 2013 bonds. Whilethere is no doubt that their A+ credit rating will migrate downwards, the extent to which it will, in the view of National Australia Bank is being overestimated by debt investors.Given the size and quality of GPT’s portfolioand that the bulk of the portfolio is expectedto remain intact, most foreseeable tie-upsinvolving GPT are likely to result in a worstcase scenario credit rating of A-. From wherethe 2013 bonds are trading at present, thatrepresents value for an investor prepared toaccept some uncertainty in return for higherrunning yield (refer Chart 5).

Phillip StranoInstitutional Markets & ServicesNational Australia BankT 61 3 8641 2795E phillip_strano@national.com.au

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So, what are CDO's?A synthetic Collateralised Debt Obligation(CDO) is a bond with a fixed maturity dateand a credit rating. They may have either a fixed or floating (variable) interest rate and some CDO's have been listed on theAustralian Stock Exchange.

A CDO takes on the exposure of typicallybetween 50 and 150 separate companies(reference entities), for which it is paid aregular fee by the arranger of the CDO.

Who issues them?They are issued by “special purpose vehiclecompanies” or trusts, which are set up by the CDO “arranger” (generally a bank or securities company), specifically for thepurpose of managing the CDO issue. For example Deutsche Bank arranged the“Octagonal” CDO bond and was issued by “Select Access Investments Limited”.

Where does my investment money go?The funds raised from investors in the CDOare placed by the issuer in a collateral depositof either cash or low risk securities (such asgovernment bonds). Interest on this depositis added to a regular fee paid by the arrangerof the CDO to make up the coupon paymentspaid to the investor. At maturity the collateralmatures or is sold to repay investorsprincipal.

Am I at risk to currency changes?No, all Australian CDO issues aredenominated in Australian dollars, and thereis no foreign exchange risk (this is all born bythe lending banks and financial institutions).

Why do CDO's have ratings?To define the credit risk and price of CDObonds, and to allow for direct comparison of the bond in the market, most Issuers willarrange for the bonds to be awarded a ratingfrom a recognised rating agency such as Standard & Poor's, Moody's or Fitch.

The rating of the CDO reflects the quality of the underlying companies in the reference

portfolio and the number of companies thatneed to be affected before the CDO bondprincipal is impacted.

How do ratings agencies assign a rating?The ratings are based on the assessment of the following three broad characteristics of CDO's:

1. Quality and maturity of underlying debtsecurities: the agency makes a creditassessment of the names in the portfolio,the geographic location of each, andindustry details, as well as the overallmaturity of the underlying loans involved(as generally the longer the debt thehigher the risk involved).

2. Tranching: the CDO issuer will generallyissue a number of tranches or classes of bonds within the one transaction, eachwill have a different credit rating and willsuit differing investors. Similar to theranking of creditors in the general wind up of a company, each class of investor in the CDO will be paid according to itspriority in the event that a portfolio suffersa loss. An example follows:

In the event that an entity in the portfoliodefaults and the portfolio suffers a loss,the lowest tranche (commonly referred toas CDO Equity) investors will be affectedfirst. If the CDO equity, through losses is fully eroded, further losses are taken by the next class. As shown above thiswould be the BBB rated notes. Each classor tranche has a level of “subordination”referred to as the “loss threshold” andbased on the likelihood of default in thefuture the rating agencies rate eachtranche taking into account the amount of this loss threshold.

3. Quality of Collateral: The credit ratingand quality of the deposit collateral (wherethe investors money is invested) will beincorporated into the rating of the CDO by the ratings agency.

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CDOs: To good to be true? Understanding CDO's may initially seem complex, this articleendeavours to explain the structure of Collateralised DebtObligations and the benefits of investment in these securities. Thehigher rated tranches of CDOs are a defensive investment and an effective method for prudent Australian investors to capture the diversification benefits of exposure to offshore debt markets.So what are CDO's? And how can they offer a high coupon giventhe low risk?

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Why is the return better than other bonds with the same rating?Returns for say an AAA rated CDO bond aregenerally higher than that of an equivalentAAA rated single name corporate bond withthe same maturity. This is because the returnreceived by a CDO investor represents therisk taken on the performance of the entirereference portfolio. This portfolio will have up to 150 varying corporate entities, each of which have their own rating from AAA to BB+. Each company can be in a differentgeographic location and in entirely differentindustries, as well as differing business stylesand management. This diversifies the overallrisk of the portfolio. The rating assigned to the CDO itself represents the likelihood of the CDO's capacity to repay principal and interest on the investment (not just one company, as each CDO can generallytolerate a number of company defaults) and is therefore dependent on a whole rangeof factors.

Why are CDO's issued?CDO's are issued generally for one of two reasons:

1. Arbitrage: Historically 75 per cent of allCDO's have been issued because anarbitrage exists between taking on the risk of an entire portfolio of names versuslending to each individual nameseparately.

2. Balance Sheet: Banks have arrangedCDO's to manage their capital andimprove return on equity. The referenceportfolio is constructed from debtobligations/ loans held by the arrangingbank. The bank will normally retain themanagement of the debt obligations, butby creating the CDO, capital is freed up tobe utilised in further banking operations.

What other types of CDO's are there?Since the inception of the CDO market in the 1980's there have been manyvariations developed on the standard CDO model. Some of these are :

– Static: A static CDO is one in which the assets do not change once thetransaction is launched.

– Managed: In a managed CDO there willbe an asset manager who can sell and buy assets according to constraints setdown by the arranger.

– Cash Flow: In a Cashflow CDO theassets are physical debt instruments(such as company loans) which arepurchased by the issuer using funds fromthe CDO investors. The principal andinterest cashflows which emanate fromthe loans purchased are used to pay theprincipal and interest due to CDO holders.

– Collateral: From its original roots ofcorporate bonds, CDO's have evolved toinclude a multitude of collateral typesincluding loans, asset backed securities,structured finance securities, tradefinance receivables, high yield debt,mezzanine debt and private equity.

What happens when a company in the portfolio defaults?Should one of the reference entities default it will be removed from the portfolio and theloss deducted from the CDO bonds. In thefirst instance the CDO equity (first tranche)or unrated tranche takes the first loss.Further losses are deducted from tranchesaccording to rating, from lowest to highest. In most default situations the loss will not be the full value of the debt security, therating agencies generally assume a recoveryof around 30 cents in the dollar based onhistorical debt recovery figures.

For example: In a 100 name portfolio eachname represents 1 per cent of the referenceportfolio. The CDO equity may represent 3.0per cent of the CDO bonds, with the nexthighest tranche being BBB (as in diagramabove). Assuming a single default with a 30per cent recovery rate, 0.70 per cent would

be deducted from the value of the collateral.This would also be deducted from theprincipal of the CDO equity holders. Thiswould still leave CDO equity representing 2.3 per cent or just over 3.5 equivalentdefaults before the BBB rated tranche would be affected.

So whilst on first review CDO's appearcomplex, when broken down into theircomponent parts investors can gain a clearunderstanding of these securities and theopportunity to enhance the yield on their fixed interest portfolio's whilst effectivelydiversifying their risk.

Moray VincentDirector, Structured FinanceT 61 2 8259 4800E mvincent@grangesecurities.com.au

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What are the advantages of a CDO Investment?

A number of advantages exist when investing in a CDO:

– A direct security offering diversity of corporate names, industry, and geography, an investor would once have had to invest in a managed fund to achieve;

– International credit exposure without foreign exchange risk;

– High rates of return;

– Minimal interest rate risk on floating rate types, as the rate of return resets every ninety days;

– Highly rated and investment grade securities; and

– In some cases available to investors with $5,000 or more.

CollateralDeposit andportfolio ofexposuretoreferenceentities

AAA rated notes

AA rated notes

A rated notes

BBB rated notes

CDO Equity

Assets Liabilities

Payment forexposure to portfolio of referenceentities �

Interest &Principal from collateral deposit �

Interest &Principal to CDOBond Holders

�

First loss

�

An example of a CDO issued with tranching

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As the name suggests, hybrids areinstruments issued by companies offering a blend of fixed income and equity attributes.The regular and known distributions they payplus the repayment of face value at maturityvia cash or shares, give them bond likecharacteristics. The subordinated nature of securities in a company's capital structure,the payment of preferred dividends, and thepotential sharing of equity price upsideprovide the equity flavour.

The hybrid securities market now plays a significant role in the Australian capitalmarket. There is approximately $16 billion on issue, which while still much lower thanthe ordinary equity market, has been growingrapidly. Issuers have been keen to meetexpanding market demand for investmentsthat provide reasonably predictable cashflows, and low capital volatility.

Grange is synonymous with the ASX listed hybrid securities market, and has been a market leader in this sector since it's re-emergence in the late 1990's.

Investment and Financing needs of “Middle Australia”“Historically “middle Australia” has beenneglected,” says Glenn Willis, managingdirector at Grange Securities. “But theirdemand for capital-secure, high yieldinginvestment is growing and hybrids fit the bill.”

It is in this league that Grange Securities hasexcelled. Willis describes these investors as “sub-wholesale”. It is a catchall phrase for investors other than institutions – itencompasses all investors from small retailinvestors to boutique investors. In reality,most of these investors tend to sit at thesophisticated and professional end of themarket.

Hybrids: An important financing tool for Small to Mid CapsAs a finance provider, Grange has found a similar position among “middle corporateAustralia” – that is providing financingsolutions to small to mid cap companies.

Issuers in the hybrid securities market havemainly comprised the banks and financialservice companies, plus larger industrialcompanies. Investors include fund managers,corporations and private individuals. Theyhave been particularly popular with thoseinvestors dependant on known incomestreams, such as superannuation funds.

Small to mid cap companies have often been ignored by the investment bankingsector because, by virtue of their size, theytend to have smaller capital requirements and generally bring to market smaller issues.However, hybrid funding remains a vital tool in their financing mix. As a finance provider,Grange has excelled at providing hybridfunding solutions to small to mid capcompanies.

“Grange has skills akin to any large, globalinvestment banking business and we presentthose skills to small to mid cap corporations”says Willis. “We can service a small-mid cap company with the same level ofsophistication that most investment banksreserve only for larger companies. Hybridsare an important financing option for thesecompanies given their potentially positiveearnings-per-share implications.”

The key to Grange's success has been that it not only helps small to mid cap companiesstructure themselves to attain their optimalcapital structure, but that it can arrange thefinancing as well.

“Grange has been very successful in this market given our unique placementcapabilities,” says Willis. “Our singular goalis to balance the requirements of companiesissuing hybrid equity with the interests of ourinvestors.”

“Our capacity to structure issues isunderwritten by our large and loyal investorbase in the hybrid equity market sector.Additionally, our secondary market supportfor those issues is unparalleled,” this isevidenced by Grange consistently beingranked by the Australian Stock Exchange

Grange Securities

Financing Solutions for Small to Mid Caps; Investment Opportunity for InvestorsHungry for investment opportunities that offer some form of capitalstable return, “middle Australia” is demanding a piece of the hybridsecurities action.

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among the top 5 most active brokers in the hybrid securities based on turnover.

Grange's distribution capability is unlike anyother market participant. Grange has built an investor base of clients by focussing on the market's growing appetite for highyielding securities.

Investor Education and Research are Key Willis says one of the major challenges for Grange is to ensure that investors areequipped to make clear assessment of therisk and reward characteristics of hybridequities instruments. He says there is anonus on planners, brokers and advisers to better understand their clients' riskpreferences. Grange selects a mix of hybridsecurities based on an investor's preferredlevel of credit rating and yield.

“We don't take issues to market that wewould not want to see end up in ourinvestors' hands,” says Willis. “We areabsolutely focused on generating optimalcapital solutions for corporate clients, and also enabling investors to access the most appropriate investments available in the hybrid equity market and across thespectrum of the Australian capital markets.”

“Our goal is to develop a diverse andeducated investor base that understands that risk and reward dynamics of the hybridequities securities. This drive has providedour clients with superior investment returns.”

Common questions for investors are relatedto the complexity of hybrid securities. “Some hybrids are more bond like thanothers, with relatively standards features.However, there are other issues with featuressuch as conversion discounts, all of which can provide investors difficulty in valueidentification,” says Willis. “This is whereGrange provides expert assistance. Ourhallmark hybrids securities research is ofpremium quality and is sought by institutionaland private investors alike. Grange utilisessophisticated quantitative methods combinedwith expert qualitative analysis to providepremium research and advice to both issuersof and investors in hybrid securities.”Theresearch covers issues such as liquidity,relative value analysis and option valuations.

Willis says, risk-reward modelling and proper pricing and structuring are crucial.“Our role as intermediary in the hybrid equitymarkets, both at the primary and secondarymarket level, enables Grange to have a keen insight into the pricing of hybrid equityinvestments. In particular, an understandingof investors' appetite for the equity and debtcharacteristics of hybrids is integral to theirefficient pricing.”

Grange's expertise in this regard has beenrecognised by the Australian FinancialReview, which uses the firm's pricing data to compile its daily summary on the hybridequity markets.

Grange now has a team of over 100 withoffices in Sydney, Melbourne, Perth andBrisbane offering widespread investmentbanking advice as well as structured finance,stockbroking, asset management and privateclient wealth management solutions.

SydneyLevel 33, 264 George StreetSydney NSW 2000T 61 2 8259 4800F 61 2 8259 4811

MelbourneLevel 34, 360 Collins StreetMelbourne VIC 3000T 61 3 9670 7100F 61 3 9670 7011

BrisbaneLevel 38, 123 Eagle StreetBrisbane QLD 4001T 61 7 3229 5177F 61 7 3229 4738

PerthLevel 17, 37 St George's TerracePerth WA 6000T 61 8 9220 5600F 61 8 9220 5611

Grange Securities

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Australia's continued lack of higher-yieldingcorporate issuance, combined with globalcredit spread contraction, provided the backdrop for active investor interest in more structured credit transactions.

Credit structuring teams working directly with investors were able to deal in an orderlymanner with the effects of Parmalat in late2003. In fact, the Parmalat default seemedonly to prove to investors that these types of transactions are structured to withstandexactly such a credit event and consequently,triggering a new phase of productdevelopment. Structured Credit product in 2004 included a raft of portfolio CLNsincluding static synthetic CDOs and CDO-squared transactions, as well as principal-protected combination notes, with the yearbeing rounded off by a retail managedoffering from Macquarie Bank.

Retail and sub-wholesale investors embracedCDO product throughout the year. Investorsbegan the year being presented with staticsynthetic single-tranche CDOs made up of investment grade (IG) credits or asset-backed securities (ABS), or a combination ofboth. The continuing contraction in spreadssaw arrangers searching for ways to sustainyield for investors without compromising thecredit quality of name selection intransactions.

A number of CDO-squared transactions werebrought to market during the year, includingtwo sizeable transactions arranged by TDSecurities and distributed through GrangeSecurities: "Kosciuszko", a AAA-rated (S&P)three-year, and "Hotham", a AAA-rated (S&P)five-year callable, fetched $75 million and$54.2 million respectively in the very activesub-wholesale sector.

Each of the following posted listed offeringsduring calendar 2004:

– Grange Securities (Arranger LehmanBrothers): "Mahogany" listed the first

combination note in December – whereinterest and principle are dependant ondifferent tranches of the underlying CDOraised $75 million.

– Macquarie Bank: Generator Notes raised$103 million in May and Generator IncomeNotes raised $154.3 million in December– the latter was the first managed retail CDO transaction in Australia (it ismanaged by AXA Investment Managers).

– Westpac: Halcyon Notes raised $66million in August – it was the first listedprinciple protected transaction structure,where income was dependant on defaultsin the portfolio.

– Deutsche Bank: raised $37.5 million in December with its BBB+ Nexus 3 notes which reference a pool ofobligations owed to Deutsche Bank.

Suitability for retail?Debate has raged – vigorously at times –around the question of whether or not CDOproducts are suitable for retail investors.What is clear is that direct investors havetaken to these products, and investmentbanks have responded supporting the directinvestor with continued education,structuring and ongoing product support.

Investment banks, arrangers, and top-tiersecurities distribution firms have facilitatedopen debate among industry bodies, andprovided transparent research on theconstruction of these trades. Listingtransactions for retail distribution is not something that happens overnight.Investors can be assured that at the time of listing that full disclosure has occurred and all due diligence processes have been met as required by the regulator, the Australian Securities & InvestmentsCommission (ASIC).

Each of the public retail listings involved large project teams. Relatively complex

TD Securities

Structured credit developments in 2004:retail and sub-wholesale the big take-upIt would have been very hard to foresee the sheer volume and typesof structured credit transactions that the Australian market would digest in 2004. Investors cast aside the shackles of thinningcredit spreads and the effects of the Parmalat fiasco of 2003 to participate in record sub-wholesale and retail volumes during the year.

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transactions require a high level ofdisclosure, legal and compliance support.Investors have relied on stress testing andrating agency support in ascertaining portfoliosuitability.

The introduction of principal protection intothese CDO structures has given anotherdegree of comfort to investors. Whileprincipal protection can be provided througha number of methods, investors need tofocus on the underlying rating behind theprotection.

Some investors have been comforted by abank guarantee (for example, the guaranteethat Westpac, rated AA-, provided to HalcyonNotes) and others have preferred theprotection of a AAA-rated tranche of a CDO(for example, Macquarie's Generator notes).Either way, investors need to be informed asto the exact meaning of principal protection in their investments. Principal protection can also serve to make investors morecomfortable in moving further down thecapital structure when considering theirdesired coupon.

Where to from here?Australia has been the global market leaderto date in the retail and sub-wholesaledistribution of structured credit product.Domestic institutional fund mangers, on theother hand, are embracing structured creditproducts at their own pace, or at least at a pace that their mandates allow. Mandatechanges take time: some managers set uptheir own alternative investment funds tofacilitate purchases of various parts of thecapital structure within CDOs, responding to the "direct Investment" trend.

We expect arrangers to continue theirresponsive approach to investor feedback;Westpac's Principal protection "HalcyonNotes" and Macquarie Bank’s managed"Generator Notes" evolved from investorsupported structuring – Both offerings weremet by strong demand.

New productEquity Default Obligations (EDOs) offeranother asset class to investors. In thesetransactions, the investor can tailor a couponaround a basket of selected equity stocks,and set triggers, or strikes, on the downsideto act much in the same way as if a creditevent occurred in a CDO. There are still a number of questions surrounding rating of these transactions. However, ratingsagencies are much closer to providinguniversal methodologies to allow moreconsistent structuring of these transactions.Until the methodology and structuresbecome more uniform, the costs involved in getting EDOs to market can be prohibitive.

Other types of product currently in the mixare CDOs linked to various indices such asthose currently traded in the CDS universei.e. DJ CDX NA IG, DJ iTraxx Europe, DJCDX NA HY and the DJ iTraxx Australia. We may even see a more active secondarymarket build up as investors look to takeadvantage of the continued spread tighteningand value that has built up in their tranches.

Shorter-dated transactions hit a sweet spot in the Australian market, and a number of the previously issued transactions are nowinside the three-year length to maturity, whichbrings into play a number of the shorter-datedcash-plus type of investors.

Australia has successfully led the way to date in structured credit product beingoffered to sub-wholesale and retail investors.At the end of December 2004, the ASX hadeight publicly listed CDO transactions thatretail investors could buy and trade in thesecondary market. Expectations are thatAsian structured credit markets will evolve in a similar manner.

Jamie SpenceVice President & DirectorCredit and Structured Credit ProductCapital Markets SalesTD SecuritiesT 61 2 9619 8866E jamie.spence@tdsecurities.com

TD Securities

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Who’s Who – Issuers

Rick Moscati Executive TreasurerBalance Sheet ManagementANZ

Rick Moscati is the Executive Treasurer,Balance Sheet Management within ANZ'sGroup Treasury Business.

He has a background in Mathematics andApplied Finance. He commenced his career in a range of trading and risk managementfunctions, including interest rate swap andcurrency option trading, but has sincespeacialised in Asset and LiabilityManagement.

Rick has obtained more than 10 years of experience in this area and is currentlyresponsible for the Bank's CapitalManagement, Mortgage Securitisation and Liquidity Framework. Over the last fewyears, Rick has successfully led ANZ's threehybrid capital transactions into the Domestic,U.S and European markets. Rick was alsoinvolved in the acquisition financing for theNBNZ purchase in 2003, including the Bank's$3.6 billion dollar rights issue.

Contact details:T 61 3 9273 1368E moscatir@anz.com

John te WechelGeneral Manager, Group FundingCommonwealth Bank of Australia

John is General Manager, Group Funding at the Commonwealth Bank and hasresponsibility for developing andimplementing the Bank's wholesale debtfunding strategy, including management of the Bank's various funding programmesand execution of the Bank's hybrid capitalissues. He has 20 years treasury experience.The Commonwealth Bank is an active issuerin the international and domestic capitalmarkets across a range of products fromcapital instruments through structuredmedium term notes to commercial paper. The Bank has been at the forefront ofinnovation in hybrid capital in the Australianmarket with its Commonwealth Bank PERLSand PERLS II issues.

Contact details:T 61 2 9378 3100E john.tewechel@cba.com.au

Craig ShapiroExecutive Director, TreasuryMacquarie Bank

Craig Shapiro is Executive Director, Treasury Division of Macquarie Bank. Hisresponsibilities include funding the Bank'sbalance sheet and managing the associatedinterest rate risk. He has over eighteen years of banking experience, fifteen of whichhave been with Macquarie Bank. Prior toMacquarie Bank, Craig worked for MitsuiTrust and State Bank of NSW. He holds a Bachelor of Science degree from SydneyUniversity and is a CFTP member of the FTA.

Contact details:T 61 2 8232 3375E craig.shapiro@macquarie.com

Ian McLeanHead of Group Funding & LiquidityNational Australia Bank

Ian McLean is the Head of Group Funding & Liquidity at the National and has been in this role since June 2002, where he hasresponsibility for the National's strategy for accessing the term wholesale fundingmarkets and the monitoring of the National'scash-flow liquidity position. Ian joined theNational in March 2001, as Head of Asset & Liability Management for the Australianbalance sheet.

Ian has had over 15 years experience in thefinancial markets, primarily in the area of debtand liability management, including:

– Victorian State Treasury – where he wasresponsible for managing the VictorianGovernment's debt portfolio and liabilitymanagement strategy;

– Commonwealth Bank of Australia – on the funding side, as Senior Manager, New Issues;

– State Bank of Victoria – as ManagerCapital Markets; and

– Australian Wheat Board – as AssistantManager Treasury.

Originally from New Zealand, Ian studiedAgricultural Economics at Massey Universityand holds a post graduate diploma from theSecurities Institute of Australia.

Contact details:T 61 3 8641 3358E ian_r_mclean@national.com.au

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Stephen KnightDeputy Chief Executive and General ManagerNSW Treasury Corporation

Stephen is Deputy Chief Executive andGeneral Manager, for NSW TreasuryCorporation (TCorp). TCorp is the largest ofthe Australian State Central BorrowingAuthorities, with a balance sheet of around$30 billion and an annual funding program ofaround $5 billion. TCorp also manages debtand asset portfolios on behalf of over 120client authorities. Stephen is responsible forall financial markets, funds management andclient service activities at TCorp, including allfunding and balance sheet activities, inaddition to the strategic management ofroughly $17 billion in client debt portfolios,and $15 billion in funds managed for clientauthorities.

Stephen joined TCorp in 1996 with 16 years experience in financial markets in the banking and investment bankingsectors. From 1992 to 1996 he was Head of Treasury and Capital Markets at UnionBank of Switzerland (Australia), where hewas responsible for all financial marketsactivities for UBS in Australia, includingfunding, balance sheet management, foreign exchange, interest rate trading,swaps & derivatives, bullion andcommodities.

Stephen has previously been Chairman of the Australian Financial MarketsAssociation (AFMA) and the AustralianBanker's Association Treasury Committee,has lectured for the Securities Institute ofAustralia (SIA) and other tertiary institutions,was a director of Austraclear Ltd (the centraldepository and clearing organisation for the Australian Financial Markets) between 1987 and 1990, and was a director of UBS Australia Ltd between 1992 and 1996. He is currently a sitting member on the Executive Committee of AFMA.

Stephen graduated from the University of Sydney in 1979, majoring in Economicsand Applied Mathematics. He is also a fellow of the Australian Institute of Company Directors, and completed the Harvard Business School GeneralManager Programme in 2001.

Contact details:T 61 2 9325 9266E stephenk@tcorp.nsw.gov.au

Who’s Who – Issuers

Richard JacksonDirector, Financial MarketsQueensland Treasury Corporation (QTC)

Richard Jackson joined Queensland TreasuryCorporation in May 2002 as Director,Financial Markets. He is responsible for the funding, liquidity and financial risk management activities of the statecentral borrowing authority.

Richard has held several senior financialmarkets positions during his career. Theseinclude Executive Director, Treasury forJardine Fleming Bank (Hong Kong andLondon) where he was responsible for all markets business, Director of FinancialRisk Management for Standard CharteredBank (Singapore) and Executive Director and Treasurer for Security Pacific Australia.

Having spent a number of years workingoffshore, Richard has a broad depth of experience in the Australian andinternational finance markets.

Contact details:T 61 7 3842 4770 E rjackson@qtc.com.au

Michael MaloneSenior Manager, Capital MarketsSt.George Bank

Michael Malone is a Senior Manager withinCapital Markets for St.George Bank. Michaeljoined St.George Bank in 1998 and has helda variety of sales and trading roles within thebank's Financial Markets Division. He hasspent the past 3 years working within thebank's Capital Markets Division where he is actively involved in the wholesale funding,securitisation and capital raising activities.

Michael holds a Bachelor of Commercedegree and a Bachelor of Economics degreefrom the University of Adelaide. He is amember of the Finance & TreasuryAssociation and is an AFMA accreditedindividual.

Contact details:T 61 2 9320 5683E malonem@stgeorge.com.au

Jeff SheehanChief Manager, Capital Markets St.George Bank

Jeff Sheehan is Chief Manager CapitalMarkets for St.George Bank. Jeff joinedSt.George Building Society in 1987 and hasheld various senior fixed income and fundingroles within the bank's Group Treasury andCapital Markets Division. Since conversioninto St.George Bank in 1992, he has built up the bank's Capital Markets division wherehe has 20 staff.

He has direct responsibility for termwholesale funding, securitisation and debtcapital raising. He also has responsibility for St.George's customer securitisationbusiness. Jeff holds a Graduate Diploma in Finance and Bank Management fromCharles Sturt University. He is a SeniorAssociate Member of the Australian Instituteof Banking & Finance and is an AFMAaccredited individual.

Contact details:T 61 2 9320 5510E sheehanj@stgeorge.com.au

Justin LoftingGeneral Manager, TreasuryTreasury Corporation of Victoria (TCV)

Justin Lofting joined TCV in 1995 andmanages the Corporation's Treasuryoperations. In this capacity he hasresponsibility for the Corporation's dealingroom functions including balance sheetmanagement, debt capital markets programmanagement, treasury client services andeconomic services.

The Treasury division is responsible for the management of the state's financialexposures and represents the state's interest in financial markets.

Prior to his current role, Justin has heldsenior risk management roles within theCorporation. Justin has a Bachelor inBusiness (Banking and Finance) and is a member of various financial marketassociations.

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William WhitfordManaging DirectorTreasury Corporation of Victoria (TCV)

Bill Whitford joined TCV in September 2002as Executive Manager and was appointedManaging Director on 28 July 2003. TCV is the central funding authority and financingadviser for the State of Victoria.

He has had considerable experience infinancial markets over the past two decades,including treasury and financial market roleswith Banque National de Paris and StateBank of South Australia, and the financing of public infrastructure with the SouthAustralian Government.

Bill has a Masters degree in BusinessAdministration from the Adelaide UniversityGraduate School of Management, is agraduate of the Australian Institute ofCompany Directors (AICD), and sits on the Executive Committee of the AustralianFinancial Markets Association (AFMA).

Who’s Who – Issuers

Chris BannisterHead of Global FundingWestpac Banking Corporation

Born and educated in the United Kingdomand a British Citizen, Chris Bannister joinedthe Bank in 1985. Chris worked forWestpac’s London Branch within the financialmarkets involved predominantly in foreignexchange and money markets, before joiningGroup Treasury in 1997.

Initially with Group Treasury in London, Chriswas responsible for the funding and liquidityof Westpac's offshore balance sheets withadditional responsibilities for the execution oflong-term and short-term debt in the Europeand the United States.

Chris joined Group Treasury in Sydney in May 2001 and was subsequently appointedas Head of Global Funding. Chris's roleencompasses long-term and short-termfunding strategy, execution and liquiditymanagement across the Westpac group.

Contact details:T 61 2 9226 0637E cbannister@westpac.com.au

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Who’s Who – Investors

Bill EntwistleHead of Structured Credit InvestmentsAbsolute Capital Group

Bill joined Absolute Capital in 2001 and holds the position of Head of StructuredCredit Investments. He has primary portfoliomanagement responsibilities for the funds at Absolute Capital that invest in mezzanineand equity risk positions of asset-backed and collateralised debt obligationtransactions. Bill is also a member ofAbsolute Capital's investment committeesand is a Director on the board of AbsoluteCapital Investments Limited.

Bill has 23 years experience in banking,finance, and asset management in Australia,including significant experience in the interestrate, currency and equity deriviativesmarkets, fixed income, distressed debttrading, securitisation, credit derivatives andstructured credit.

Prior to joining Absolute Capital, Bill workedfor Chase AMP Bank, Chase ManhattanBank and JPMorgan and was involved in the early stages of the derivative markets development and more recently washeavily involved in the growth of the creditderivatives and structured credit markets inAustralia.

Contact details: T 61 2 9230 6412E bill@absolutecapital.com

Matt JohnsonPortfolio Manager, Structured CreditAbsolute Capital Group

Matt joined Absolute Capital in 2004 andholds the position of Portfolio Manager,Structured Credit. In addition to holdingportfolio management responsibilities forAbsolute Capital's Enhanced Cash Fund,Matt is also a member of the investmentcommittee.

Prior to joining Absolute Capital, Matt held a number of positions at CommonwealthBank of Australia (CBA) over a six yearperiod including responsibilities across riskmanagement, credit portfolio managementand global markets.

Matt's most recent prior experience at CBA was as a structured credit securitiesanalyst in the debt capital markets group,with primary responsibility for structuredproduct development and analysis. This role included the structuring and valuation of various derivative products including credit linked notes, first to default baskets,CDOs, total return swaps, asset swaps and repackaged bonds. Matt was heavilyinvolved in the development of a new capitalmarkets business at CBA involving thecreation of a special purpose company andthe issuance of tailored debt securities.

Contact details: T 61 2 9230 6424E matt.johnson@absolutecapital.com

Deon JoubertGroup Managing Director and Chief Investment OfficerAbsolute Capital Group

Deon Joubert co-founded the AbsoluteCapital Group in 2001 and holds thepositions of Managing Director and ChiefInvestment Officer. He began his career in 1990 and has held positions in pension,banking, asset management and financeorganisations in Australia and South Africa.

Deon has significant experience in assetmanagement, credit risk management,investment operations and legal andcompliance matters related to theseactivities. He has specific experience instructured credit, securitisation, privateequity and hedge fund portfolio management.

Deon actively participates in the financeindustry and is Director on the boards ofseveral companies within the Absolute capitalGroup as well as Cederra Structured CreditInvestments, IXIS Asset ManagementAustralia Limited and CentraVest SPC. He also participates in the financial marketsdirectly by actively managing his family'sprivate retirement fund as trustee ofCasseldale Superannuation Fund.

He holds the qualifications of Bachelor of Commerce, with accounting and costaccounting majors, and Graduate Diploma in Applied Finance and Invesmtent from theSecurities Institute of Australia.

Contact details: T 61 2 9230 6401E deon@absolutecapital.com

Stuart FowlerManaging DirectorBasis Capital

Stuart Fowler is a Joint Founder of BasisCapital, which is a specialist Asia-PacificFixed Income absolute return fund managerand securitisation advisory firm.

Stuart formed Basis with Steve Howell in April 1999 to capitalise on their extensive

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regional capital markets experience. The firmcurrently manages / advises on US$275m of investor capital and has received manyaccolades including AsiaHedge Awards(2004 & 2002), Macquarie's "Skilled Managerof the Year 2004", Assirt 5 Star rating,Barclay Trading Group – Top Sharpe Ratioover the last 36 months, for the Fund's risk-adjusted returns and more recently a strong 4 out of 5 rating from Morningstar.

Stuart is responsible for the firm’ssecuritisation activities and the Fund’sinvestments in the structured credit market,which includes ABS, MBS and CDO’s.

Stuart has held senior roles in Fixed Income & Treasury over 25 years in Australia andAsia, including as a Director of SalomonSmith Barney, board member of CountyNatWest and Regional MD – Asia-Pacific,NatWest Markets.

Stuart holds a Bachelor of Business from The University of Technology and a Master ofApplied Finance from Macquarie University.

Contact details: T 61 2 8234 5500E sfowler@basiscap.com.au

Steve HowellManaging Director & CIOBasis Capital

Steve Howell is a Joint Founder of BasisCapital, which is a specialist Asia-PacificFixed Income absolute return fund managerand securitisation advisory firm.

Steve formed Basis with Stuart Fowler inApril 1999 to capitalise on their extensiveregional capital markets experience. The firmcurrently manages / advises on US$275m of investor capital and has received manyaccolades including AsiaHedge Awards(2004 & 2002), Macquarie's "Skilled Managerof the Year 2004", Assirt 5 Star rating,Barclay Trading Group – Top Sharpe Ratioover the last 36 months, for the Fund's risk-adjusted returns and more recently a strong 4 out of 5 rating from Morningstar.

Steve, as Chief Investment Officer, isresponsible for the firm’s investment andtrading activities across all products.

Steve has held senior roles in Fixed Income,Hybrid’s and Equity Derivative Product over20 years, in Australia and Asia-Pacific. Stevewas previously Senior Director of AmericanExpress Bank (Asia based), Director ofCargill Financial Products (Asia based) andDirector of County NatWest Capital Markets.

Steve holds a Bachelor of Business from The University of Technology and a Master ofApplied Finance from Macquarie University.

Contact details: T 61 2 8234 5500E showell@basiscap.com.au

Paul van RynHead of Fixed Interest Challenger Financial Services

Paul has 20 years Investment Industryexperience with particular interest in HighYield and Hybrid debt/equity securities. He is also a lecturer for the SecuritiesInstitute of Australia and tutor for the CFAprogram. Paul has nine years experience in credit portfolio management and is a recognised authority on Australian highyield and hybrid securities.

Challenger’s High Yield Fund is a corebusiness for Challenger Financial Services. It is a fund which seeks to outperform cashand fixed interest markets whilst creating less risk than equities. Challenger’s HighYield Fund is an active manager of Australiahigh yield and hybrid securities because they believe that the market is not perfectlyefficient and that pricing anomalies can anddo occur. This is particularly true of the less-researched and less well understood hybridand high yield bond markets in Australia.

Paul’s responsibilities at Challenger FinancialServices include fixed interest strategy,portfolio construction, dealing and businessdevelopment. Paul joined ChallengerPortfolio Management Ltd in February 2001from County (now Invesco) InvestmentManagement Ltd. Prior to joining County,Paul managed the SECV’s interest rate riskand was also a director of the $1.6 billionSECV Superannuation Fund at the StateElectricity Commission of Victoria.

Contact details: T 61 3 8616 1951E pvanryn@challenger.com

Mitchell Stack Director, Head of Fixed IncomeCitigroup Asset Management

Mitchell joined Citigroup Asset Managementin August 1999 as a Portfolio Manager andCredit Analyst and was promoted to Head ofFixed Income in January 2002. Before joiningCitigroup Asset Management, Mitchell spentone year as an Associate Director in theutilities and infrastructure group of ANZ Bankand six years as a Vice President in thecorporate finance and credit departments of JPMorgan.

Mitchell holds a Bachelor of Commercedegree from the University of Melbourne and completed J.P. Morgan's CorporateFinance training program in New York.Mitchell is a Chartered Financial Analyst and is a Member of the Association forInvestment Management & Research (AIMR).

Years of experience in the financial industry: 14.Years with Citigroup Asset Management: 5.

Contact details:T 61 3 8643 9662E mitchell.stack@citigroup.com

Anthony KirkhamDirector, Senior Portfolio ManagerCitigroup Asset Management

Anthony joined Citigroup Asset Managementas Fixed Income Dealer in August 1999 andwas promoted to Senior Fixed IncomePortfolio Manager and Deputy Head of FixedIncome in January 2002. Before joiningCitigroup Asset Management, Anthony wasthe Assistant Fixed Income Manager at theRoyal Automobile Club of Victoria.

Anthony holds a Bachelor's degree inCommerce from the University of Melbourne,a Masters degree in Applied Finance fromMacquarie University and is an Associate ofthe Securities Institute of Australia. Anthonyis also a Chartered Financial Analyst and is aMember of the Association for InvestmentManagement & Research (AIMR).

Years of experience in the financial industry: 14.Years with Citigroup Asset Management: 5.

Contact details:T 61 3 8643 9664E anthony.kirkham@citigroup.com

Stuart GrayCredit AnalystDeutsche Asset Management

Stuart Gray graduated with a Bachelor ofBusiness (major in finance and economics) at the University of Technology, Sydney in 1995. Following that he completed a Graduate Diploma in Applied Finance and Investment with the Securities Instituteof Australia. Most recently Stuart spent threeyears working for Westpac Bank, Australia,as a senior credit analyst. Stuart joinedDeutsche Asset Management in September2000 as a member of the fixed income team.Stuart is a senior manager, specialising incredit analysis.

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Contact details:T 61 2 9249 9361E stuart.gray@db.com

George BoubourasSenior Investment ManagerHSBC Asset Management

George joined HSBC Asset Management in October 1996. George is responsible for economic analysis, A$ fixed incomestrategy implementation, security analysisand also manages the hybrid portfolios.Further responsibilities include being part of the domestic Asset Allocation Committeeand A$ currency input into the global FXprocess. George is part of a global fixedincome and currency team of over 70specialists.

Before joining HSBC Asset Management,George was employed at NSW Treasury.Prior to this, George worked at Westpac as a Financial Markets Economist. Georgebegan his career as an Economist at SBC (now UBS Warburg). George has an Honours Degree in Economics fromFlinders University.

Contact details:T 61 3 9225 3110E george.boubouras@hsbc.com.au

James WrightDirector, Fixed IncomeING Investment Management

James Wright is Director, Fixed Income with ING Investment Management (INGIM).He joined the Fixed Income team in May 2002following the joint venture announcementwith ANZ. James is responsible for alldomestic and international fixed interest andcash exposures. James is also a member ofthe Asset Allocation Committee, InvestmentCommittee and Private Capital InvestmentCommittee.

Prior to joining ING Investment Management,James was at ANZ Investments (ANZI),managing all fixed interest portfolios,including the composite, corporate andinternational funds. His responsibilities also included the analysis and investment in hybrid debt/equity securities for all ANZIportfolios. Prior to ANZI, James spent fouryears as a portfolio manager with Treasury

Who’s Who – Investors

Corporation of Victoria (TCV), where hemanaged portfolios of government andcorporate fixed interest investments as wellas the State's liability portfolio. James wasalso with the Department of the Treasury in Canberra for seven years, occupyingvarious positions in the Economics,International and Debt Policy divisions.

James holds a Bachelor of Economics(Honours) from Monash University.

Contact details:T 61 2 9234 8491E james.wright@ing.com.au

Lachlan Callander Head of Fixed IncomeINVESCO

Lachlan joined INVESCO in 1997. Lachlan'sinitial role was as a member of the FixedIncome team, with responsibilities in fixedincome, indexed bonds, and diversified fixedincome. He contributed to the strategyformulation for fixed income and had overallresponsibility for the portfolio constructionand implementation aspects of all fixedincome portfolios.

In 2001, Lachlan was made responsible for the tactical and portfolio constructionmeetings ahead of being appointed asINVESCO's Head of Australian Fixed Incomein 2002, reporting to the Chief InvestmentOfficer, INVESCO Worldwide Fixed Income.The Australian fixed income group manages a wide range of portfolio types includingactive, enhanced, and indexed Australiannominal and inflation-linked bonds, cash,investment grade corporate bonds, anddiversified fixed income portfolios.

Prior to joining INVESCO, Lachlan worked for nine years with UBS Global AssetManagement (Australia) Ltd. His roles at UBS included overall responsibility forindexed bonds, structured/securitisedissues, and the management of diversifiedfixed income portfolios. He also contributedto fixed income strategy formulation and had portfolio management responsibilities.Lachlan has a Bachelor of Business (Banking& Finance).

Contact details: T 61 3 9611 3654E lachlan_callander@au.invesco.com

Tony Edmonds Head of CreditINVESCO

Tony joined the INVESCO Fixed Income teamas Senior Credit Manager in July 1999 andwas promoted to the new position of Head of Credit in December 2000. In his currentrole, Tony is responsible for all credit-relatedinvestment processes.

Tony has over 20 years of experience in theanalysis and management of credit risk. Priorto joining INVESCO, his previous positionwas Vice President, Head of Credit RiskManagement & Lending, Australasia, for JPMorgan. In this role, he was responsiblefor credit risk management and research for Australian and New Zealand clients andcounterparties. He was also responsible forJPMorgan's Australian and New Zealandcorporate and project lending business. His role as Head of Credit consolidates histransition to the investment managementenvironment and further aligns the resourcesof the Fixed Income team to the changingdynamics of the Australian and Globalinterest rate markets. Tony qualificationsinclude Bachelor of Business (Accounting),C.P.A., F.C.I.S.

Contact details: T 61 3 9611 3649E tony_edmonds@au.invesco.com

Wayne FitzgibbonHead of Cash, Fixed Interest and CurrencyMacquarie Funds Management

Wayne has overall responsibility forMacquarie's cash, domestic and internationalfixed interest and currency business and has been with Macquarie for 15 years. Hehas driven the development of Macquarie'srange of offerings, ranging from True Index, enhanced, active and alpha transferstrategies. Wayne has held a variety of senior positions at Macquarie including Head of Asset Allocation and Head of FixedInterest and has over 24 years of investmentexperience. His early career was spent in theCommonwealth Public Service, mostly in theCommonwealth Treasury including Head ofthe Monetary Policy Section.

Contact details: T 61 2 8232 3333E wayne.fitzgibbon@macquarie.com

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Adam Kibble Head of Portfolio Management forDomestic and Global MarketsMacquarie Funds Management

Adam has over 15 years of financial marketsexperience, and leads the domestic andglobal markets team. Adam is responsible for the Macquarie global fixed interest funds,which has encompassed the development of Macquarie's enhanced and True Indexglobal bond capabilities. Adam has played a key role in developing Macquarie's currency business which includes dynamiccurrency hedging as well as active currencymanagement through the Macquarie GlobalActive Currency fund.

Contact details: T 61 2 8232 3333 E adam.kibble@macquarie.com

Aaron Minney Head of Australian Fixed InterestMacquarie Funds Management

Aaron is Head of Australian Fixed Interest and is responsible for the management of the Australian Fixed Interest and EnhancedFixed Interest Funds. Aaron's focus isduration, yield curve and government andsemi-government security selection. Prior to joining Macquarie Aaron was at InsuranceAustralia Group where responsibilitiesincluded asset allocation strategy, the designof capital protection strategies for the Groupand strategic duration adjustments to theasset-liability matching of claims received.

Aaron previously spent nearly eight yearswith Macquarie where he was responsible forthe portfolio management of the multi-sectorfunds and a specialist fixed interest fund.

Contact details: T 61 2 8232 3333 E aaron.minney@macquarie.com

Who’s Who – Investors

Jill Pleban Head of Product Management Fixed Interest and CurrencyMacquarie Funds Management

Jill heads the fixed interest and currencyproduct management team. The team is responsible for the management anddevelopment of the cash, fixed interest and currency product range. Jill is also theportfolio manager for the Diversified FixedInterest Fund and (together with DeanStewart, Head of Credit) manages the sector rotation process within the Fund. Jill has played a important role in developingMacquarie's fixed interest and currencyprocesses.

Contact details: T 61 2 8232 3333 E jill.pleban@macquarie.com

Dean Stewart Head of CreditMacquarie Funds Management

As Head of Credit, Dean is responsible for security selection of corporate andstructured securities across our range of cash and fixed interest products. Dean has been integral to the development of Macquarie's investment capabilities in corporate and structured securities. He is the author of extensive credit researchthat developed Macquarie's investmentphilosophy for managing corporate debt.

Dean was previously Head of Fixed Interestand Currency Research, responsible forquantitative research into new portfoliomanagement techniques, relative valueanalysis and risk management. Dean wasalso Portfolio Manager for Macquarie'senhanced fixed interest portfolios from 1998-2003.

Contact details: T 61 2 8232 3333 E dean.stewart@macquarie.com

Stephen MillerManaging Director, Fixed Income and CashMerrill Lynch Investment Managers

Stephen is a Managing Director and heads upthe Fixed Income and Cash team in Australia,having joined Merrill Lynch InvestmentManagers (MLIM) in April 2002. He also sitson MLIM's Asset Allocation Committee.Stephen is ultimately responsible for all FixedIncome and Cash portfolio performance.Immediately prior to joining MLIM, Stephenwas at BT Funds Management, where heheaded up BT Funds Management's domesticand international Fixed Income investmentteam. Stephen has a Masters degree in Economics from the London School ofEconomics and a 1st class Honours degree in Econoics from the University of WesternAustralia. Investment experience: 22 years.

Contact details: T 61 2 8223 6113 E s_miller@ml.com

Michael KorberHead of CreditPerpetual Investment

Michael Korber, Head of Credit, PerpetualInvestments. Michael brings over 20 years of credit investing experience to Perpetual.As the first Head of Credit at MacquarieFunds Management, Michael spent six yearsdeveloping its credit investment processesand building the business from inception toover $7 billion in funds under management.

Prior to this he spent seven years as DivisionalDirector in Corporate Banking and four yearsas 2IC to the Head of Macquarie Bank Credit.Earlier, Michael has spent five years as aCredit Analyst with Westpac CorporateBanking. Michael has a Bachelor of Economicsfrom the Australian National University.

Contact details: T 61 2 9229 9000 E michael.korber@perpetual.com.au

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Julian FoxallVice President and Portfolio ManagerPIMCO

Mr Foxall is a Vice President and PortfolioManager at PIMCO. He joined PIMCO in2001, having previously been associated with Westpac investment management and Allianz. He has 14 years experience ininvestment management and 12 years priorto that in fixed income sales for investmentbanks in London, Sydney and Tokyo. He hasan MA from Oxford University in Engineeringand Economics.

Contact details: T 61 2 9262 5048 E julian.foxall@au.pimco.com

Robert Camilleri Senior Credit Investment Manager Portfolio Partners

Robert is part of a team of 4, primarilyresponsible for credit research and creditportfolio management with a specialty instructured finance & RMBS. He has workedfor Portfolio Partners, for 7 years with 9 yearsexperience in the industry. Prior to joining

at ANZ Treasury and ANZ Balance SheetManagement.

Robert holds a Bachelor in BusinessEconomic and Finance from RMIT with the focus on econometrics andstatistical analysis.

Contact details: T 61 3 9220 0335 E robertc@ppl.com.au

Who’s Who – Investors

Robert da SilvaManaging Director Asia-Pacific Fixed IncomePrincipal Global Investors

Robert da Silva – Head of Asia-Pacific Fixed Income. Robert joined Principal GlobalInvestors Australia in 1988 and has beenresponsible for Asia-Pacific & Australian non-sovereign securities since 1992. In July2001 Principal launched its global multi-sector fixed income capability and since thenRob has been a key member of the portfoliomanagement team for this capability,contributing to decisions in respect of bothsovereign and non-sovereign positioning. In 2002, his responsibilities were expandedto cover all Asia-Pacific fixed income and to overseeing the management of globalsovereign bond portfolios.

Robert is the lead manager for the Asia-Pacific component of Principal’s global multi sector fixed income portfolios as well as Australian fixed income portfolios. His responsibilities include assessment andmanagement of fixed income investments for Asia-Pacific and Australia. He has primaryresponsibility for stock selection and sectorallocation with respect to Asia-Pacific andAustralian fixed income across all relevantportfolios as well as duration and yield curvepositioning.

Contact details: T 61 2 8226 9059E dasilva.robert@principal.com

Tony PiliotisPortfolio ManagerPrincipal Global Investors

Tony joined Principal, Global InvestorsAustralia in June 2003 as a Portfolio Managerin the Fixed Income Group. Tony focuses on the management of Principal's AsianAggregate and Global Sovereign bondportfolios. He has extensive experienceacross fixed income, foreign exchange,derivative and hybrid markets.

at Deutsche Bank, with emphasis oninternational fixed income, foreign exchangeand derivatives.

Tony is currently completing a Master of Business Administration (Finance) at Macquarie University.

Contact details: T 61 2 8226 9061E piliotis.tony@principal.com

Tony ArnoldHead of Global Fixed Interest ImplementedQueensland Investment Corporation

– 13 years experience in the financeindustry

– Previous experience includes:Mercer Investment Consulting,Garrisons/Synergy Capital Management,Shadforths, Arthur Andersen

– Bacheor of Commerce, University of Tasmania; Diploma of Financial Planning(Deakin); Graduate Diploma in AppliedFinance & Investment.

Contact details:T 61 7 3360 3936 E t.arnold@qic.com

Jeff BruntonHead of Global Fixed Interest CreditQueensland Investment Corporation

– 13 years experience in the financeindustry

– Joined QIC Investment Strategy Divisionin December 1992, moved to FixedInterest Division in October 1994

– Bachelor of Commerce (Hons) & LLB,University of Queensland and is a CFACharterholder.

Contact details:T 61 7 3360 3841E j.brunton@qic.com

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Prior to joining Principal, Tony was a Director

Portfolio Partners, Robert worked

Susan BuckleyGeneral Manager, Global Fixed InterestQueensland Investment Corporation

– 18 years experience in the financeindustry

– Appointed QIC General Manager, GlobalFixed Interest November 2001

– Previously, Head of Strategy, NRMAAsset Management; Senior VicePresident, BT Funds Management; Head of Fixed Interest, SuncorpInvestment Management

– Bachelor of Econonomics, University of Queensland; Graduate Diploma inEconomics, University of Melbourne

– Currently undertaking MBA, University of Queensland

– Associate Fellow of Australian Institute of Management.

Contact details:T 61 7 3360 4030E s.buckley@qic.com

Robert JewellHead of Global Interest RatesQueensland Investment Corporation

– 11 years experience in the financeindustry

– Previous experience includes BT FundsManagement, Atlas Capital (London),Suncorp Investment Management

– Bachelor of Economics, University ofQueensland; Graduate Diploma in AppliedFinance and Investments, SIA and is aChartered Financial Analyst (CFA).

Contact details:T 61 7 3360 3835 E r.jewell@qic.com

Who’s Who – Investors

Lindsay Skardoon DirectorSpectrum Asset Management

Lindsay Skardoon is a joint founder ofSpectrum Asset Management (SpectrumAM). Spectrum AM specialises in themanagement of debt securities (includinglisted securities, preferred debt andconvertibles) using quantitative analysis andrisk management techniques. Spectrum AMseeks to take advantage of pricing anomaliesin the Australian Credit Markets utilising the combined expertise of the Foundersexperience in capital markets and proprietarytrading. Spectrum AM is an absolute returnfund that provides enhanced income returnsto its investors averaging over 8.5 per centpa (after fees and expenses) since inception.

Lindsay is responsible for investment andtrading activities. These activities includecredit modelling, market analysis and riskmodelling. He has held senior roles in Fixed Income trading and capital marketsactivities (benchmark deals include GasNet, Electranet, Manager on Bank ofScotland's International Programme, and a number of MTN transactions for local banks including one of the first credit linkednotes issued by an Australian Counterparty),with 20 years experience in domestic andinternational securities markets. Lindsay is also experienced in International Equitieswhere his focus was primarily devotedtowards convertible and preferred debt.

Lindsay has served as Vice Chairman of AFMA's Debt Capital Markets Committeeand is currently serving as a member of AFMA's Index Committee. As a promoter of market education Lindsay has jointly edited the AFMA Dealers Handbook and has contributed to the development of otherAFMA Course Handbooks. He has also beena public speaker at a number of conferences.His qualifications include B Sc Physics,Graduate Diploma Banking and Finance,Master's of Applied Finance, econometriccourses (honours/masters level) and has also successfully completed PhD level courses at the AGSM in FinancialMathematics and Asset Pricing Modelling.

Contact details: T 61 2 9299 2288 E lskardoon@spectruminvest.com.au

Ross BoltonPortfolio Manager, Fixed InterestState Street Global Advisors

Portfolio Manager, Ross joined State StreetGlobal Advisors in October 1999. Hisprevious position was Assistant Director –Global Fixed Interest with Prudential FundManagers. He worked at Prudential for tenyears. Ross was responsible for portfoliomanagement and strategy formation forPrudential's international fixed interest andcurrency portfolios. He was also involvedwith strategy formation for domestic fixedinterest portfolios. Prior to his role atPrudential, he worked in a number of differentfinancial institutions including the ReserveBank of Australia.

Ross received a Masters of Applied Financeand a Bachelor of Economics degree fromMacquarie University. He was also awarded a Diploma of Applied Finance by theSecurities Institute of Australia, and is aRegistered Representative of the SydneyFutures Exchange. Ross reports to the Headof Fixed Income and Cash, Dr Stephen Nash.

Contact details:T 61 2 9240 7680E ross_bolton@ssga.com

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Diana Shmulburd Associate Director, Repackaged &Structured Credit Products ABN AMRO

Diana recently joined ABN AMRO fromMallesons Stephen Jaques where she has had extensive CDO, securitisation and structured debt markets experience.

Diana has worked in London dealing withcredit derivative and numerous repackagingtransactions.

Diana was involved in the legal structuringand documentation of the RembrandtAustralia Trust program while at Mallesons.

Contact details:T 61 2 8259 6648E diana.shmulburd@au.abnamro.com

Guy HargreavesDirector, Structured Credit ProductsANZ Investment Bank

Guy is a Director in the structured creditproducts business at ANZ Investment Bankresponsible for structuring and distributing a range of products including CDOs, credit-linked notes, repackaged assets and fundlinked products. Prior to joining ANZ Guyworked at Deutsche Bank in Sydney for 12years where his career spanned fixed incomeand derivative trading, and structuring acrossa range credit, interest rate and fund-linkedproduct sectors. Guy holds a B Engineering(Hons) and B Commerce from the Universityof Canterbury.

Contact details:T 61 2 9227 1283E hargreag@anz.com

Pierre KaterdjianDirector Rates and Credit Marketing GroupBNP Paribas

Pierre Katerdjian, Director Rates and CreditMarketing Group, joined BNP Paribas in 2003. He is responsible for developing and marketing structured credit products,ultimately to the Australian investor base,leveraging off BNPPs global credit derivativeexpertise. Prior to that he has worked as acredit derivative trader at Deutsche BankAustralia and SG Australia.

Contact details: T 61 2 9025 5015 E pierre.katerdjian@au.bnpparibas.com

Stephen ConradHead of Derivatives & Structured Products Citigroup

Stephen joined Citigroup in 2003 afterreturning to Australia from Hong Kong. He has broad experience across derivativeand credit markets having spent the last 15years in the fiinancial industry. At CitigroupStephen is a member of the Fixed IncomeManagement Committee.

He holds a Master of Applied Finance fromMacquarie University, Bachelor of Economicsfrom Newcastle University, has completed a graduate diploma in Applied Finance &Investment from the Securities Institute ofAustralia and completed & passed the HKSIFinancial Market Principal ProgrammeExamination.

Contact details: T 61 2 8225 6555 E stephen.conrad@citigroup.com

Andrew BaumeDirector, Global Relative Value GroupDeutsche Bank AG

Andrew Baume has worked in the FinancialMarkets for over 20 years, and joinedDeutsche Bank in 2000 where he is aDirector of the Global Relative Value Group.This group has access to products generatedanywhere in the Deutsche Global Marketsworldwide business, and offerings for theAustralasian market are drawn from thisbroad palette. While Deutsche Bank hasbecome closely identified with the growth of the retail focus of CDOs, the GRVGbusiness has also structured and placedtransactions with sub-wholesale, bank and institutional investors across a variety of asset types including hedge funds, rates product, distressed debt and inflationindexed offerings.

Who’s WhoIssuers

Investors

Intermediaries

Professional Services

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Contact details:T 61 2 9258 2322E andrew.baume@db.com

Moray VincentDirector, Debt Capital MarketsGrange Securities

Moray Vincent is Director of Debt CapitalMarkets and joined Grange in 2002. Based in Sydney Moray has led Grange’s efforts in structured credit products and has beeninstrumental in the development of thefledgling A$ denominated CDO market overthe past two years. Moray was formerly asenior manager at Westpac where he washead of their London credit trading operationbefore moving to Sydney to establish theirstructured credit products group. Prior tojoining Westpac, Moray was head of MerrillLynch’s Australasian credit trading operationin Sydney. Moray started with Merrill Lynch in New York after completing his MBA atDartmouth.

Contact details:T 61 2 8259 4800 E mvincent@grangesecurities.com.au

Sonia Favero Vice PresidentStructured Credit and Rates MarketsJPMorgan

Sonia Favero has 15 years of financialmarkets experience, 11 years in banking andfour years in a corporate treasury capacity.

Sonia has worked on the Credit and Ratesdesk at JPMorgan Australia for over sevenyears, covering predominantly the investorclient base, across a broad range ofproducts, including Foreign Exchange, FixedIncome, Derivatives and Equities. Over thelast two years Sonia has specialised inStructured Credit Sales.

Who’s Who – Intermediaries

Contact details:T 61 2 9220 3199E sonia.favero@jpmorgan.com

Peter McInnesDirectorHead of Structured Capital MarketsJPMorgan

Peter McInnes has considerable experiencein the finance industry, working for over 10 years in funds management beforeembarking on a career in investment banking in 1994. Currently, Peter heads the JPMorgan Structured Capital Marketsgroup, focussing on financial institutionregulatory capital, capital advisory andcorporate hybrid securities.

Prior to joining JPMorgan in May 2001, Peter worked with major US and Europeanfirms in areas of Structured Capital Markets,derivatives and structured finance.

In 2004, the JPMorgan's hybrid team wasinvolved in a number of successful dealsincluding the first domestic Non-call 10 Tier 1security for St.George and the first significantSterling bank capital deal for a non-major inthe form of Macquarie Banks £350 millionJersey Partnership transaction.

Other significant transactions Peter has worked on include:

– BHP $2.1 billion off-market buy-back of ordinary shares (2004)

– Macquarie £350 million Tier 1 CapitalRaising (2004)

– St.George $350 million Perp NC10SAINTS Tier 1 Capital Raising (2004)

– Austar $115 million STARS unrated hybrid debt capital raising (2004)

– Westpac US$750 million Trust PreferredTier 1 qualifying capital raising (2003)

– APN News & Media Limited $250 millionConvertible Note issue (2002)

– Commonwealth Bank of Australia $750million PERLS tier 1 capital rasing (2001)

– ERG Limited $250 million ConvertibleNote issue (2000)

– National Australia Bank $2 billion NationalIncome Securities hybrid Tier 1 capitalissue (1999)

– Publishing & Broadcasting Limited $300 million Perpetual Adjustable RateSecurities (“PARS”) issue (1999)

– Woolworths $600 million WoolworthsIncome Notes issue (1999)

Contact details:T 61 2 9220 7853E peter.s.mcinnes@jpmorgan.com

Robert PriestleyManaging DirectorSenior Country OfficerJPMorgan

Rob Priestley was appointed Senior CountryOfficer of Australia and New Zealand forJPMorgan in July 2002. Prior to this Rob helda number of roles for the bank around theworld including Regional Head of the banksFixed Income and Debt businesses acrossAsia-Pacific, as well as the Regional Head ofGlobal Emerging Markets, and the RegionalHead of International Fixed Income acrossEurope, Africa and the Middle East. Robjoined JPMorgan in 1994 (then The ChaseManhattan Bank) in Australia as Head of thebanks Global Financial Markets business in Australia.

In his current role Rob is a member ofJPMorgan's Asia-Pacific ManagementCommittee. He is an Executive Committeemember of the International Banks andSecurities Association (IBSA) as well as a member of the Business Council of Australia (BCA).

Prior to joining JPMorgan in 1994, Robworked for Macquarie Bank in Sydney as aDirector within their Financial Markets Group.

Contact details:T 61 2 9220 7975E robert.priestley@jpmorgan.com

Andrew SkinnerVice PresidentStructured Credit and Rates MarketsJPMorgan

Andrew Skinner has more than 12 years of financial markets experience covering a broad range of markets and products,specialising in interest rate and creditderivative structuring and hedging forcorporate and investor clients.

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Andrew has worked on the derivatives deskat JPMorgan in Australia for seven years,covering both corporate and investor clients.Prior to that he worked in fixed incomeresearch for JPMorgan and spent five yearsin balance sheet management at the TreasuryCorporation of Victoria.

Contact details:T 61 2 9220 3198E andrew.skinner@jpmorgan.com

Russell TaylorVice PresidentHead of Structured Credit and Rates MarketsJPMorgan

Russell Taylor is responsible for Sales and Distribution of Global Credit Products,covering Australian domestic andinternational markets.

With more than 16 years at JPMorgan in global financial markets, Russell hasextensive distribution and structuringexperience across a wide range of financialproducts from Government bonds through to complex collateralised Debt Obligationsand Credit Derivatives.

Russell and his team are at the forefront ofdeveloping ground-breaking structured creditproducts, ensuring JPMorgan is consistentlyranked number one across a broad array ofstructured credit products.

Contact details:T 61 2 9220 3234E russell.taylor@jpmorgan.com

Natalie VanstoneVice PresidentHead of Debt Capital MarketsJPMorgan

Natalie Vanstone has over 12 years of experience in Debt Capital Markets.Natalie has originated and led many landmarktransactions for a diverse group of largeAustralian issuers including Telstra, Westpac,Amcor, Westfield, Boral, Foster's andWoodside. During her time with JPMorganshe has delivered consistent leadership ininternational fixed income, syndicated loans,private placements and structured finance.

Who’s Who – Intermediaries

In 2004, Natalie's group lead managed over US$11 billion worth of debt and hybridtransactions for Australasian issuers.

Prior to joining JPMorgan in 1996, Nataliespent four years in debt capital marketsorigination at West Merchant Bank in Londonand four years as a banking lawyer at theNew Zealand law firm Rudd Watts and Stone.

Some significant transactions in 2004 have included:

– Westfield Group US$2.6 billion US 144A bond issue

– Foster's Group Limited US$300 millionUS 144A bond issue

– Telstra Corporation Limited €500 millionbond issue

– Boral Limited US$600 millionMulticurrency Note Issuance Facility

– Austar United Communications Limited$115 million “STARS” Reset DebtSecurities

– Austar Entertainment Pty Ltd $290 millionSenior Credit Facilities

– Macquarie Capital Funding L.P. £350million Perp-nc15 Tier 1 Securities

– Interstar US$1.0661 billion IMS Trust2004-2G RMBS

– Australia & New Zealand Banking Group£300 million FRN

– St.George Bank $350 million “SAINTS”Perp-nc10 Tier 1 Hybrid

– Australia & New Zealand Banking Group€800 million / £400 million senior notes

Contact details:T 61 2 9220 3172E natalie.vanstone@jpmorgan.com

Gary VassalloHead of Structured Trading and Derivatives(Debt Markets Division)Macquarie Bank

Gary has over 18 years experience in theglobal interest rate and credit derivativesmarkets. He has been responsible for pricing,structuring and managing interest rate andcredit derivatives in Sydney, London, NewYork and Tokyo for BZW, Bankers Trust andMacquarie Bank.

Gary came to Macquarie Bank through the Bankers Trust acquistion in 1999 andcurrently is Head of Structured Trading andDerivatives within theDebt Markets Division.Since joining Macquarie Bank he has beenresponsible for the application of a number of highly innovative hedging and productstructures for investors, borrowers andstructured finance applications.

Contact details:T 61 2 8232 8304E gary.vassallo@macquarie.com

Craig SwangerHead of Alternative InvestmentsMacquarie Financial Services

Craig Swanger is the Head of AlternativeInvestments at Macquarie Financial Services.His team has been responsible for thedevelopment and distribution of the 3 Generator deals in Australasia, totallingmore than $350 million in total raisings.

Contact details:T 61 2 8232 9138E craig.swanger@macquarie.com

Richard Langberg Director, Asia-Pacific Rim Region MBIA International Marketing Services

Mr. Langberg joined MBIA in 1998, andrelocated to MBIA's Sydney office in January2003. While at MBIA, his focus has been on underwriting the issuance of financialguarantees for asset backed securitisationsinvolving a variety of structures and assettypes including premium finance loans,commercial real estate, timber properties,corporate aircraft loans, rental car franchiseeloans, small and middle ticket leaseportfolios, franchise loans and timeshareloans. Prior to joining MBIA, Mr. Langbergworked in New York for the financialguarantor CapMAC which he joined in 1994, and in Singapore at ASIA Ltd, a financial guarantor established byCapMAC, focusing on project finance,particularly power plants and toll roads, in the emerging markets of Asia.

Contact details:T 61 2 9375 2190E richard.langberg@mbia.com

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Graham MetcalfManaging Director, Asia-Pacific Rim Region MBIA International Marketing Services

Graham Metcalf is Managing Director, Asia-Pacific for MBIA International. MBIA is the world’s largest monoline financialguarantor, based in New York with offices in Europe and Asia. MBIA is AAA rated andprovides financial guarantees for senior debtobligations of municipal borrowers, essentialservice infrastructure companies andstructured finance vehicles. Graham was appointed to this role in 2002 afterspending seven years in debt markets andinfrastructure capital at BZW Australia andABN AMRO Australia. Prior to working ininvestment banking Graham was a bankingand finance lawyer with Freehills. He hasdegrees in Law and Commerce from UNSW.

Contact details:T 61 2 9375 2117E graham.metcalf@mbia.com

Linda MeadExecutive DirectorMorgan Stanley

Graduated from University of Chicago with a Masters of Business Administration(Economics and Marketing) (1991) andreceived a Bachelor of Science Degree in Economics and Computer Science fromDickinson College (1986). Linda joinedMorgan Stanley in Sydney in 2001 as a Vice President in Fixed Income Sales. Prior to that she worked at JPMorgan in Sydney as a Vice President in FixedIncome Sales from 1997-2001 and prior to that worked at Kidder Peabody in NewYork in Fixed Income Sales from 1991-1996and Goldman Sachs in New York as anAnalyst in Mortgage Backed Securities from 1986-1989.

Contact details:T 61 2 9770 1192E linda.mead@morganstanley.com

Who’s Who – Intermediaries

Louis DavisHead of Financial Institutions Credit ResearchNational Australia Bank

Louis Davis is the National Australia Bank'sHead of Financial Institutions CreditResearch with responsibility for providing in-depth market research coverage for:Banks; Insurance companies; Investmentbanks; and, Supranational issuers.

Louis commenced this role in Oct 2004,before that he was the Credit Analyst at State Street Global Advisors (SSgA) in Sydney with primary responsibility formaintaining the credit quality of $12 billion in fixed income securities. Louis wasresponsible for reviewing all securities beforebeing added to SSgA's portfolios which alsoincluded: Asset-backed securities; mortgage-backed securities; and, Corporates. Prior to this, Louis worked at Moody's InvestorsService, in its Sydney office, providinganalytical support for all Moody's corporateratings with specialisations in: Projectfinance; Utilities & Infrastructure; and, Metals & Mining.

Louis has a Masters Degree in Economics,specialising in growth theory, obtained fromMonash University at Clayton, Victoria.

Contact details:T 61 2 9237 1904E louis_davis@national.com.au

Mark Garrick Head of Primary Markets, AustraliaNational Australia Bank

Mark Garrick is National Australia Bank'sHead of Primary Markets Australia. He hasprincipal responsibility for originating andexecuting transactions for Australian NABclients in the debt and hybrid capital markets.This also involves raising funds for Australianclients in Europe and distribution to the UScapital markets in conjunction with the NAB'sjoint venture with partner Royal Bank ofScotland.

Mark has extensive experience in all financialmarkets related fields and has worked in debtcapital markets since 1997. Joining NAB inApril 2000, Mark previously worked with theCommonwealth Bank of Australia and prior to that Westpac Banking Corporation. Markhas a bachelor of Economics and a Mastersof Business Administration from MacquarieUniversity.

Contact details:T 61 2 9295 1558E mark_c_garrick@national.com.au

Malcolm ThompsonHead of Institutional Sales, AustraliaNational Australia Bank

As Head of Institutional Sales for Australia,Malcolm Thompson and his team areresponsible for the sale of Fixed Income,Bonds, Securitised assets and LoanSyndications to institutional and sub-institutional investors.

Malcolm has worked for NAB for almost five years during which time the NAB hasbeen a consistent leader in primary marketcorporate bond issuance and has been at the top of the league tables for LoanSyndications and Securitisation. He has awealth of sales experience in the internationalcapital markets, having worked for oversixteen years in Australia, USA and Europe.

In Australia, he previously worked forMacquarie Bank and Credit Suisse FirstBoston. In the United States, at BankersTrust Company and prior to this in thecorporate treasury field in the UnitedKingdom with BICC plc.

Malcolm holds an Honours Degree inEconomics from the University of Sydney and is currently undertaking a Masters ofBusiness Administration at the AustralianGraduate School of Management.

Contact details: T 612 9237 1561E malcolm_thompson@national.com.au

Boyd WintonGlobal Head of Capital MarketsNational Australia Bank

Boyd joined National Australia Bank in March1997 as chief dealer on the fixed interestdesk. Progressing to Head of Asset andCredit trading, Boyd was directly responsiblefor the introduction and management of thefollowing desks; Corporate Bonds, IndexedLinked Bonds, Indexed Linked Swaps,Mortgage Backed and other Asset BackedSecurities and Credit Default Swaps.

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Boyd was promoted to his current role inDecember 2004 with responsibility for themanagement and delivery of secondarymarket capabilities to NAB's customer baseand also including the development anddelivery of primary transactions.

Starting his career in financial markets withthe Treasury division of Challenge Bank inPerth, Boyd moved to Barclays de ZoetteWedd in Sydney during 1990 where he ranboth the option pricing book and nominaltrading books for the fixed interest desk. This was followed by a two year stint inLondon trading and selling Australian andNew Zealand fixed interest products.

Boyd holds a Bachelor of Commerce(Accounting and Finance) and a Bachelor of Economics from the University of Western Australia.

Contact details:T 61 3 9277 3360E boyd_winton@national.com.au

Leo D'AndretiDirector of Structured Products Fixed Income Division – Asia-PacificNomura

Leo D'Andreti joined Nomura Australia in2003 and is responsible for the distribution of structured credit, structured interest rate, equity linked and alternative products to investors in Australia and New Zealand.

Prior to Nomura, Leo spent 2 years at ZurichCapital Markets as Executive Vice Presidentand before that 2 years at Macquarie Bankand 12 years at Bankers Trust Australia. Hehas over 17 years experience in fixed incomeand derivatives.

Contact details:P 61 2 9321 3703E leo.dandreti@au.nomura.com

James HayesHead of Fixed Income Sales, AustraliaNomura

James Hayes is the Head of Fixed IncomeSales at Nomura Australia and is responsiblefor the distribution of Nomura's fixed incomeproduct range into the Australian and NewZealand investor base. This includes flow

Who’s Who – Intermediaries

product such as global government, agency,supranational and corporate debt, as well asall structured credit, interest rate, and indexlinked product.

James joined Nomura in 1996 after a twoyear stint at WestLB where he also held a fixed income sales role. Prior to that heworked as a quantitative analyst in theInvestment Management Division of MLC.

James holds a Bachelor of Commerce fromthe University of New South Wales, and aGraduate Diploma in Applied Finance fromthe Securities Institute of Australia

Contact details:T 61 2 9321 3704E james.hayes@au.nomura.com

Andrew ChickHead of Structured Capital MarketsRoyal Bank of Scotland

Andrew Chick is the Head of StructuredCapital Markets for the Australian branch of The Royal Bank of Scotland. Andrew hasbeen with the bank for eight years based in New York, London and Sydney withexperience in a wide variety of securitisation,project finance, conduit and derivativestransactions. The Structured Capital Marketsteam consists of six front office and supportstaff and has closed $20 billion of structuredtransactions since the beginning of 2003.Prior to joining RBS, Andrew was a lawyer at Blake Dawson Waldron in Sydney and has a commerce degree and a law degreefrom the University of Queensland.

Contact details:T 61 2 9004 2113E andrew.chick@rbos.com

John CumminsHead of SalesCapital Markets & DerivativesRoyal Bank of Scotland

With over 15years experience in the financialmarkets both domestically and offshore,John looks after all the Financial Marketsnon-origination business for RBS plcAustralia branch.

He joined RBS in 2002 after almost 5 yearsas a director in the Debt Markets Division at Macquarie Bank. That period includedrunning the Debt Markets sales andestablishing their credit derivatives business.Prior to that he was running the Australianinterest rates trading and sales business at HSBC in London after several years at HSBC locally.

A derivatives and structured productsspecialist, John has overseen theestablishment and growth of RBS presencein the local derivatives market, with particularemphasis on securitisation and structuredand asset finance transactions. He alsomanages the FX, capital markets and moneymarkets businesses for RBS domestically.

RBS Australia's FM business focuses on delivering RBS global products, bothvanilla and structured, to the domesticinstitutional market.

Contact details:T 61 2 9004 2188E john.cummins@rbos.com

Mark Langsworth Head of Capital Markets, OriginationRoyal Bank of Scotland

Mark is Head of Capital Markets, Originationfor The Royal Bank of Scotland's Australianbusiness, based in Sydney. Over the past 12 years, Mark has been involved in asubstantial number of large and innovativeCapital Market financings from a broad range of Australian companies, includingGovernment, Financial Institutions andCorporations.

Transactions that Mark has successfullyexecuted include senior and subordinateddebt financing, mezzanine debt financing,debt/equity hybrids, structured financings,indexed-linked, and asset-backed financingsin all of the major local and internationalCapital Markets across Australia, Asia,Europe and the USA.

He has concluded significant and award-winning transactions for a diverse range of organisations including:

– ACTEW: largest corporate CPI financing in Australia, $400 million

– BHP Billiton: A$ Deal of the Year 2001, and the largest corporate bond deal done in Australia

– Telstra: A$ Deal of the Year 2002

– Citipower: first ever A$ AAA wrapped bond financing

– Amcor: Hybrid Deal of the Year 2002

– St.George Bank: Euro750 million, largestever FRN for a Single A bank

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– Coles Myer: Hybrid Deal of the Year 2000

– Royal Bank of Scotland: 2004International Issuer of the Year in the Australian Bond Market

In addition, Mark has concluded a number of significant capital market transactions, in both Australia and offshore for ANZ Bank,National Australia Bank, CBA, John Fairfax,Treasury Corporation of Victoria, Etsa,Suncorp and Westpac.

Prior to joining RBS in 2003, Mark was at UBS where he was Managing Director,Head of Debt Capital Markets from 1993. He is a fully qualified Chartered Accountant(ACA) and has a B.Comm(merit)/LLB fromUniversity of NSW. He is also a Member(CFTP) of the Finance and TreasuryAssociation of Australia.

Contact details:T 61 2 9004 2117E mark.langsworth@rbos.com

Philip CoatesHead of Credit Trading & Director of Financial MarketsSG Corporate & Investment Banking

Phil has worked at SG Corporate &Investment Banking (SG CIB) for nine years,having worked at the top end of the marketfor seventeen years in two main areas ofinterest rate risk for several years at a time:interest rate swaps and fixed income portfoliomanagement. Recent expertise spans abroad range of fixed income product fromonshore and offshore corporate bonds toasset backed securities and creditderivatives.

Aside from trading responsibilities, Phil hasdirectly assisted in the development of thedebt originations and distribution functions at SG CIB. In 2000 Phil created a specialistcredit trading desk, including responsibilityfor fixed interest sales team and establisheda debt market research role to strengthenFinancial Market Group’s capabilities in client services. More recently Phil hasconcentrated on the bank’s credit tradingportfolios and structured credit businesses.

Phil has served as Chairman of AFMA’s DebtCapital Market’s Committee and is a SeniorAssociate AIBF.

Who’s Who – Intermediaries

Contact details: T 61 2 9233 1159E phil.coates@sgcib.com

Jim FingletonDirector, Structured Credit SolutionsSG Corporate & Investment Banking

Jim Fingleton is a Director, Structured Credit Solutions at SG Corporate &Investment Banking (SG CIB) responsible for structured credit product and themanagement of a structured investment fund. Jim is a specialist in CDO product. He has over 19 years financial marketsexperience, focusing principally on the fixedincome, asset-backed, structured credit,credit derivatives and interest rate derivativemarkets.

Prior to joining SG CIB in 1996, Jim hadresponsibility for the interest rate derivativesbook at the South Australian AssetManagement Corporation and prior to that he traded interest rate derivatives and fixedincome at State Bank of South Australia.

Jim holds a Bachelor of Laws degree and a Bachelor of Economics degree from theUniversity of Adelaide, a Graduate Diploma in Securities and Finance Law (SydneyUniversity) and a Master of Applied Finance(Macquarie University).

Jim sits on the Australian Financial MarketsAssociation Credit Derivatives Committee.

Contact details:T 61 2 9233 1159E jim.fingleton@sgcib.com

Corey WittenbergHead of Institutional & Structured CreditSales and Director of Financial MarketsSG Corporate & Investment Banking

Corey has 10 years experience in arrangingand executing innovative structured credittransactions. Corey joined SG Corporate & Investment Banking (SG CIB) in 2002 andheads up the Structured Credit Distribution,Corporate and Commercial PaperDistribution and Bond Syndication. Prior to joining SG CIB, Corey was a director ofMerrill Lynch Australia and has over 20 yearsexperience in Investment Banking in Australiaand overseas.

Contact details: T 61 2 9233 4422E corey.wittenberg@sgcib.com

Anthony EverettVice President, Capital Market SalesTD Securities

Anthony Everett is Vice President, CapitalMarket Sales at TD Securities withresponsibility for domestic distribution in awide range of fixed income and structuredproducts. He has over 15 years experience in Financial Markets gained domestically and offshore, spanning Government and nonGovernment Fixed Income, Emerging MarketDebt, Interest Rate, Credit Derivatives andStructured Products.

Anthony joined TD Securities in 2004,previously he was based in Singapore for 6 years working for CSFB, Merrill Lynch and UBS, focusing on Emerging Market Debt and Structured Products, with anemphasis on Libor based products forfinancial institutions, hedge funds andconduits.

Contact details:T 61 2 9619 8866E anthony.everett@tdsecurities.com

Michael HallVice President & Director Capital Market SalesTD Securities

Michael Hall has been with TD Securities for 8 years, moving from Cititbank toestablish the firm's Australian Debt CapitalMarket Business. As Vice President & Director he is responsible for Australianand New Zealand Capital Market Salesincluding fixed income and structured credit products. Michael has over 20 yearsexperience in financial markets includingequities, corporate and banking. The last 12 years he has specialised in Governmentand Corporate Debt, credit derivatives and structured products. TD has beeninstrumental in the development of Kangaroobonds in Australia and is building a strongfranchise in structured credit.

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Contact details:T 61 2 9619 8866E michael.hall@tdsecurities.com

Nick Howell Vice President & DirectorDebt Capital MarketsTD Securities

Nick Howell joined TD Securities in September 2001 and is responsible for debt origination in Australia. Prior to moving to Australia in 1998 he had 12 years' experience in the Eurobond debtcapital markets covering global frequentborrowers. At TD Securities he has principalresponsibility for covering the kangarooissuers but also oversees the raising of funds for Australian clients in the domestic, European and US capital markets.

Nick holds a Bachelor of Arts fromLoughborough University in the UK.

Some significant transactions in 2004 have included:

– Republic of Austria $500 million Inaugural kangaroo issue

– L-Bank $400 million Inaugural kangaroo issue

– Bayerische Landesbank $325 million Inaugural kangaroo issue

– Rentenbank two separate $500 milliontrades in 2007 and 2009 maturities

– Dexia MA two trades for $250 million and$200 million in 2009 and 2014 maturities

– Eurofima increased the outstanding 2018 bond to $515 million and issued new $300 million 2014 maturity

Contact details:T 61 2 9619 8868E nick.howell@tdsecurities.com

Stephen KoukoulasChief Strategist, Asia-PacificTD Securities

Stephen Koukoulas is TD Securities' ChiefStrategist, Asia-Pacific where his researchfocus is economic and market trends in theAsia-Pacific region, with an emphasis ondevelopments in Australia and New Zealand.

Who’s Who – Intermediaries

Stephen has a high profile in the media,appearing frequently on news and currentaffairs programs where he comments on data and policy developments.

Stephen was co-creator of the TD Securities-Melbourne Institute Monthly Inflation Gaugewhich is now a key data release on themonthly calendar, given its timeliness and track record in anticipating the officialinflation data.

Prior to joining TD Securities, Stephen was at the Australian Financial Review for threeyears where he would write comment andopinion pieces for Australia's premierbusiness newspaper. He was employed in theCitibank (Australia) economic department forfive years between 1994 and 1998 and waschief economist for the last two years.

Stephen began his career as an Economist in the Department of Treasury in Canberra.He holds a Bachelor of Economics, withHonours, from the Australian NationalUniversity.

Contact details:T 61 2 9619 8846E stephen.koukoulas@tdsecurities.com

Chris PashleyManaging Director, Capital Market SalesTD Securities

Chris Pashley has responsibility for CapitalMarkets Distribution at TD Securitiescovering Australia, New Zealand, Hong Kong,Singapore and mainland China.

After 12 years at Citibank, Chris moved to TD Securities in January 1997 takingresponsibility for developing the TDSecurities Capital Market Distributionplatform in Australia and non-Japan Asia.Over this period TD Securities has become a significant Fixed Income primary marketsparticipant, and has considerably broadenedthe product mix to include Structured Rate,Equity, and Credit markets. Having theflexibility to offer a broad range of securitiesacross a number of asset classes hasallowed Chris to expand TD Securitiesresources to the region. Chris recentlymoved some of his team to Singapore,further strengthening TD Securitiesdistribution capabilities into Asia.

Contact details:T 61 2 9619 8866E chris.pashley@tdsecurities.com

Jamie SpenceVice President & DirectorCredit & Structured Credit ProductCapital Market SalesTD Securities

Jamie Spence joined TD Securities inNovember 2003 focusing on StructuredCredit opportunities in Australia and Asia.TD's structured credit platform engineersproduct tailored to wholesale investorsneeds, as well as utilising their capabilities to work with third party distribution channelsto deliver structured transactions to the subwholesale market.

Prior to TD Jamie worked with MacquarieBank, Bankers Trust and most recently as head of structured credit sales at CBA. He has 20 years financial markets experienceand has run a number of businesses acrossseveral disciplines including foreignexchange, and debt and derivatives.

Contact details:T 61 2 9619 8866E jamie.spence@tdsecurities.com

David FeldmanAssociate DirectorUBS

David Feldman is an associate director in UBS' debt capital markets team. His isresponsible for sourcing debt originationopportunities both locally and offshore. During his career, he has been involved in the execution of numerous offerings in US$, A$, €, YEN, CHFand £ for banks,corporates and semi-government institutions.

Prior to joining UBS, David was part of Nomura's debt capital markets team. David holds a Bachelor of Commerce (with Honours) and a Bachelor of Laws (with Honours) from Monash University.

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Contact details: T 61 2 9324 3324E david.feldman@ubs.com

Duncan HaigCo-Head of Rates, AustraliaUBS

Duncan is jointly responsible for Ratestrading in Australia and New Zealand. Duncan has 16 years of Fixed Incomeexperience – 13 with UBS – in a variety of Sales and trading roles in Sydney,Melbourne and London. In January 2005Duncan returned to Sydney after 4 years in UBS’s London office.

The Rates business is a growing part of UBSAustralia. It combines Government, StateGovernment and Supra/Sovereign bondswith Interest Rate Derivative products intoone business.

Contact details:T 61 2 9324 2883E duncan.haig@ubs.com

Steve HawkinsManaging Director, Head of Hybrid CapitalUBS

Steve Hawkins rejoins UBS’s Hybrid Capitalteam following three years with UBS in London where he was Head of CapitalSecurities. During this time in London, Stevehas worked on more than 20 insurance andbank capital transactions. Transactions haveincluded subordinated financings for MunichRe, Allianz, HBOS, Prudential, Legal andGeneral, Fortis, Rabobank and RBS.

Prior to his move to London, Steve wasa member of the Australian Hybrid teamworking on transactions for clients such as Amcor, Foster's, Coles Myer, Colonial,Woolworths and AMP.

Who’s Who – Intermediaries

Contact details:T 61 2 9324 2516E steve.hawkins@ubs.com

Michael HendrieManaging DirectorHead of Fixed Income DistributionUBS

Michael has 18 years of investment industryexperience, the last 10 of which have beenwith UBS. Subsequent to joining the bank in Melbourne, Michael spent 3 years inLondon heading the successful Australian/New Zealand dollar business before returning to Australia in 2001 to take managementresponsibility for distribution. He currentlyleads a team of sales professionalsresponsible for delivering UBS’s full range of global product and solution expertise into Australia and New Zealand Institutions.Along with expanding the Rates businessfurther into local banks and regional hedgefunds, Michael's focus has centred aroundbuilding UBS’s credit structuring credentials in the region.

Contact details:T 61 2 9324 2222E michael.hendrie@ubs.com

Simon Maidment Managing Director, Head of Fixed IncomeRates and CurrenciesUBS

Simon Maidment is Managing Director, Head of Fixed Income, Rates and Currenciesfor UBS in Australia. Simon has functionalresponsibility as the Head of Debt Syndicatein Australia for the underwriting and executionof all Australian dollar debt capital marketsissues. In Australia, UBS originates andexecutes senior debt, subordinated debt,asset backed securities and hybrid capitalissues for Australian and internationalborrowers.

Transactions executed in 2004 include:

– IAG $550 million Reset Preference Shares

– Suncorp Metway Insurance Limited $200million Lower Tier 2 MTN

– NAB $675 million Lower Tier 2 Subordinated MTN

– Italy $1billion Global MTN

– Sallie Mae $600million fixed and FRN senior MTN

– CBA $500million Lower-Tier-2 Subordinated MTN

– AIG $400million fixed and FRN GIC-backed MTN

Simon has been with UBS for over 13 yearsin roles spanning the fixed income business.Simon joined UBS as an economist andspent 6 years in London with UBS in the A$ Government bond sales and tradingbusiness.

Simon has a Bachelor of Economics degree(in Economics and Finance, with merit) from the University of New South Wales,Australia.

Contact details:T 61 2 9324 3948E simon.maidment@ubs.com

Nicholas RossManaging DirectorHead of Debt Capital MarketsUBS

Nicholas Ross is Managing Director andHead of Debt Capital Markets for Australiaand New Zealand. Nicholas has functionalresponsibility for managing internationalcross border business, Australian dollarorigination and capital securities.

He has been involved in numerous Australiandollar, US dollar, Sterling and Euro capitalraising deals for organisations including ANZ, National Australia Bank, Westpac, St.George, Suncorp Metway, Bank of Queensland, BHP Billiton, Telecom New Zealand and BankWest.

Nicholas joined UBS in 1996 and has worked in New Zealand, the UK and Australia.

Contact details:T 61 2 9324 3943E nicholas.ross@ubs.com

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Matthew TaylorDirector, Ratings AdvisoryUBS

Matthew is a Director in Investment Bankingand is based in Melbourne. He is also Head of Australasian Ratings Advisory whichinvolves provide advice to both internal andexternal clients in relation to credit ratingrelated matters. Matthew joined UBS in 2003and his previous experience was with MerrillLynch where he was a Director and hadworked as a rating advisor for seven years in Europe and Australia. Matthew has advisedover 30 issuers in Australia and New Zealandspanning a diverse range of sectors includinginfrastructure, consumer products, retail,health care, gaming, property, metals andmining and financial institutions. He has alsoworked on a range of projects in Asia.

Matthew holds a Bachelor of Economics from La Trobe University and is an Associateof the Institute of Chartered Accountants inAustralia (ACA).

Contact details:T 61 3 9242 6397E matt.taylor@ubs.com

Peter BloomfieldHead, Corporate SecuritiesWestpac Institutional Bank

Peter Bloomfield is Head of Westpac'sCorporate Securities team, which hasresponsibility for the origination of corporatesecurities solutions for the bank's client base.The team's area of expertise covers both the domestic market as well as the offshoremarkets via Westpac's alliance with Bank of America.

Peter has spent the past 25 years withWestpac Banking Corporation, the last 20years of which have been in Capital Marketsand Corporate Finance roles. These includedoffshore postings in London, where he tradeddebt securities, as Head of Capital MarketsSales and Trading, Hong Kong, and Head of Corporate Finance in Singapore where his responsibilities covered capital markets,project finance, structured finance andcorporate relationships.

Since 1994, Peter has worked in Sydney on the origination and execution side of the corporate securities business. Duringthat time Peter has held senior roles in theWestpac team that has won numerousawards and been consistently ranked in the top tier among market providers.

Peter holds a Bachelor of Commerce degreefrom the University of NSW, majoring inEconometrics.

Who’s Who – Intermediaries

Contact details:T 61 2 9284 8173E pbloomfield@westpac.com.au

Tabitha ChangAssociate Director, Corporate SecuritiesWestpac Institutional Bank

Tabitha Chang has more than 10 years'experience in financial markets and debtcapital markets, specialising in foreignexchange, derivative sales and debt capitalmarkets origination at UBS and nowWestpac.

Tabitha has originated a number of keytransactions for clients during this time,including Telstra, Goldman Sachs, CocaCola, AMP and Suncorp Metway.

At Westpac Tabitha is focused on providingglobal funding solutions for the bank'scorporate client base.

Significant transactions over the past yearhave included:

– Goldman Sachs $1.0 billion inaugural kangaroo transaction

– Telstra $500 million 10.5 year domestic transaction

– SPI Electricity & Gas $350 million debut aussie transaction

– AMP Bank $250 million senior and subordinated bond issue

Contact details:T 61 2 2 9284 9231E tchang@westpac.com.au

Louise CorsonAssociate Director, Corporate SecuritiesWestpac Institutional Bank

Louise Corson is an Associate Director in Westpac Institutional Bank's (WIB's)Corporate Securities, with over four years of Debt Capital Markets experience and over 10 years of banking experience. Prior to joining the Debt Capital Marketsteam, Louise worked in WIB's relationshipbanking team.

Over the past three years, Louise's focus has primarily been on Australian corporates,originating and managing numerousgroundbreaking transactions for large

Australian issuers including Tabcorp,Stockland, Investa and SPI PowerNet.

Some landmark transactions executedrecently include:

– Tabcorp $450 million 7 year inauguralbond issue

– Investa $175 million 5 year inaugural bond issue

– Stockland repurchase of $470 millionnotes and new issue of $590 millionacross various maturities

– Stockland $250 million bond issue

– SPI PowerNet $170 million 4.5 year bond issue

– Caterpillar $120 million inaugural bond issue

Contact details:T 61 2 9284 9140E lcorson@westpac.com.au

Nick FyffeHead of Structured SalesWestpac Institutional Bank

Since joining Westpac in 1996 Nick hasundertaken a number of roles within FinancialMarkets including leading and distributingstructured credit transactions to wholesaleinvestor markets both domestically andoffshore.

Nick joined Westpac from JPMorgan wherehe led their Capital Markets sales activities in Australia. Prior to this Nick worked in theCapital Markets group for Deutsche BankAustralia both in Sydney and as head of theNew York Sales team.

He holds a Master of BusinessAdministration from the Australian Graduate School of Management.

Contact details:T 61 2 9284 8566E nfyffe@westpac.com.au

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Jason LeeGlobal Head, Market SalesWestpac Institutional Bank

Jason was appointed Global Head of MarketSales for Westpac Institutional Bank inAugust 2004. The Market Sales groupcomprises Corporate Securities, Hybrid andStructured Capital, Structured Securities,Foreign Exchange and Commodities Salesand Structured Derivatives businesses. Withspecialists located in Australia, New Zealand,London and New York, the Market Salesteam provides both domestic and globalsolutions to its client base through a widerange of capital markets products. In 2004,Jason's group lead managed over $13 billionworth of transactions for Australasianissuers, and topped the bookrunner leaguetables for total A$ bond volume. Through itslongstanding alliance with Bank of America,Westpac has also dominated the US PrivatePlacement market for Australasian issuersover the last 3 years.

Prior to joining Westpac, Jason worked for JPMorgan, where he was ManagingDirector and Head of Debt Capital Marketsfor Australia and New Zealand. During his time in that role, he originated and ledlandmark financing transactions for a diversegroup of Australasian companies and private equity funds, delivering consistent marketleadership in international fixed income,syndicated loans, private placements andstructured finance.

Contact details:T 61 2 9284 8920E jasonlee@westpac.com.au

Enrico MassiGlobal Head of SyndicateWestpac Institutional Bank

Enrico heads the Global Syndicate businessat Westpac Institutional Bank. The GlobalSyndicate team is responsible forcoordinating the execution of debt capitalmarket transactions including launch, pricingand transaction logistics for corporate bonds,asset backed securities and hybrid capitalinstruments. The team is complemented by professionals in Sydney, Auckland andLondon and works closely with other areas of WIB.

Enrico has over 12 years experience infinancial markets, seven of those in debtcapital markets/syndicate roles. Prior tojoining Westpac, Enrico was Head of DollarBloc Syndicate for RBC Capital Markets in London and previously, Head of AustralianDollar Syndicate at Merrill Lynch. He holds a Bachelor of Commerce from GriffithUniversity.

Who’s Who – Intermediaries

Contact details:T 61 2 9284 8207E emassi@westpac.com.au

Andrew McDonaldGlobal Head of Capital Market SalesWestpac Institutional Bank

Andrew heads up Westpac InstitutionalBank's capital markets distribution teamswhich focus on the sale of GovernmentBonds, Corporate Bonds, Asset BackedSecurities, CPI and Annuity Bonds, InterestRate Swaps and Options, Credit DefaultSwaps, CDO's, Money Market, CP productand any Structured /Alternative Assets to the bank's wholesale investor base.Investors that Westpac distributes to includedomestic institutional and middle market,New Zealand institutional and middle market,US, European and Asian wholesale investors.

Prior to this role Andrew headed up thebank's Loans & Syndication department from 1999 through to 2003. He was involved in the structuring and distribution of all bilateral and syndicated loan facilities,from vanilla transactions through to LBO and project finance. This role also includedresponsibility for the banks' CorporateLeasing department.

Contact details:T 61 2 9284 8118E amcdonald@westpac.com.au

Grant PaverHead of Institutional SalesWestpac Institutional Bank

Grant is Head of Institutional Sales forWestpac. The Institutional Sales teamprovides a highly regarded service towholesale clients in our core market of Australia across the full range of the bank's debt product offering. Productcoverage includes all money marketsecurities, government and corporatesecurities, structured products and interestrate derivatives. The team consistentlycommands a large percentage of the A$ government bond and interest ratederivative markets turnover. Likewise, it is a consistent powerhouse in the corporate sector, as evidenced by ournumber one ranking in the primary leaguetable for total A$ supply in 2004.

Grant has 16 years of financial markets sales experience. He has been in this rolewith Westpac since 2000. Prior to joiningWestpac, Grant performed similar roles in other institutions, as Director, FixedIncome Sales at Warburg Dillon Read andHead of Debt Sales at both Union Bank of Switzerland and Bankers Trust Australia.

Grant holds a Bachelor of Arts HonoursDegree in Economics from the University of Cape Town.

Contact details:T 61 2 9283 4100E gpaver@westpac.com.au

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Who’s Who – Professional Services

Matthew AllchurchPartnerAllens Arthur Robinson

Matthew acts for many of the leading playersin the Australian securitisation market andhas been the principal lawyer on a number of ground-breaking transactions. He alsoadvises financial institutions on mattersranging from straight bank debt to the mostcomplex tax-effective financing structures.His recent transactions include acting forInterstar on the creation of a master truststructure to securitise its net interest marginentitlements, and the initial issue of $180million of MTNs under that structure. He alsoacted for Macquarie Bank and ALE DirectProperty Trust on the spin out of Fosters'pubs, Australia's first whole of businesssecuritisation and acted for ABN AMRO and HY-FI Securities Limited on 4 issues of publicly listed, retail, synthetic CDO's inAustralia and New Zealand, the first ratedpublic deals of this kind in both markets.

Contact details: T 61 2 9230 4943E matthew.allchurch@aar.com.au

Nicky AndrewsPartnerAllens Arthur Robinson

Nicky has extensive CMBS experience andhas acted in the restructure and refinance ofthe Macquarie Office Trust CMBS program.She also acted in the establishment of CMBSprograms for ING Office Fund, ING IndustrialFund, ING Retail Fund, Tyndall Meridian Trust (now JF Meridian Trust), Centro and,most recently, Harvey Norman. In the RMBSarea, she has acted on the ARMS II program(for AMS), the Interstar Millennium program(for Interstar), the Compass program (for Citibank) and the PUMA program (forMacquarie). She has also acted for AMS in establishing the program to securitise its net interest margin entitlements.

Contact details: T 61 2 9230 4947E nicky.andrews@aar.com.au

David CliffordPartnerAllens Arthur Robinson

David has been involved in many innovativetransactions in the capital markets and in corporate finance. He has worked onAustralian, US and Kangaroo bond programsand financings, capital managementprograms and structured finance transactionswith Australian and foreign banks andcorporates including Westpac, GE, CBA,Bank of America, CSFB, Merrill Lynch, CITInc, Trust, DBRREEF, ETSA, Transurban,St.George, ABN AMRO, Customs House,Southcorp, Coates Hire, Electrolux, SnowyHydro, Meridian Energy, Transpower andPerth Airport. He has been involved withfinancial markets law reform and advises on regulatory issues to banks and specialistfinancial services and market entities.

Contact details: T 61 2 9230 4975E david.clifford@aar.com.au

Robert CornishPartnerAllens Arthur Robinson

Robert has advised various Australian banksand issuers on both Australian and Asian debtcapital markets programs. He acted forAmbac Assurance Corporation on AdelaideBank's Low-Doc RMBS (Australia's firstcredit wrap of a low-doc residential mortgagebacked securitisation), he acted for Ambacagain on a wrapped issue of $250 million of MTNs to refinance Energy Partnership Gas senior debt, and he acted for XL CapitalAssurance as credit wrapper of $170 millionof MTNs issued to refinance the participationof Abbey National in the financing of Redbank1 power project. He also recently acted forMacquarie Bank, UBS and CSFB as bridgingfinanciers to the Macquarie CommunicationsInfrastructure Group in its acquisition ofntl:broadcast in the UK.

Contact details: T 61 2 9230 4924E robert.cornish@aar.com.au

Who’s WhoInvestors

Issuers

Intermediaries

Professional Services

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Tom HighnamSenior AssociateAllens Arthur Robinson

Tom's recent transactions include two highvalue, tax driven cross-border structuredfinancings for an Australian investment bank,a tax driven cross-border structured financingfor a large European investment bank and a wholesale synthetic CDO for ABN AMRO.He acted for the bridging financiers to theMacquarie Communications InfrastructureGroup in its acquisition of ntl:broadcast in the UK, he advised the bridge financiers in relation to Project Shearwater (Alinta &DUETs purchase of Aquila Inc's Australianassets) and he acted for the bridge financierson the acquisition of the Dampier to Bunburypipeline. He also recently advised MacquarieAirports on the financing aspects on the issueof TICkETS hybrid securities to fund theacquisition of Brussels Airport.

Contact details: T 61 2 9230 4009E tom.highnam@aar.com.au

Andrew JinksPartnerAllens Arthur Robinson

Andrew's major clients include AMS,Bluestone Group, Challenger, DeutscheBank, Deutsche Asset Management,Interstar, Macquarie Bank, St.George Bankand Westpac, and he has acted on theCrusade, Millennium and WST programs inrespect of domestic, euro, 144A and globalissuances, as well as the Sapphire non-conforming program, the RMT program andthe SAFE and Starship conduits. He alsoacted on the David Jones' Risk EquityParticipation Structure, the Fosters’ GroupALE CMBS issue, and the Deutsche OfficeTrust and Deutsche Industrial Trust CMBSprograms.

Contact details: T 61 2 9230 4925E andrew.jinks@aar.com.au

Who’s Who – Professional Services

Mark KidstonPartnerAllens Arthur Robinson

Mark has advised on numerous debt capitalmarkets transactions including the $1.1 billionETSA Utilities refinancing and wrappedissues by Singapore Power, PowercorAustralia, TXU Australia, United NetworksLimited and each of the MTN issues byBrisbane, Adelaide and Melbourne airports.He acted for MBIA Insurance Corporation on a US$ denominated credit cardsecuritisation by Korean issuer KookminCard, a transaction involving Korea, the US,the Cayman Islands and Ireland but having no Australian connection. His most recenttransactions include the 2002 refinancing ofTransurban, the 2002 and 2004 refinancingsof Sydney Airport, and the constructionfinancing of Lane Cove Tunnel, the firstAustralian toll road construction financedpurely in the capital markets.

Contact details: T 61 2 9230 4419E mark.kidston@aar.com.au

Jason LeeSenior AssociateAllens Arthur Robinson

Jason acted for SG Australia in the syntheticCDO ̂ 2 transaction involving $200 millionCLNs issued by the Obelisk Trust 2004-1(the largest CDO squared transaction in Australia to date). He advised asuperannuation fund in various CDS withDeutsche Bank (both single name andiBOXX index trades), he acted for Westpac in their Structured Equity Solutions platforminvolving bespoke equity derivatives, and he advised 8 swap counterparties in the £4 billion multi-currency ABCP Program of Network Rail, the UK rail operator.

Contact details: T 61 2 9230 4596E jason.lee@aar.com.au

Mark WormellPartnerAllens Arthur Robinson

Mark heads the firm's securitisation team. He acted for Westpac in establishing theWaratah, Sydney Capital Corporation andWST securitisation programs. He establishedthe Crusade securitisation program forSt.George and a number of other assetbacked programs. He acts for MacquarieBank, Société Générale Australia Branch and Allco on a range of securitisation projectsincluding SG's recent Obelisk CDO. He wasthe principal legal advisor to the first marginlending securitisation undertaken anywhere in the world. He also established the firstsecuritisation program for a "big four" bank, the first cross border securitisationundertaken from Australia and the firstsecuritisation of Australian finance leases. In the CMBS area, he has acted forMacquarie Goodman, Macquarie OfficeTrust, ING, Westpac and ANZ.

Contact details: T 61 2 9230 4460E mark.wormell@aar.com.au

Bob BivenMarket Co-ordinatorTrading Market DevelopmentAustralian Stock Exchange

Bob Biven has spent all of his working lifeinvolved in the Australian money and debtsecurities markets, commencing with theReserve Bank and a period in its SecuritiesMarkets Department. During the ‘70’s and‘80’s he was a dealer in the money marketdivisions of both an investment bank and anAustralian bank. He also coordinated andlectured in the Securities Institute of Australiacourse on “Money Markets and FixedInterest Securities”. In 1989 he joinedAustraclear Limited, the money market andfixed interest depository and clearing andsettlement company (now owned by SFE)with a brief to expand their product range.

More recently he has worked for the ASX in the fixed interest and hybrid security areasand has been involved in a number of projectsconcerning trading, clearing and settlementof other ASX listed securities and futurescontracts.

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Contact details: T 61 2 9227 0934E bob.biven@asx.com.au

Robin PickoverApplications SpecialistBloomberg

Robin has been in financial markets for morethan 20 years in London, Singapore andSydney. He has been involved in both salesand trading positions in fixed income, equityand derivatives markets. He currently works in Sydney as an application specialist forBloomberg focussing on fixed income andderivative functionality.

Contact details: T 61 2 9777 8688E rpickover@bloomberg.net

Andrew Smith Managing DirectorFitch Ratings

Andrew Smith is the Managing Director ofFitch's Australian operations. He establishedthe Australian office in 1994 and hasoverseen Fitch's expansion in Australia andNew Zealand across the banking, utilities,infrastructure, project finance, telecoms,industrial and insurance sectors. Andrew hasworked in the finance industry for nearly 20 years, in roles ranging from corporatebanking to funds management, with 15 years'experience in the credit rating industry.

Andrew earned a Bachelor of Science(Honours) at Monash University and an MBAat the University of Melbourne. Andrew isalso a member of the Finance and TreasuryAssociation and the Australian Institute ofCompany Directors.

Contact details: T 61 7 3222 8618E andrew.smith@fitchratings.com

Who’s Who – Professional Services

Kevin StephensonManaging DirectorFitch Ratings

Kevin Stephenson is the Managing Directorand Head of Structured Finance for FitchRatings in Asia-Pacific. His team isresponsible for rating CMBS, RMBS, ABS,and CDO transactions composed of assetslocated throughout the non-Japan Asia-Pacific region. Previously, Kevin ran Fitch'sstructured finance group in Tokyo, Japan,started Fitch's structured finance group in Sydney, Australia, and was part of Fitch'scommercial mortgage group in New York.

Prior to joining Fitch, Kevin worked forCiticorp, in loan workouts and restructures.Prior to that, he worked as an analyst for the Prudential Realty Group.

Kevin has a BA in history from the Universityof California at Berkeley and an MBA fromthe Kellogg Graduate School of Managementat Northwestern University.

Contact details: T 61 2 8256 0321E kevin.stephenson@fitchratings.com

Ken AstridgePartnerMallesons Stephen Jaques

Ken Astridge is a Partner in the Sydney office of Mallesons Stephen Jaques wherehe specialises in banking and finance. Ken has recently returned from heading up the firm's London based financial servicesgroup. His practice is broadly based andcovers syndicated lending, structuredfinance, securitisation, capital markets andwithholding tax with an emphasis on crossborder transactions between Australia andEurope. Ken has extensive experience in the stamp duty area, particularly in relation to large, secured financing transactions.Some of Ken's recent transactions includethe English law aspects of a Euro500 Tier 1hybrid offering from Australian and NewZealand Banking Group Limited and the saleof a UK residential mortgage book for AMPBank (London branch).

Contact details: T 61 2 9296 2146E ken.astridge@mallesons.com

Scott FarrellPartnerMallesons Stephen Jaques

Scott Farrell is a Partner in the financialservices team in the Sydney office ofMallesons Stephen Jaques where hespecialises in wholesale and retail CDOs,synthetic and traditional securitisations,structured and complex derivatives,structured capital market products andfinancial markets regulation. He has acted as deal counsel on the retail synthetic CDOtransactions known as Nexus Yield Bonds,Nexus Portfolio Linked Floating Rate Notes,Nexus3, Halcyon Notes, Prise Notes andPrise II Notes. He also acted on the Titan andQuasar securitisation programmes as well astransactions for a range of repackaging andstructured credit issuing vehicles.

Contact details: T 61 2 9296 2142E scott.farrell@mallesons.com

Stuart FullerPractice Team Leader Mallesons Stephen Jaques

Stuart Fuller is the Practice Team Leader of the financial services team at MallesonsStephen Jaques. Stuart specialises insecuritisation and structured finance and acts for issuers, originators or arrangers of programmes in the Australian, euro andUS bond and commercial paper markets. He has extensive expertise in all types ofmortgage and asset backed securitisation.Stuart is widely recognised as one ofAustralia's leading securitisation lawyers with exceptional commercial and legal skills.As a result, he has been involved in the vast majority of securitisation transactionsundertaken in all asset classes in theAustralian and Asia-Pacific markets over the past ten years.

Contact details: T 61 2 9296 2155E stuart.fuller@mallesons.com

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Greg HammondPartner Mallesons Stephen Jaques

Greg Hammond is one of Australia's leadingbanking and capital markets lawyers. As a Partner in the Sydney office ofMallesons Stephen Jaques he specialises indebt capital markets and securities, bankingregulation and supervision, payments andclearance systems and corporate finance. He was partner-in-charge of the firm's Londonoffice from 1995 till 1998 and has extensiveexperience in advising both Australian andoverseas financial institutions and corporateinvestors in these areas. Since returning from London he has regularly acted forinternational banks and financial institutionson the development of new products andfinancial services for the Australian market(including the development of the“kangaroo” bond market, the structuring of debt/equity hybrids and reset preferredsecurities, credit-linked notes, the listing of debt securities on the Australian StockExchange, the importation of repackaging,CLO and securitisation structures from theEuropean and US markets, internet paymentservices and public key infrastructure, equitylinked warrants and continuous-linkedsettlement).

Contact details: T 61 2 9296 2487E greg.hammond@mallesons.com

Richard MazzochiPartnerMallesons Stephen Jaques

Richard Mazzochi is a Partner in the HongKong office of Mallesons Stephen Jaqueswhere he specialises in banking and finance.He has previously worked in Sydney,Singapore and London. Richard hasextensive experience in a broad range ofsignificant matters including capital marketsfinancing in the European, American andAsian markets; securitisation, repackagingand other structured finance; project andinfrastructure finance derivatives; andregulatory and financial markets (includingclearing and settlement systems).

Contact details: T 852 2848 4617E richard.mazzochi@mallesons.com

Who’s Who – Professional Services

David OlssonManaging Partner Mallesons Stephen Jaques

David Olsson is the Managing Partner,Practice of Mallesons Stephen Jaques,based in the Melbourne office. He alsoserved as the national practice team leader of the firm's Financial Services group for 3 years until 2004. David is a capital marketsand securities specialist who regularly acts for Australia's largest corporations in accessing the domestic and internationalcapital markets. Acting for both arrangersand issuers, David advises regularly inrelation to all aspects of the capital marketsincluding, listed and unlisted securities in thedomestic and international capital markets;corporate bonds, kangaroo bonds, retailbonds, credit enhanced and other forms of structured bonds, and hybrids.

Contact details: T 61 3 9643 4330E david.olsson@mallesons.com

Chris DaltonManaging DirectorStandard & Poor’s

Chris Dalton is the Managing Director ofStandard & Poor's Australia & New Zealand.In this role, Chris is responsible for the overallmanagement of Standard & Poor's operationsin Australia and New Zealand, and overseeinga staff of more than 100 professionals basedin Melbourne and Sydney. Prior to beingappointed to this position in July 2000, Chrisspent three years in the Standard & Poor'sNew York office. Chris holds a Masters ofBusiness Administration from the Universityof Melbourne and a Bachelor of Economicsfrom Monash University. Prior to joiningStandard & Poor's he held a number of rolesin banking, corporate treasury and charteredaccounting.

Contact details: T 61 3 9631 2020E chris_dalton@standardandpoors.com

Brendan FlynnDirectorSovereign and Public Finance RatingsStandard & Poor’s

Areas of Expertise: Regional & LocalGovernments, Public-Private Partnerships,Project Finance, Sovereigns

Brendan Flynn is an Associate Director within the International Public Finance group, covering Australia, New Zealand, and Southeast Asia. Brendan has extensiveexperience in rating regional and localgovernments, including the Australian states,government-owned non-utility businesses,and project finance. Brendan previouslyworked as an Australian stockbroker, and in the Commonwealth Treasury. Brendanholds a Master of Economics from theAustralian National University, a GraduateDiploma of Applied Finance and Investmentfrom the Securities Institute, and a Bachelorof Economics (Honours) from La TrobeUniversity.

Contact details: T 61 3 9631 2042E brendan_flynn@standardandpoors.com

Gavin GunningDirectorHead of Financial Services RatingsStandard & Poor’s

Area of Expertise: Banks and DiversifiedFinancials

Gavin Gunning is a Director within, and headof, the Financial Services Ratings group for Australia and New Zealand. Gavin has a team of 14 staff, with responsibility for a portfolio of more than 110 financial services companies. Before joining Standard& Poor’s in 1994, Gavin spent nine years inthe Australian financial services sector, intreasury, group strategic development andretail divisions of an Australian major bank.Gavin holds a Masters of Applied Financefrom Macquarie University and a Bachelor of Commerce degree from The University of Queensland; Gavin also is a CPA and aFellow of the Australian Institute of Bankingand Finance.

Contact details: T 61 3 9631 2092E gavin_gunning@standardandpoors.com

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Fabienne MichauxManaging Director and Team LeaderStructured Finance RatingsStandard & Poor’s

Area of Expertise: Securitisation

Fabienne joined Standard & Poor’s in 1994 and heads up a team of more than 20 analysts responsible for Standard & Poor’sratings of structured finance products in Australia and NewZealand. Fabienne has ten years experience in the securitisationfield. During her time with Standard & Poor’s,she has rated all assets classes and beenresponsible for developing much of Standard& Poor’s early criteria for the Australian andNew Zealand markets. Fabienne is activelyinvolved in the securitisation industry both domestically and offshore. She is aregular speaker at industry events, trainingprograms, and is often quoted in the financialmedia. More recently, she has contributed to the development of the industry as a national committee member of theAustralian Securitisation Forum (ASF).Fabienne completed her Bachelor of Business in Economics and Finance (with Distinction) from the Royal MelbourneInstitute of Technology.

Contact details: T 61 3 9631 2050E fabienne_michaux@standardandpoors.com

Who’s Who – Professional Services

Paul StephenDirectorCorporate and Infrastructure Finance RatingsStandard & Poor’s

Area of Expertise: Industrials

Paul Stephen is a Director within, and theRegional Team Leader of, the Corporate and Infrastructure Finance Ratings group.Paul is responsible for supervising thesurveillance of industrial, infrastructure, and project finance ratings in Australia andNew Zealand. Having worked with Standard& Poor’s for more than 14 years, Paul hassurveilled companies operating in a widearray of sectors. Paul is a CharteredAccountant, holds a Masters of BusinessAdministration from RMIT and a Bachelor ofCommerce from the University of Melbourne,and is a member of the Finance & TreasuryAssociation.

Contact details: T 61 3 9631 2070E paul_stephen@standardandpoors.com

Ian ThompsonManaging DirectorFinancial Services RatingsStandard & Poor’s

Areas of Expertise: Banks and DiversifiedFinancials, Life and Health Insurance, General Insurance – Asia-Pacific.

Ian joined Standard & Poor’s in 1988 and wasappointed Managing Director and RegionalHead of Standard & Poor’s Financial ServicesRatings group in Australia, New Zealand,and Southeast Asia in 1998. Ian hasextensive knowledge of the banking andinsurance sector throughout Asia, and is a regular speaker at seminars and frequentlyinterviewed by the media. Before joiningStandard & Poor’s, Ian worked in the bankingindustry. Ian has a Bachelor of Business(Accounting) and has a Post GraduateDiploma in Corporate Finance.

Contact details: T 61 3 9631 2100E ian_thompson@standardandpoors.com

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Directory – Issuer

Established in 1835, ANZ is a full-range financial services provider whoseheadquarters are located in Melbourne, Australia. ANZ is one of Australia's 5 largest publicly listed companies by market capitalisation, with a marketcapitalisation of $34.6 billion as at 30 September 2004. The ANZ Groupoperates in 27 countries, with the principal markets being in Australia and New Zealand, and with smaller operations in Asia, the Pacific, the UnitedKingdom, Europe and the United States.

Wholesale funding undertaken in the name of Australia and New Zealand Banking GroupLimited, ANZ National Bank Limited, ANZ National (Int'l) Limited and ANZ (Delaware) Inc is coordinated centrally by the Strategic Funding unit within Group Treasury. Group Treasury is headquartered in Melbourne, with representation in Wellington, London, New York andSingapore.

ANZ's global funding strategy is designed to deliver a sustainable portfolio of term wholesalefunds that balances cost-efficiency against prudent duration while targeting diversification by markets, investors, currencies and funding structures. These objectives are achieved vialong established and flexible funding programmes issuing commercial paper and certificates of deposit, through to medium term notes featuring either senior or subordinated debt status.ANZ's wholesale funding programmes are supported by dedicated dealer panels and a demonstrated commitment by ANZ to meet regularly with investors globally, allowing theBank to reach the broadest investor base possible.

For further information please contact:

ANZLevel 14530 Collins StreetMelbourne VIC 3000T 61 3 9273 5555W www.anz.com

Mr Ross Glasscock Executive Treasurer Strategic Funding T 61 3 9273 1467 E glasscor@anz.com

Mr Luke Davidson Manager Strategic Funding T 61 3 9273 1357 E davidsl1@anz.com

Mr Mark Anwender Senior Manager Strategic Funding T 61 3 9273 2357 E anwendm@anz.com

800mFebruary 2009

3.625% Senior FixedRate Notes

£200mNovember 2015

5.625% SubordinatedFixed Rate Notes

A$675mMarch 2009

6.00% Fixed Rate TransferableCertificate of Deposit

A$500mOctober 2007

5.80% Fixed Rate TransferableCertificate of Deposit

A$350mMay 2014

6.50% SubordinatedFixed Rate Notes

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For further information please contact:

Macquarie Bank TreasuryLevel 1, No. 1 Martin PlaceSydney NSW 2000T 61 2 8232 3608F 61 2 8232 4227E globalfunding@macquarie.comW www.macquarie.com.au/funding

Mr Craig ShapiroExecutive Director, TreasuryE craig.shapiro@macquarie.com

Mr Sam ViloAssociate Director, TreasuryE sam.vilo@macquarie.com

Mr Kaneran MudeliarAssociate Director, TreasuryE kaneran.mudeliar@macquarie.com

Mr Ashwin LoboDealer, TreasuryE ashwin.lobo@macquarie.com

Directory – Issuer

Macquarie ranks as one of Australia's top 25 companies by market capitalisation and hasreported successive years of record profits and consistent growth since 1992. Our approach is driven by a deliberate focus on areas of business where our particular skills and expertisedeliver a real advantage for clients, concentrating resources where we can add the most value.As a result we have established leading positions in a diverse range of market segments andregions internationally.

The funding of Macquarie Bank is managed by the Treasury Division. One of the key aims of Treasury is to provide a diverse range of funding for the Group. Treasury focuses on diversifying Macquarie's funding across product, currency, maturity, investor type and geographical location. The primary tools used to tap the global investor base are the US$10 billion Debt Instrument Programme, a multi-instrument, multi-jurisdictional and multi-issuer program, and the US$2 billion USCP Program.

Wholesale Funding is undertaken in the name of Macquarie Bank and Macquarie InternationalFinance Limited (MIFL). MIFL, a wholly owned subsidiary of Macquarie Bank, was created as a result of new regulatory requirements by the Australian Prudential Regulation Authoritylimiting the level of intra-group exposure that Macquarie Bank may have to subsidiaries that are not eligible for inclusion in the Macquarie Bank Extended Licensed Entity ('ELE'). MIFL willbe responsible for meeting the funding requirements of non-ELE subsidiaries including fundsmanagement, securitisation management and stockbroking subsidiaries as well as certainoverseas subsidiaries.

RATINGS Macquarie Bank Short-term Long-term

Fitch F1 A+Moody's P1 A2Standard & Poor's A1 A

RATINGS MIFL Short-term Long-term

Fitch F1 AMoody's P1 A3Standard & Poor's A1 A-

Macquarie is a diversifiedinternational provider of financial and investment banking services, with over 6000 people in 23 countries.In Australia, Macquarie is a full-service investment bank providingfinancial market trading and advisoryproducts and services. In the Asia-Pacific region, Macquarie provides a broad range of investment bankingservices, while in the Americas andEurope the Bank focuses on selectedbusiness areas where its expertiseprovides special value to clients.

“Macquarie” comprises MacquarieBank Limited (Macquarie Bank), a company authorised to conductbanking business in Australia, and its worldwide affiliated entities.

128-177 3/5/05 12:33 AM Page 153

154

Directory – Issuer

The Group is organised around three regional businesses in Australia, Europe and NewZealand. These regions include the retail bank brands, National Australia Bank (Australia), Bank of New Zealand (New Zealand), Yorkshire Bank and Clydesdale Bank (United Kingdom).

The National also includes Wealth Management and transactional and custodial operations. In addition, we have a global business in Institutional Markets & Services, which focuses on debt capital markets, risk management and investment products for corporate andinstitutional customers.

Group Funding & Securitisation The Group's wholesale funding strategy is designed to provide cost effective funding to the National's general banking business and its member banks.

The National achieves this through pursuing opportunities in all major debt capital markets in Australia, Asia, Europe and the US. Group Funding endeavours to diversify the Group'sfunding base by:

– Geographic distribution

– Currency of issue

– Investor type

– Instrument

– Maturity profile

Securitisation is used by the National to assist in achieving the overall Group funding strategy as well as being utilised as a capital management tool.

Securitisation of residential mortgages is accomplished through a separate vehicle, National RMBS Trust.

For further information please contact: Mr Ian R McLeanHead of Group Funding & LiquidityGroup TreasuryT 61 3 8641 3358E ian_r_mclean@national.com.au

Ms Mindy SheaManager Group FundingGroup TreasuryT 61 3 8641 2597E mindy_shea@national.com.au

Mr Randolph MorrisonSenior Manager Group FundingGroup TreasuryT 61 3 8641 3638E randolph_morrison@national.com.au

Mr Michael WhiteManager Group Funding (Securitisation)Group TreasuryT 61 3 8641 2157E michael_a_white@national.com.au

The National is an internationalfinancial services organisation that provides a comprehensive and integrated range of financialproducts and services.

128-177 3/5/05 12:33 AM Page 154

155

Directory – Issuer

QTC funds the State of Queensland's public sector borrowing requirement, capturingsignificant economies of scale and scope in the issuance, management and administration of debt. These economies, together with a AAA rating flowing from the QueenslandGovernment's full guarantee of all debt on issue, mean that investors have the highest possible investment security.

As at 31 December 2004, QTC had total borrowings of $24.7 billion and an indicative gross borrowing requirement for 2005 of $6.7 billion. In its funding role, QTC borrows funds in both domestic and international markets by issuing a variety of debt instrumentsthrough its principle funding programs, which include:

1. Domestic and Global A$ Benchmark Bonds,

2. Commercial Paper, Treasury Notes and Medium-Term Notes denominated in a range of currencies.

Credit Rating

Local Currency (A$) Long-term Short-term

Moody's Aaa P1Standard & Poor's AAA A-1+

Foreign Currency Long-term Short-term

Moody's Aaa P1Standard & Poor's AAA A-1+

For more information on QTC and its borrowing activities please visit our website:http://www.qtc.qld.gov.au

For further information please contact:

Mr Richard JacksonHead of Financial MarketsQueensland Treasury CorporationLevel 14, 61 Mary Street Brisbane QLD 4000T 61 7 3842 4789E rjackson@qtc.com.au

Queensland Treasury Corporation(QTC) was established in 1991 as the central borrowing authority and corporate treasury servicesprovider for the State of Queensland.

CFI04_QTC NEW 3/8/05 8:45 PM Page 155

156

Directory – Issuer

St.George sources the majority of its funding from the retail deposit market in Australia throughits extensive distribution network and large customer base. Nonetheless, to meet the growingneed for wholesale funding due to balance sheet growth, St.George has pursued a strategy of diversifying its funding markets since the mid 1980s. Access to various global markets hasbeen established to provide cost effective, flexible and reliable funding. Substantial effort hasbeen directed towards establishing a strong profile for St.George in the major offshoremarkets, complementing a strong domestic presence.

In these markets, we seek to broaden our investor base as much as possible, and pursue anactive marketing and communication strategy. A program of regular issues in these marketshas also been instrumental in attracting investor focus. Through the Crusade MBS program,securitisation also provides additional diversification by opening up global asset-backedmarkets to St.George’s balance sheet. Crusade has an established profile in global markets as one of Australia's most active MBS issuers.

St.George places great value on the established strong relationships we have with ourinvestors. Through the active marketing approach embodied in our funding strategy, thedevelopment of relationships with our investors has our ongoing focus. We are committed to keeping investors fully informed through continuous communication of St.George creditdevelopments. Regular investor roadshows and communication are undertaken to this end.

Our Customer Securitisation team, leveraging off St.George's extensive capital market and securitisation experience, provides tailored wholesale funding solutions to corporate and institutional customers. St.George has particular expertise in helping first-time issuersdevelop a securitisation capability. It is also able to provide support to customers with anexisting issuance structure.

St.George is the sponsor of the highly successful asset-backed commercial paper programme,Crusade CP No.1 Pty Limited. The programme is managed by the Customer Securitisationteam and is the issuing vehicle for its receivables warehousing activities.

Current Ratings:

– St.George – Standard & Poor's A/A-1, Moody's A2/P-1, Fitch A+/F1

– Crusade CP – Standard & Poor's A-1, Fitch F1

The St.George Bank Group is Australia's fifth largest bank with assets of $70.0 billion andshareholders equity of $4.7 billion. In the twelve months to September 30, 2004, the Bank successfully raised its profit to $717 million (after tax and significant items),representing an increase of 18.3% on the previous year. St.George is primarily a domestic retail bankwith a particular focus on homelending in Australia.

For further information please contact:

Mr Jeff SheehanChief Manager, Capital MarketsSt.George Bank LimitedLevel 2, 55 Market StreetSydney NSW 2000T 61 2 9320 5510F 61 2 9320 5785

Mr Michael MaloneSenior Manager, Capital MarketsSt.George Bank LimitedLevel 2, 55 Market StreetSydney NSW 2000T 61 2 9320 5683F 61 2 9320 5785

Mr Michael AuerHead of Customer SecuritisationSt.George Bank LimitedLevel 2, 55 Market StreetSydney NSW 2000T 61 2 9320 5649F 61 2 9320 5785

128-177 3/5/05 12:33 AM Page 156

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Directory – Issuer

For further information please contact:

Mr Stephen KnightDeputy Chief Executive and General Manager, TreasuryNSW Treasury CorporationLevel 22, Governor Phillip Tower1 Farrer Place, Sydney NSW 2000T 61 2 9325 9266F 61 2 9325 9333E stephenk@tcorp.nsw.gov.au

New South Wales TreasuryCorporation (TCorp) is the centralborrowing authority for the State ofNew South Wales, the largest of theAustralian States. Bonds issued byTCorp carry a AAA rating from bothMoody's and Standard & Poor's.

TCorp has outstanding borrowings of $30 billion, and an annual borrowing program of around$4-5 billion. TCorp sources roughly 60 per cent of its funding domestically, with TCorp bondsbeing the most liquid and actively traded bonds in the Australian market after CommonwealthGovernment Bonds.

TCorp sources funding from a number of offshore markets via the following programs:

(i) Global Bonds where $A denominated bonds, with coupon and maturity dates identical to TCorp's domestic bonds, are sold to a range of investors in Europe, US, and Asia.

(ii) Euro Medium Term Notes where TCorp issues to offshore investors in a range of currencies. The majority of issuance under this program in recent years has been to Japanese investors, including issuance into the Uridashi market.

(iii) Euro Commercial Paper where TCorp issues short term paper to Asian and European investors, in a range of currencies.

In addition to TCorp's role as the central financing authority for the State of NSW, TCorp is also a manager of asset and liability portfolios on behalf of clients, and provides financial risk management services to the NSW Government and its constituent businesses.

128-177 3/5/05 12:33 AM Page 157

158

Directory – Issuer

TCV was established to consolidate the state’s debt obligations and to bring a coordinatedapproach to the state’s financing needs. This is a highly successful model and consistent with the state’s commitment to sound financial management. The state’s excellent credit rating reflects low levels of net debt and achievement of sustained budget surpluses.

TCV’s high credit quality is also a function of the existence of a government guarantee. TCV’s payment obligations in relation to borrowings and derivative transactions are guaranteed by the Government of Victoria, while TCV’s loans to clients are also guaranteed.

Since its inception, TCV’s funding strategy has accommodated significant structural change.On creation, the strategy was to diversify funding sources, lengthen the maturity profile, reduce the cost of borrowing and spread debt more evenly across the yield curve. During theprivatisation phase, TCV’s balance sheet reduced from $36 billion to $17 billion as proceedswere used to retire debt, while budget surpluses changed the state’s long-term debt profile.TCV’s funding strategy evolved to accommodate a focus on maintaining sufficient domesticissuance to sustain a liquid and competitively priced TCV yield curve.

With a current balance sheet of some $16.2 billion, today TCV maintains four key fundingprograms to deliver its funding requirements. TCV’s domestic Hotstock program is thecornerstone of the Corporation’s funding strategy. TCV seeks to maintain at least five lines of Hotstocks with a minimum of $1 billion per issue. TCV supplements its Hotstocks with three other programs: a US$3 billion million Euro Medium Term Note program, a $2 billion Euro Commercial Paper Program and a $2.5 billion Australian Promissory Note program.

The Corporation targets international funding of some 10-25 per cent of total outstandings. TCV is opportunistic within this range, identifying offshore sources that satisfy its funding diversity requirements. International funding opportunities must also offer appropriate pricingbenefits to the domestic market.

TCV utilises dealer panels to facilitate its market transactions. The panel members of eachfunding program offer TCV specific competencies that complement the Corporation’s funding objectives.

For the 2004/5 financial year, TCV’s annual funding requirement has been approximately $1.7billion per annum. This requirement has been for refinancing of maturing debt rather than newmoney borrowings. Future borrowing requirements are expected to be of a similar magnitude.

TCV’s primary business activities are:– Assisting the Victorian government in

the management of the state’s balancesheet, especially in the management of financial risks.

– Assuring the liquidity of the state and itsauthorities and enterprises by ensuringthat sufficient funds at acceptable pricing are always available regardless of prevailing market conditions.

– Achieving a cost of borrowing consistentwith the state’s AAA credit rating (thestate and TCV are AAA/aaa rated by both Moody’s Investors Service andStandard & Poor’s Corporation).

– Providing the state and its authorities and enterprises with comprehensivefinancing services.

– Centralising and managing state debt and financial risk.

For further information please contact:

Mr William WhitfordManaging DirectorTreasury Corporation of VictoriaLevel 12, 1Collins StreetMelbourne VIC 3000T 61 3 9651 4800F 61 3 9651 4880

Mr Justin LoftingGeneral Manager, TreasuryTreasury Corporation of VictoriaLevel 12, 1Collins StreetMelbourne VIC 3000T 61 3 9650 7577F 61 3 9650 7557

Treasury Corporation of Victoria(TCV) is the central financingauthority of the State of Victoria.Established by an act of Parliament,TCV commenced operations on 1 January 1993. TCV providestreasury services, financing adviceand analytical capability to the state, statutory authorities andgovernment departments, businessenterprises and agencies.

128-177 3/5/05 12:33 AM Page 158

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Directory – Investor

Basis employs 15 staff and manages/advises on $400 million of investor capital.

– The flagship fund, the "Basis Aust-Rim Opportunity Fund", has delivered returns to investorsin excess of 10 per cent pa over the past 41/2 years, with an annual volatility of less than 3.0 per cent pa. The Aust-Rim Fund has an absolute return focus and employs a multi-strategy and multi-geographical approach to investments.

– The “Basis Yield Fund”, launched in December 2003, has delivered an annualised return in excess of 12 per cent p.a. – with 100 per cent positive monthly returns to investors. TheYield Fund target's to deliver “credit alpha”, by investing primarily in global structured creditinvestment opportunities.

A key philosophical underpinning of Basis's investment process is the implicit understandingthat risk can be decomposed into its constituent parts. To classify risk, Basis breaks down thecapital structure of a company or asset class, to assess potential risk and reward. In that light,fixed income or credit investments forms an important part of the investment spectrum at Basis.

The Investment Mandate is to invest "risk capital" where the manager has conviction, as part of a diversified portfolio, and does so by employing long/short trading strategies. The focus ison Relative Value and Arbitrage, utilising fundamental disciplines to identify and extract value.Moreover, the investment philosophy is aimed at identifying mispriced securities.

Value is added to the investment process by the investment team operating from a regional base(in Sydney), having 20 years regional investment experience and operating a regional strategy.

The job at hand is to protect and grow investors capital in all market conditions, to act decisivelyand employ systematic risk management disciplines.

Some of the key principles of Portfolio and Risk Management are diversification, liquidity,relative value & reasonableness. Importantly, "reasonableness" to Basis means employing a conservative & often cynical approach to the markets.

Basis Capital (Basis), a Sydney-basedAlternative Fixed Income Specialist,has a simple goal. The goal is to bothgrow and protect investor's capital – and be performance driven.

Basis Yield Fund

1000

Nov

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Dec

-03

Jan-

04Fe

b-04

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Apr-0

4M

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101010201030104010501060107010801090110011101120113011401150

Alpha

Basis Aust-Rim Opportunity Fund

900950

1000105011001150120012501300135014001450150015501600

MSCI AUDAust Govt Bond IndexBasis Aust-Rim

Jan-

01Ap

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Performance Basis Aust-Rim Basis Yield Statistics Opportunity Fund

Fund

Return Since 54.63% 15.59%Inception

Annualised Return +10.17% +13.22%

Annualised Volatility +2.71% +0.77%

Sharpe Ratio +1.91 +10.73%(RF=5.00%)

% Positive Months 90.7% 100.0%

For further information please contact:

Mr Rick BernieDirector, Funds ManagementLevel 17, 309 Kent StreetSydney NSW 2000T 61 2 8234 5500E rbernie@basiscap.com.au

Mr Steve HowellJoint Managing Director & Chief Investment Officer

128-177 3/5/05 12:37 AM Page 160

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Directory – Investor

The focus on our three core business lines – Challenger Wealth Management, Challenger Life and Challenger Wholesale Finance – enables us to leverage our capabilities in financialasset and liability management as well as our depth of knowledge of financial markets, anddeliver a broad spectrum of financial products and services.

Our passion at Challenger is to find better ways for Australians to achieve their financial goals. We want to help people build and manage their wealth, to own their own homes, and secure their retirement. We are already helping many Australians do just that with over 70,000 Australians having more than $5.9 billion of their wealth invested in a range of investment products issued by Challenger.

Our investment range includes the Challenger High Yield Fund, a high-yielding incomeinvestment that aims to outperform traditional fixed interest markets, while achieving lower volatility of returns.

The Challenger High Yield Fund invests in diversified portfolio of primarily hybrid debt/equitysecurities and fixed interest investments, including bank bills, bonds, commercial paper,mortgages, loans, convertible shares or notes, mortgage-backed and asset-backed paper,floating rate notes and reset securities.

The portfolio is diversified over a range of industries, security types and issuer ratings. The portfolio construction process aims to create a diversified portfolio which is capable of achieving the Fund's objectives, including out performing the UBS Warburg Composite Bond Index over 12 month rolling periods.

The fund was one of the early entrants into the hybrid market and is one of the largest in the market. Challenger has developed an integrated investment process that has enabled it to grow whilst performing solidly.

The Fund is designed for investors who are seeking to diversify the income-producing segmentof their investment portfolio and are willing to accept some additional risks iin return for thepotential for higher performance. The Fund is a medium to long-term investment, to be held for at least three years.

Challenger Financial Services Grouphas begun to emerge as a mainstreamplayer in Australian financial services– broadening and sharpening ourfocus, making acquisitions, forgingalliances and exiting non-corebusinesses.

For further information please contact:

Challenger Financial Services GroupLevel 41, Aurora Place88 Phillip StreetSydney NSW 2000T 61 2 9994 7000

Institutional SalesMatt GadenT 61 2 9994 7126E mgaden@challenger.com.au

Patricia NewbyT 61 3 8616 1811E pnewby@challenger.com.au

Retail DistributionDavid AsplinT 61 2 9994 7119E dasplin@challenger.com.au

128-177 3/5/05 12:37 AM Page 161

A Two Minute Guide – 30 Jun 2004

Credit Rating Long Term Short Term

Standard & Poor’s Corporation AA- (stable outlook) A-1+

Moody’s Investors Service, Inc. Aa3 (stable outlook) P-1

Fitch AA (stable outlook) F1+

Ratings

The Bank is one of Australia’s largest financial services organisations with leading market shares in banking, funds management and life insurance. Operations cover both retail and wholesale financial services.

Retail services include savings and cheque accounts, demand and term deposits, credit card services, personal, business and housing loans as well as share broking, superannuation, investment and life insurance products.

Wholesale services include corporate lending, project finance, securities underwriting, payments and transaction services, financial markets activities and funds management.

❖ 2nd largest Australian bank (by market ❖ Australia’s largest fund manager with $110 billion market capitalisation. in funds under administration.

❖ 4th largest Australian company by market ❖ Australia’s largest credit card issuer with capitalisation). 2.9 million accounts.

❖ Retail focused – in Australia and New Zealand. ❖ Largest financial services distribution network

in Australia (over 135,000 points of access). ❖ Largest market share of Australian retail deposits

(approximately 23.6%) and Australian home loan ❖ Most recognised financial services brand in outstandings (approximately 19.3%). Australia.

Full Year Ended

2004 2003 2002 2001

Key Points about the Commonwealth Bank

What the Commonwealth Bank Does

Capital Ad equacy

Total 10.3% 9.7% 9.8% 9.2%

Tier 1 7.4% 7.0% 6.8% 6.5%

Tier 2 3.9% 4.2% 4.3% 4.2%

Adjusted Common Equity (ACE) 4.8% n/a n/a n/a

Profitability

Return on Average Shareholders’ 13.2% 13.3% 13.1% 12.0% Equity – Cash basis

Net Interest Margin 2.5% 2.7% 2.8% 2.8%

Other banking Income/Total Banking Income 34.5% 34.3% 35.1% 34.7%

Asset Quality

Net Charge to Profit and Loss/ 0.2% 0.2% 0.3% 0.3% Avg gross loans, adv & oth receivables

Total Provisions for Impairment/ 451.8% 239.4% 183.9% 251.6% Gross Impaired Assets (Net of Interest Reserved)

Net Impaired Assets/Risk 0.1% 0.3% 0.4% 0.3%

Key Ratios

Weighted Assets

General Provisions/Risk 0.8% 0.9% 1.0% 1.0% Weighted Assets

Productivity & Efficiency

Banking:

Underlying Expense to income 50.8% 52.0% n/a n/a

Funds Management:

Underlying Expenses to average funds under 0.8% 0.8% n/a n/a Management

Insurance:

Underlying Expense to Average Inforce Premiums 46.1% 50.4% n/a n/a

Underlying Staff Expense/Total Operating Income 25.3% 26.5% 26.4% 26.8%

Total Operating Income/Full Time 278,047 261,292 243,469 235,558 (equivalent) Employee (A$)

Euro Medium Term Note Programme Principal Debt Funding Programmes

Eurocommercial Paper and Certificates of Deposit Programme US Commercial Paper Programme COMMETS Programme

162

Full Year Ended

2004 2003 2002 2001

Balance Sheet

Total Assets 305,995 265,110 249,648 230,411

Lending Assets 205,945 175,074 161,216 149,776

Deposits and Other Public Borrowings 163,177 140,974 132,800 117,355

Shareholders’ Equity Attributable to 22,405 20,024 19,030 18,393 Members of the Chief Entity

Profit and Loss Account Net Interest Income 5,410 5,026 4,710 4,474

Other Income 5,081 4,373 4,358 4,350

Operating Expenses 5,500 5,312 5,201 5,170

Charge for Bad and Doubtful Debts 276 305 449 385

Initiatives including Which new Bank 749 239 0 0

Total Expenses 6,525 5,856 5,650 5,555

Net Profit before Goodwill Amortisation, AV Uplift and Income Tax 3,966 3,543 3,418 3,269

Corporate Tax Expense (1,059) (1,016) (952) (899)

Policyholder Tax Expense (203) 58 36 94

Net Profit after Income Tax 2,704 2,585 2,502 2,276

Outside Equity Interests (9) (6) (1) (14)

Operating Profit after Income Tax and before 2,695 2,579 2,501 2,262 Goodwill Amortisation, Abnormal items a

nd AV Uplift/Reduction

Goodwill Amortisation (324) (322) (323) (338)

Appraisa l Value Uplift 201 (245) 477 474

Net Profit Attributable to Members 2,572 2,012 2,655 2,398 of the Bank

w

F

Credit Portfolio - Industry Profile AS AT 30 JUN 2004

Loans, Advances and Other Receivables

Real Estate - Mortgage 63.3%

Other Commercial and Industrial 16.6%

Personal 5.5%

Financial, Investment and Insurance 5.0%

Agriculture, Forestry and Fishing 3.7%

Lease Financing 2.7%

Real Estate - Construction 2.5%

Government and Public Authorities 0.7%

Summary Financials A$ MILLION

Asset Distribu on

Australia 252,652

New Zealand 35,059

Other countries 18,284

Asset Distribution AS AT 30 JUN 2004 A$ MILLION

Disclaimer

Nothing in this document constitutes, or is intended to constitute, an offer for subscription or purchase, or an invitation to subscribe for or buy any securities of Commonwealth Bank of Australia (ACN 123 123 124) or any of its subsidiaries. This document is not intended to constitute a recommendation or advice.

ww.commbank.com.au

unding Contacts

ist

ti

Sydney John te Wechel Philip Christie Jeanmaree Furtado Steven Furlong - Ph 612 9378 3100 - Ph 612 9378 3256 - Ph 612 9378 3174 - Ph 612 9378 2325 - Fax 612 9231 4214 - Fax 612 9231 4214 - Fax 612 9231 4214 - Fax 612 9231 4214 - john.tewechel@cba.com.au - philip.chr ie@cba.com.au - jeanmaree.furtado@cba.com.au - steven.furlong@cba.com.au

London New York Hong Kong Jacques Lumb Lisa Balfe Godwin Ip - Ph 44 207 710 3910 - Ph 1 212 336 7730 - Ph 852 2844 7532 - Fax 44 207 710 3911 - Fax 1 212 336 7758 - Fax 852 2845 9194 - lumbj@cba.com.au - balfel@cba.com.au - ipgo@cba.com.au

E-Mail: - groupfunding@cba.com.au

163

164

Directory – Investor

As a market leader in Fixed Interest, Macquarie Funds Management offers choice and flexibilityacross the full spectrum of Fixed Interest investing. Our enviable reputation is built upon ourtotal approach to understanding and managing risk.

Our team, which has built a reputation for excellence, is a highly and broadly experienced groupof 24 investment professionals. With an average of 12 years investment experience anddiverse ranging backgrounds the team has specialist expertise across all fixed interest sectors.

Each member successfully combines academic excellence and real-world financial marketinsights creating a team recognised for its thought leadership and innovative approaches to fixed interest management. This excellence has been recognised with numerous awardsfrom leading research houses.

The core aim of our business is to research and deliver innovative investment solutions across the full spectrum of fixed interest investing.

The Full Spectrum of Fixed Interest Investing at Macquarie

*As at 31 December 2004. This information is general advice only and has been prepared without taking intoaccount any investor's objectives, financial situation or needs, which should be considered, together with therelevant offer document before investing. A copy of the relevant offer document can be obtained from anyMacquarie office. Macquarie Investment Management Limited ABN 66 002 867 003 (MIML) is the Issuer.

Macquarie Funds Management, part of the Macquarie Group, is one of Australia's leading fund managerswith a domestic and internationalreach that extends across the majorinvestment markets of the world. We manage over $29 billion* in Fixed Interest and Currencyinvestment solutions for a range ofsuperannuation funds, intermediariesand institutional clients.

For further information please contact:

Ms Jill PlebanHead of Product Management Fixed Interest & Currency Macquarie Funds ManagementLevel 22, 20 Bond Street SydneyT 61 2 8232 4264F 61 2 8232 4732E jill.pleban@macquarie.com

True Index

Enhanced

Active

Alpha Transfer

Across a range of asset classes

Cash

Australian Fixed Interest

Global Fixed Interest

Credit

Currency

128-177 3/5/05 12:37 AM Page 164

With over A$500 bn in globalassets under management,ING Investment Management(INGIM) is one of the majorbusinesses of ING Group. Itemploys over 2,300 staff in29 countries across threebroad geographic regions:Europe, the Americas and AsiaPacific. In Australia, INGIM isone of the ten largest assetmanagers, managing overA$32bn as at December 2004.

INGIM's clients includesuperannuation funds,corporate institutions,government authorities,charities and other financialinstitutions seeking domesticor international professionalinvestment managementservices.

ING Investment Management is a global debt market leader managing overUS$275 billion across a selection of fixed income strategies for a broadrange of institutional clients.

As one of the premier global fixed income managers, ING Investment Managementprovides its clients with a comprehensive array of investment strategies which canbe used as the basis for a tailored investment solution.

Driven by a success-focused investment culture that is built around deliveringdisciplined, risk controlled and sustainable performance, ING InvestmentManagement's Fixed Income team is focused on identifying information advantages,and exploiting mispriced investment opportunities to generate alpha.

ING Investment Management in Australia offers a full spectrum of fixed incomestrategies including investment grade credit, high yield, sovereign and structuredinvestment in both the domestic and international markets.

ING Investment Management seeks to capitalise on its investment expertise by:

using multiple non-correlated investment strategies;

focusing on risk management and control; and

delivering innovative portfolio construction techniques.

Combining rigorous research with integrated risk management, our team ofinvestment professionals are experts at constructing and delivering progressive andtailored solutions.

Add to this ING Investment Management's commitment to providing first class client servicing, and investors gain the benefits of dealing with an institutional assetmanagement firm in a unique position to offer access to investment solutions on atruly global scale.

For further information on ING Investment Management's institutional assetmanagement capabilities please contact:

Daphne van der Oord Jason BarkerDirector, Business Development Director, Consultant Relations(02) 9234 7496 (02) 9234 8316

daphne.vanderoord@ing.com.au jason.barker@ing.com.au

www.ingim.com.au

ING Investment Management F ixed Income

Global institutionalasset management

This information is provided by ING Investment Management ABN 23 003 731 959 AFS Licence233793 and is based on current information as at the date of publication. ING InvestmentManagement does not guarantee the repayment of capital or investment performance.

INGIM Fixed Income 2.qxd 8/02/2005 11:31 AM Page 1

Directory – Investor

QIC Global Fixed InterestThe QIC Global Fixed Interest team, led by Susan Buckley, comprises fourteen specialist and experienced investment professionals with a strong track record of adding value to clientportfolios. Over $8 billion of Australian sourced, wholesale funds is managed across a diverserange of strategies. The team, structured around interest rate and credit research, apply a focused, independent research process which is reflected through a unique, disciplined‘Scorecard’ approach.

QIC Global Fixed Interest’s investment philosophy is predicated on the belief that fundamentalfactors drive fixed interest markets. However, over short time frames other influences causemarkets to deviate from a fundamental ‘fair value’. These transitory influences can, and have,played out over reasonable time frames. However, we believe that over longer periods marketswill still revert to being primarily driven by fundamental factors. When short run factors drivemarkets away from fundamental fair value the opportunity exists to take scaled, active positionswithin fixed interest portfolios.

The final tenet of our investment philosophy is to construct diversified portfolios with strategiesthat capitalise on the broadest possible interest rate and credit market opportunity set. As opportunities and liquidity within the Australian bond market are limited, we believe that by managing fixed interest as one global investment class the opportunities to add value can be expanded. While QIC Global Fixed Interest offers a range of fixed interest products, our preferred benchmark is a combination of the Lehman Global Aggregate (hedged in A$) and UBSA Composite Bond Index. QIC’s Diversified Fixed Interest product is managed to such a benchmark and combines a blend of investment styles between in-house interest rate and credit management together with the world’s leading global credit managers. We areseeking to add meaningful active returns from the broadest possible set of interest rate andcredit sources.

QIC BackgroundWhen QIC was established in 1991 as a Queensland government owned corporation, theBoard and management identified our mission as providing efficient, high quality investmentmanagement services to clients. Consistent with our single focus on investment managementservices, QIC management has:

– built a robust and flexible investment platform that can adapt to our clients’ needs and changing markets

– implemented a disciplined investment process across all asset classes, and – developed and retained an experienced investment team capable of employing

the necessary tools to deliver consistent returns.

QIC provides clients with a complete investment offering. As well as managing fixed interestassets our services include the active management of equities and property, absolute returnstrategies and currency, manager selection and configuration, asset consulting, strategic assetallocation and strategic currency allocation policy formulation.

QIC would welcome the opportunity to discuss its services with prospective wholesale clientsin the rapidly changing world of global fixed interest.

For further information please contact:

Mr Scott CornfootBusiness Relationship ManagerGlobal Fixed InterestQueensland Investment Corporation6th Floor, Central Plaza Two, 66 Eagle StreetBrisbane QLD 4000T 61 7 3360 3942F 61 7 3360 3971

Mr Tony McFadyenHead of Client ServicesQueensland Investment CorporationLevel 12, 56 Pitt StreetSydney NSW 2000T 61 2 9347 3300F 61 2 9347 3399

QIC is one of the largest wholesaleinvestment managers in Australia with over $38 billion in funds undermanagement from public and privatesector clients. QIC has consistentlyachieved above industry-averagereturns over the last ten years and is active as both a specialist managerand a unique provider of controlledmulti-sector and multi-managerportfolios.

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Schroders is one of the largest and most internationally diverse investment managers, with over 230 investment professionals, providing investment management, research and marketing services from its 34 offices located in 26 countries.

Schroders has over 60 fixed interest investment professionals working across the group. In Australia, investment management has been a core business since 1961. As at 31December 2004, SIMAL managed $10.9 billion across a broad range of asset classes.

Schroders' approach to managing Fixed interest funds is based on the principle that risk and return are of equal importance. This means that understanding risk and how to allocate it across the portfolio is crucial to successful investment management over the long term.While Schroders' research also seeks to identity assets that are mis-priced relative to medium term fundamentals, our preference is to find and hold assets that deliver consistentreturns over time.

We believe that asset classes and securities within them suffer from varying degrees of inefficiency. These inefficiencies are driven by, among other things, investor behaviour –primarily through extrapolation of recent trends but also including the overuse of inappropriatebenchmarks, and a lack of or misinterpretation of information.

Schroders believes that these inefficiencies can be exploited through:

– Consideration of the full spectrum of investment opportunities within the allowable universe - particularly non-benchmark/non-traditional assets;

– Strategically, and where appropriate tactically, allocating to those asset classes offering better risk adjusted returns;

– Rigorous research at the asset class and security level to identify opportunities;

– An emphasis on the probability of outcomes (particularly adverse) rather than just concentrating on the most likely outcome;

– An emphasis on understanding and managing risk.

The Schroder Fixed Income Fund, is the flagship of Schroders defensive asset class offerings.It is the next generation of fixed interest vehicles designed to anchor client portfolios with a higher return sourced from a wide spectrum of income producing asset classes. The fund is designed to be the core part of the defensive component of a clients portfolio and can beused in combination with higher risk assets such as listed property trusts, hybrid securities and mortgage trusts.

The Schroder Fixed Income Fund gives investors access to a selected range of global anddomestic credit and interest rate markets in an actively managed package. The focus of the fund is on using these opportunities to deliver a high return to clients with low volatility.

Schroders has over 60 fixed incomeinvestment professionals managingover $53 billion in key financialcentres worldwide. The benefit of ourbreadth of experience is in developinginnovative fixed income solutions.

Schroders Investment Management AustraliaLevel 20123 Pitt StreetSydney NSW 2000

For further information on how Schroders can complement your existing fixed interest line up:

Institutional Investors:

Mr Ross Ynfante-JewellBusiness Development ManagerT 61 2 9210 9470T 0414 300 148E ross.ynfante-jewell@schroders.com

Retail Distribution:

Adrian WhittinghamHead of Adviser SalesT 61 2 9210 9258T 0412 050 457E adrian.whittingham@schroders.com

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DirectoryIntermediaries

Professional Services

A leading International Financial Service ProviderDeutsche Bank is a leading internationalfinancial service provider. The bank servescustomers in 74 countries worldwide and is a leading Bank in the Eurozone, and a strong position in the Americas and throughout the Asia-Pacific region.

Deutsche Bank delivers global capability toits operations in Australia and New Zealand,which is supported by a staff of over 1000, a commitment to this market unrivalled bypeers. Both operations are market leaders in many business areas such as GlobalMarkets, Corporate Finance, InvestmentBanking and Equities. Deutsche Bank is ableto rapidly assess the right market for ourclients and provide innovative solutions,advice, and capital raising both public andprivate via debt, equity or hybrid markets in minimal time.

Deutsche also leads the market in securitised products.

A Recognised Leader in Credit Structuringand Risk Management SolutionsDeutsche Bank was one of the first providersof credit derivative solutions to clients inAustralia and continues to be at the forefrontof product development. Over the last 6 years, Deutsche Bank Sydney has built a full service dedicated credit trading desk to provide structured investment/hedgingsolutions and liquidity to clients acrossproducts, risk profiles and time horizons.

Deutsche Bank is a recognised leader in allaspects of credit products from credit swaps,to risk transformation tools, structured creditinvestments and relative value opportunities.Investors are able to access customisedstructured products such as credit-linkednotes, repackaged notes and syntheticcollateralised debt obligations.

The Sydney Credit Desk has globalresponsibility for all Australian and NewZealand credit risk trading and maintainsstrong relationships with other offices toensure clients have an unparalleled access to global products. Combined with a clientfocussed business model, these factors

have enabled Deutsche Bank to clearlyposition itself as the prominent creditstructuring and risk management house in Australia and New Zealand.

For more information, please contact:

Capital raisingGrant BushDirector, Head of Debt Capital MarketsAustralia and New ZealandT 61 2 9258 2657E grant.bush@db.com

Glenn McDowellDirector, Head of SecuritisationAustralia and New ZealandT 61 2 9258 1437E glenn.mcdowell@db.com

TradingKevin KosovichManaging DirectorHead of Global Integrated Credit Australia and New ZealandT 61 2 9258 3611E Kevin.kosovich@db.com

SalesWayne HoweManaging DirectorHead of Institutional Client GroupAustralia and New ZealandT 61 2 9258 2322E wayne.howe@db.com

Honor McFadyenDirector, Fixed Income SalesAustralia and New ZealandT 61 2 9258 1444E honor.mcfadyen@db.com

Matthew YenckenDirector, Fixed Income SalesAustralia and New ZealandT 61 2 9258 1444E matthew.yencken@db.com

Philip NobleDirector, Global Finance SalesAustralia and New ZealandT 61 2 9251 9688E philip.noble@db.com

Andrew BaumeDirector, Global Relative Value GroupAustralia and New ZealandT 61 2 9258 2322E andrew.baume@db.com

Grange SecuritiesLevel 33Australia Square264 George StreetSydney NSW 2000

Grange provides premium investmentbanking services to private and institutionalinvestors, corporate clients and governmentauthorities throughout Australia and the Asia-Pacific region.

As an independently owned Australian basedinvestment banking business, we providequality, impartial advice and services acrossour business offerings.

Established in 1995, the depth of ourexperience combined with our proactiveapproach has seen Grange successfully growinto a vibrant financial services business.

Our team has a wealth of knowledge andspecialist investment banking expertise,allowing us to provide premium services toissuers, borrowers and investors across theAustralian Capital Markets spectrum,including:

– Interest Rate Markets

– Equities Markets

– Hybrid Securities

– Property

– Structured Finance

– Corporate Advisory

– Research

– Economics

– Private Investor Services

– Funds Management

Interest Rate and Hybrid SecuritiesOperating from offices in Sydney, Melbourne,Brisbane, and Perth, the organisation has a substantial team dedicated to the fixedincome and hybrid securities sectors. The Grange team has an unrivalled depth of experience providing quality, customerfocused investment advisory services across a wide ranging client base. This core capability underpins our competitiveadvantage with respect to new issuedistribution.

Grange's distribution capability is unlike any other market participant. We have builtan investor base of over 10,000 clients byfocussing on the market's growing appetitefor higher yielding securities.

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Structured FinanceGrange specialises in the origination andplacement of non-standard debt and equityfinanced transactions.

The Grange methodology is built on adetailed understanding of cash flows, theassociated risks of an asset, liability ortransaction, and their interaction with therelevant market and legislative fundamentals.

This methodology involves managing andallocating risks and returns betweenborrowers and investors in order to deliverworkable solutions to complex financialissues.

Subordinated and Mezzanine DebtWe are a leading underwriter, arranger andsecondary market trader of subordinated andmezzanine debt for banks, building societies,credit unions and other ADI's in Australia.Grange was a pioneer in this market andremains pre-eminent today, regularlyunderwriting new issues and providing anactive secondary market in these securities.

Structured CreditThe Grange team has played a dominant rolein the emerging Structured Credit Marketsand Collateralised Debt Obligation sector.We distributed the first broadly distributed A$ CDO issue in December 2002 and in2003 we co-managed the first rated retailCDO issue. Grange has led or co-managedover 20 independent retail and wholesaleCDO transactions, underwriting most ofthese issues. Grange has taken a leadingrole in this market.

Research and Quantitative Skills Our Interest Rate Markets Research teamspecialises in the detailed credit analysis of issuers of hybrid securities, senior debt,subordinated debt and other fixed interestsecurities. Grange utilises sophisticatedquantitative and research capabilities inadvising both investors in and issuers of fixedinterest and hybrid securities. A componentof our quantitative data is published daily inthe Australian Financial Review.

Market Presence Complimenting our origination anddistribution capabilities, Grange is an activeparticipant in the secondary market for debtand ASX listed hybrid securities. Grangeconsistently ranks in the top ten in turnover in these markets.

For more information, please contact:

Michael CloutT 61 2 8259 4800E mclout@grangesecurities.com.au

Moray VincentT 61 2 8259 4800mvincent@grangesecurities.com.au

JPMorganLevel 32, Grosvenor Place225 George StreetSydney NSW 2000T 61 2 9250 4111

JPMorgan is the investment banking arm of JPMorgan Chase & Co., an internationalfinancial services powerhouse. In Australia it is one of the few fully integrated investmentbanks with leadership positions across M&A,debt capital markets, derivatives, equities,equity capital markets and treasury andsecurities services.

JPMorgan is at the forefront of developinglandmark debt and structured credit solutionsfor Australian issuers, in both domestic andinternational markets.

For more information, please contact:

Robert PriestleyManaging DirectorSenior Country OfficerT 61 2 9220 7975E robert.priestley@jpmorgan.com

Natalie VanstoneVice PresidentHead of Debt Capital MarketsT 61 2 9220 3172E natalie.vanstone@jpmorgan.com

Peter McInnesDirectorHead of Structured Capital MarketsT 61 2 9220 7853E peter.s.mcinnes@jpmorgan.com

Russell TaylorVice PresidentHead of Structured Credit and Rates MarketsT 61 2 9220 3234E russell.b.taylor@jpmorgan.com

Sonia FaveroVice PresidentStructured Credit and Rates MarketsT 61 2 9220 3199E sonia.favero@jpmorgan.com

Andrew SkinnerVice PresidentStructured Credit and Rates MarketsT 61 2 9220 3198E andrew.skinner@jpmorgan.com

MBIALevel 29, Chifley Tower2 Chifley SquareSydney NSW 2000

MBIA Inc., (NYSE: MBI) through itssubsidiaries, is a leading financial guarantorand provider of specialised financial services.MBIA’s innovative and cost-effectiveproducts and services meet the creditenhancement, financial and investment needs of its public and private sector clients,domestically and internationally. MBIA Inc.’sprincipal operating subsidiary, MBIAInsurance Corporation, has a financialstrength rating of Triple-A from Moody’sInvestors Service, Standard & Poor’s RatingsServices, Fitch Ratings, and Rating andInvestment Information, Inc. MBIA has officesin London, Madrid, Milan, New York, Paris,Singapore, Sydney and Tokyo.

For more information, please visit us at:www.mbia.com

Or contact:

Graham MetcalfManaging Director, Asia-Pacific Rim RegionT 2 9375 2117E graham.metcalf@mbia.com

Richard LangbergDirector, Asia-Pacific Rim RegionT 2 9375 2198E richard.langberg@mbia.com

Morgan StanleyLevel 38Chifley Tower2 Chifley SquareSydney NSW 2000T 61 2 9770 1111

Morgan Stanley is a global financial servicesfirm listed on the New York Stock Exchange(NYSE: MWD) and a market leader insecurities, asset management and creditservices. With more than 700 offices in 28countries, Morgan Stanley connects people,ideas and capital to help clients achieve theirfinancial aspirations.

Morgan Stanley has had a presence in Asia-Pacific for over 30 years. With nearly 1,300employees in the regional headquarters in Hong Kong, as well as offices in Beijing,Shanghai, Taipei, Seoul, Singapore, Bangkok,Mumbai, Sydney and Melbourne, the Firmprovides its clients with access to the fullscope of Morgan Stanley services across the Region.

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Primary businesses include corporatefinance, mergers and acquisitions advisory,direct investment, equities and fixed incomeresearch as well as sales and trading, foreignexchange and commodities, private wealthmanagement and investment management.

Morgan Stanley in Australia is a full-serviceoperation with offices in Sydney andMelbourne, providing:

– Investment banking - corporate finance,M&A advisory, capital markets

– Sales and Trading - in equity, fixed incomeand derivative products

– Research - providing coverage of the localtelecommunications, financial institutions,media, retail and natural resourcessectors

– Investment Management

For more information, please contact:

Linda MeadExecutive Director, Fixed IncomeT 61 2 9770 1192

Dominic McGrathExecutive Director, Fixed IncomeT 61 2 9770 1140

National Australia BankMelbourne500 Bourke StreetMelbourne VIC 3000T 61 3 8641 4052

Sydney255 George StreetSydney NSW 2000T 61 2 9237 1765

National Australia Bank (NAB) is Australia'slargest listed financial institution company*and one of the world's top 40 financialservices companies**. With total assets ofmore than $411 billion operating across 10countries, NAB delivers financial solutions toover 8 million banking clients and 2.3 millionwealth management customers.

The Group provides an extensive range offunding, risk management and investmentsolutions to its Institutional, Corporate,Business, Private and Retail clients and is backed by a strong balance sheet with a AA- Standard & Poor’s credit rating.

NAB has had another successful year in thecapital markets during 2004 bringing 21 bonddeals to the Australian market, maintaining its key position in corporate bond origination

and winner of insto's 2004 Vanilla BondHouse of the Year#.

NAB has been actively involved in bringingKangaroo issuers from North America, Asia and Europe as foreign borrowers havetaken advantage of the wide basis swap.Over the past year, NAB completed severalsecuritisation transactions funded both in the public term market and in the commercialpaper market through bank sponsoredconduits. NAB has also continued to maintaina leading position as an arranger ofsyndicated loans in Australasia.

* by market capitalisation, ASX

** by revenue Fortune magazine, July 2004

# insto's 6th Annual Distinction Awards, December 2004

For more information, please contact:

Malcolm ThompsonHead of Insitutional Sales, AustraliaT 61 2 9237 1561E malcolm_thompson@national.com.au

Boyd WintonGlobal Head of Capital MarketsT 61 3 9277 3360E boyd_winton@national.com.au

Mark GarrickHead of Primary Markets, AustraliaT 61 2 9237 1558E mark_c_garrick@national.com.au

NomuraLevel 32Colonial Centre52 Martin PlaceSydney NSW 2000T 61 2 9321 3500

Nomura is Japan's largest securities firm andmaintains a strong presence in all the majorfinancial centres around the globe. Nomura'sbusiness activities include investmentconsultation services for retail investors,securities brokerage services, securitiesunderwriting for governments andcorporations, merger and acquisition andfinancial advisory services, merchant bankingand asset management for investment trustsand pension funds.

For more than two decades in AustraliaNomura has consistently been a leader inproviding cross border financing for a widerange of Government, bank and corporateissuers. These offshore financing solutionsare predominantly focused on the G3currencies. However, for the last ten yearsNomura has also been one of the largestarrangers of Australian dollar bond issues.

Nomura is also a leading house in terms of providing Australian and New Zealandinvestors with access to offshore cash bondproduct across the credit spectrum.

Nomura Australia also has a structuredproducts team that can help tailor credit,interest rate and index derivative solutions to suit our clients' specific needs.

For more information, please contact:

Fixed Income SalesJames HayesHead of Fixed Income Sales, AustraliaT 61 2 9321 3704E james.hayes@au.nomura.com

Leo D'AndretiDirector, Structured Product Sales, AustraliaT 61 2 9321 3703E leo.dandreti@au.nomura.com

Gavan LynnAssociate Director, Structured Product Sales, Australia T 61 2 9321 3707E gavan.lynn@au.nomura.com

David RockliffExecutive, Fixed Income Sales, Australia T 61 2 9321 3701E david.rockliff@au.nomura.com

Debt Capital MarketsJames HoustoneHead of Debt Capital Markets, Australia T 61 2 9321 3803E james.houstone@au.nomura.com

Gerard PerrignonDirector, Debt Capital Markets, Australia T 61 2 9321 3801E gerard.perrignon@au.nomura.com

Fiona HongHead of Structured Finance, Australia T 61 2 9321 3821E fiona.hong@au.nomura.com

The Royal Bank of ScotlandAustralia Square Tower264-278 George StreetSydney NSW 2000T 61 2 9004 2100

The Royal Bank of Scotland Group (RBS),founded in 1727, is the second largestfinancial services group in Europe by marketcapitalisation and the sixth largest in theworld. It is a broadly based financial servicesgroup with operations spanning retailbanking, corporate and commercial banking,financial markets activities, wealthmanagement and insurance.

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With an AA Credit Rating, RBS group hasnearly 30 million customers worldwide andtotal assets as of June 2004 of £485 billion.Since 2000, the RBS group has made 21 acquisitions including the £21 billionacquisition of NatWest and the $10.5 billionacquisition of Charter One in the US. RBShas delivered double digit income growthevery year for the last 5 years.

Following the Australian branch statusaccreditation in 2003, the establishment of Corporate Banking and Financial Markets(“CBFM”) marked an important stage in thedevelopment of the Group's activities inAustralia. Capitalising on the very successfulproject finance business that was establishedin 1999, RBS has broadened our wholesalefranchise to manage, advise and service aselect group of corporate and institutionalclients across a broad range of industries,providing balance sheet support andintelligent debt financing solutions.

Our 'relationship banking' strategy provides for a coordinated, tailored andsolution-based delivery to the client via a dedicated Relationship Management team. Our strategy for growth focuses on developing strong relationships withcorporate & institutional clients who willbenefit most from the balance sheetstrength, product capabilities, geographicfocus and skills set that RBS has to offer.

For more information, please visit us at:www.rbs.co.uk

Or Contact:

Stephen WilliamsManaging DirectorT 61 2 9004 2100E stephen.williams@rbos.com

Mark LangsworthHead of Capital Markets OriginationT 61 2 9004 2117E mark.langsworth@rbos.com

Andrew ChickHead of Structured Capital MarketsT 61 2 9004 2113E andrew.chick@rbos.com

John CumminsHead of Capital Market Sales and DerivativesT 61 2 9004 2181E john.cummins@rbos.com

SG Corporate & Investment Banking (SG CIB)Level 21400 George StreetSydney NSW 2000T 61 2 9210 8000

SG Corporate & Investment Banking, a branch of the Société Générale Group,provides corporations and investors withfinancial solutions. Established in 1981, it offers a broad range of corporate &investment banking services including project finance and advisory, financialmarkets and commodities hedging,structured finance and securitisation, asset based finance, commodities and trade finance, mining finance, syndicatedfinance and corporate lending.

For more information, please visit us at:www.sgcib.com

Or Contact:

Corey WittenbergDirector/Head of Institutional & StructuredCredit SalesT 61 2 9233 4422E corey.wittenberg@sgcib.com

Phil CoatesDirector/Head of Credit TradingT 61 2 9233 1159E phil.coates@sgcib.com

Jim FingletonDirector, Structured Credit SolutionsT 61 2 9233 1159E jim.fingleton@sgcib.com

TD SecuritiesLevel 249 Castlereagh StreetSydney NSW 2000T 61 2 9619 8888

TD Securities works with clients around the world, focusing selectively andstrategically on markets from offices in key financial centres through NorthAmerica, Europe and Asia.

TD Securities provides a wide range ofcapital markets products and services toGovernment, Corporate and Institutionalclients across the globe.

In Asia, TD Securities offers a full range of Corporate Banking, Debt Capital Markets, Fixed Income, Foreign Exchangeand Structured Equity, Rate and CreditDerivative Product.

For more information, please contact:

Chris PashleyManaging Director, Capital Market SalesT 61 2 9619 8866E chris.pashley@tdsecurities.com

Jamie SpenceVice President & DirectorCredit & Structured Credit ProductCapital Market SalesT 61 2 9619 8866E jamie.spence@tdsecurities.com

Michael HallVice President & Director, Capital Market SalesT 61 2 9619 8866E michael.hall@tdsecurities.com

Anthony EverettVice President, Capital Market SalesT 61 2 9619 8866E anthony.everett@tdsecurities.com

Nick HowellVice President & Director, Debt Capital MarketsT 61 2 9619 8868E nick.howell@tdsecurities.com

Stephen KoukoulasChief Strategist, Asia-PacificT 61 2 9619 8846E stephen.koukoulas@tdsecurities.com

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UBS AG Australia BranchLevel 25 Governor Phillip Tower1 Farrer PlaceSydney NSW 2000T 61 2 9324 2000

UBS is one of the world's leading financialfirms. It is the world's largest wealth manager,a premier investment banking and securitiesfirm, and one of the largest global assetmanagers. Combining financial strength with a focus on innovation and a culture thatembraces change. UBS employs more than66,000 people, and has operations in over 50 countries.

UBS highlights include:

– Employs more than 1000 staff inAustralasia

– Judged by industry polls as the AustralianInvestment Bank of the Year for each ofthe last four years

– The leading ASX stockbroker, by marketshare, for the last five years

– Has led 14 of the 20 largest equityofferings in Australia over the last 5 years

– UBS was independently ranked No 1 in 2004 for equity and equity-linkedissuance, IPO's, M&A (both completedand announced transactions) and buy-backs

– Wealth Management has in excessof $5 billion dollars of assets undermanagement for private investors

– Our retail network has access to high networth clients, middle market retail and the Australian financial planning network

– Global Asset Management is a leadingAustralian funds management firm with$24 billion assets under management

– UBS has raised more hybrid capital for itsclients than any other Investment Bank

– The UBS Hybrid team is at the forefront of innovation by combining the strength of the leading investment banking, equitycapital markets and debt capital marketsteams.

For more information, please contact:

Simon MaidmentManaging DirectorHead of Fixed Income Rates and CurrenciesT 61 2 9324 3948E simon.maidment@ubs.com

Nicholas RossManaging DirectorHead of Debt Capital MarketsT 61 2 9324 3943E nicholas.ross@ubs.com

Steve HawkinsManaging DirectorHead of Hybrid CapitalT 61 2 9324 2516E steve.hawkins@ubs.com

Westpac Institutional BankLevel 9255 Elizabeth StreetSydney NSW 2000T 61 2 9226 3311

Westpac Institutional Bank focuses on providing clients with the benefits ofunsurpassed market knowledge derived frombroad coverage and one of the largest salesand distribution networks in Australasia. We have in-depth expertise and knowledge in a wide range of industries and sectors.

Our capital markets team provides the mostinnovative and widest range of productsamong wholesale banks in Australia and New Zealand. Our leadership in theseproducts is consistently demonstrated by industry league tables.

Increasing liquidity, the shift of capitaldemand from the government to the privatesector, regulatory changes, and expansion of superannuation funds present anunprecedented number of financing optionsfor Australian and New Zealand borrowers.

As the leading provider of debt capital in the Australasian market, we offer clientsinnovative solutions in:

– public debt securities

– hybrid securities and structured finance

– securitisation

– loans and syndications

– equipment finance

– project finance

Through our international sales network anddistribution alliance Westpac also providesclients with access to the offshore debtcapital markets.

For more information, please visit us at:www.westpac.com.au

Or contact:

Jason LeeGlobal Head, Market SalesT 61 2 9284 8920E jasonlee@westpac.com.au

Peter BloomfieldHead, Corporate SecuritiesT 61 2 9284 8173E pbloomfield@westpac.com.au

Enrico MassiGlobal Head of SyndicateT 61 2 9284 8207E emassi@westpac.com.au

Andrew McDonaldGlobal Head of Capital Market SalesT 61 2 9284 8118E amcdonald@westpac.com.au

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DirectoryIntermediaries

Professional Services

Allens Arthur RobinsonLocationsThe Chifley Tower2 Chifley SquareSydney NSW 2000T 61 2 9230 4000F 61 2 9230 5333

Stock Exchange Centre530 Collins StreetMelbourne VIC 3000T 61 3 9614 1011F 61 3 9614 4661

Riverside Centre123 Eagle StreetBrisbane QLD 4000T 61 7 3334 3000F 61 7 3334 3444

Level 8, Wesfarmers House40 The EsplanadePerth WA 6000T 61 8 9488 3700F 61 8 9488 3701

1 Raffles Place #54-00OUB CentreSingapore 048616T 65 6535 6622F 65 6535 4855

49/F One Exchange Square8 Connaught PlaceCentral Hong KongT 852 2840 1202F 852 2840 0686

We are also on the ground in Shanghai,Beijing, Bangkok, Phnom Penh, Jakarta and Port Moresby.

ProfileWith staff in 12 cities and 7 countries acrossthe Asia-Pacific, Allens Arthur Robinson isone of the region's largest law firms.

We were ranked in the highest tier in thelatest editions of both Chambers Global

Guide to the World's Leading Lawyers

and Asia-Pacific Legal 500 for all areas of finance they covered – Capital Markets,

Securitisation, Banking & Finance and Project Finance.

Our focus is on delivering the clearest of commercial solutions on all transactions,from plain vanilla to mind-bendingly complex.Our firm culture fosters excellence,encourages innovation and requiresunmatched client service from our 1600 staff. We invest heavily in our people, offering lawyers to our clients who are clear leaders in their field of expertise.

We are active in each of the key areas of capital markets:

– domestic and international debt issues,including ECP, EMTNS, ETCDs, TLNs,private placements, hybrids, subordinatedand structured debt, US 144A or SECregistered issues and kangaroo bonds;

– credit wrapped transactions, where we have acted on over 80% of all dealsdone in Australia;

– capital management activities such as Tier 1 and Tier 2 issues for banks;

– project and infrastructure debt issues;

– securitisation, including synthetics;

– s128F Tax Act loan note structures;

– trading systems for capital markets, suchas Internet-based systems or traditionalexchange-based systems, including SFEAustraclear; and

– regulation of conduct in capital markets.

For more information, please visit us at:www.aar.com.au

Or contact:

Matthew AllchurchPartner, SydneyT 61 2 9230 4943E matthew.allchurch@aar.com.au

David CliffordPartner, SydneyT 61 2 9230 4975E david.clifford@aar.com.au

Robert CornishPartner, SydneyT 61 2 9230 4924E robert.cornish@aar.com.au

Tom HighnamSenior Associate, SydneyT 61 2 9230 4009E tom.highnam@aar.com.au

Mark KidstonPartner, SydneyT 61 2 9230 4419E mark.kidston@aar.com.au

Andrew JinksPartner, SydneyT 61 2 9230 4925E andrew.jinks@aar.com.au

Jason LeeSenior Associate, SydneyT 61 2 9230 4596E jason.lee@aar.com.au

Mark WormellPartner & Securitisation Practice LeaderT 61 2 9230 4460E mark.wormell@aar.com.au

Simon LynchPartner, MelbourneT 61 3 9613 8922E simon.lynch@aar.com.au

Steve PembertonPartner, SingaporeT 65 6535 6622E steve.pemberton@aar.com.au

Matthew BarnardPartner, Hong KongT 852 2903 6212E matthew.barnard@aar.com.au

Australian Stock ExchangeLevel 6 Exchange Centre20 Bridge StreetSydney NSW 2000T 61 2 9227 0000

ASX operates a stock exchange offeringtrading, clearing and settlement systems thatare recognised as being amongst the best in the world. Bonds and hybrid securities areactively traded on ASX with a number ofbrokers offering specialist services in thesesecurities. Like shares, trading takes placeon the Stock Exchange Automated TradingSystem (SEATS) and settlement occurs inthe Clearing House Electronic SettlementSystem (CHESS). Trading is reportedseparately in the Australian Financial Review,major metropolitan and financial newspapers.

With an average monthly turnover in excess of $800 million and a total of $22billion outstanding, this market encompasses a spectrum of securities, readily available to retail investors, including corporate bonds,FRN’s, convertible notes and other hybriddebt/equity securities. $4.1 billion of thesesecurities were listed on ASX in 2004.

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The listing requirements of wholesale debtmarket transactions by supranational,kangaroo and domestic borrowers are alsofacilitated by ASX. Issuers with over $30billion worth of wholesale securities arecurrently listed on ASX ranging from straightMTN programs to securitised products.

For more information, please visit us at:www.asx.com.au

Or contact:

Robert BivenMarket Co-ordinatorTrading Market DevelopmentT 61 2 9227 0934F 61 2 9227 0667E bob.biven@asx.com.au

BloombergGateway Building, Level 36 1 Macquarie Place Sydney NSW 2000T 61 2 9777 8600

Company ProfileBloomberg L.P., founded in 1981 by MichaelR. Bloomberg, is a leading financialinformation services, news, and mediacompany, serving customers around theworld. Headquartered in New York, thecompany employs 8,000 people globally in 110 offices around the world. Bloombergleverages its data and news resourcesthrough related media products, includingtelevision and radio programming, Web sites,books, and publications, to meet the financialinformation needs of professionals andconsumers globally.

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service is the interactive, financial informationnetwork that is Bloomberg’s core business.Available 24 hours a day, to more than260,000 professionals in 126 countries, the service seamlessly integrates data, news,analytics, multimedia reports, e-mail andtrading capabilities into a single sophisticatedplatform. Corporations, issuers, financialintermediaries, and institutional investors rely on the BLOOMBERG PROFESSIONALservice to help them make informed decisionsand complete transactions every day.

BLOOMBERG NEWS® is a global newsleader and the driving force behind allBloomberg media content. BLOOMBERGNEWS has more than 1,700 reporters andeditors in 97 news bureaus worldwide. Everyday, the news division generates more than4,000 stories that are made available via theBLOOMBERG PROFESSIONAL service and

syndicated to over 350 newspapers andpublications worldwide.

BLOOMBERG TRADEBOOK® is a globalelectronic agency brokerage, that givesinstitutional equity, energy, foreign exchange,and futures professionals the tools they needto help them meet the challenge of today’strading marketplace. A leading consolidatorof liquidity, BLOOMBERG TRADEBOOKunites ahead-of-the-curve trading technologyand sophisticated algorithms withBloomberg's news, data and analytics – in one integrated solution on a singleplatform. BLOOMBERG TRADEBOOK is fully supported by Bloomberg’s world-classcustomer service.†

BLOOMBERG.COMSM is one of the topmultimedia sites for breaking financial news,investor tools, and data on the Internet.Drawing from the data power of theBLOOMBERG PROFESSIONAL service and strengths of Bloomberg media products,BLOOMBERG.COM provides the highestquality news and information.

BLOOMBERG TELEVISIONSM is a 24-hourbusiness and financial news channel, which is broadcast via 10 networks in sevenlanguages, as well as via syndicatedprogramming. Through anchored reports and a multiscreen format, BLOOMBERGTELEVISION keeps viewers on top of theirmoney with a continuous stream of stockprices, financial data, and breaking businessheadlines. BLOOMBERG® InteractiveTelevision enables digital viewers tocustomise their viewing and track theirportfolios at a glance.

BLOOMBERG RADIOSM keeps listeners who are serious about their money abreast of breaking financial, business, national, andglobal news, along with a special focus onpersonal finance. Its syndicated reports arebroadcast through more than 840 affiliatesworldwide. The company’s flagship station is BLOOMBERG® 1130 (WBBR–AM) in New York.

BLOOMBERG MARKETS™ is the magazinefor and about professional investors andcorporate executives – the places they workand the companies they invest in. Writtenspecifically for users of the BLOOMBERGPROFESSIONAL service, content focuseson new functions, trends, and strategies, as well as in-depth features on current areasof interest.

BLOOMBERG PRESSSM publishes practicalbooks for consumers, professionals,individual investors, and entrepreneurs,authored by leading authorities from thefinancial and business sectors.

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† Communicated in the EEA by Bloomberg TradebookEurope Limited which is authorised and regulated in the UK by the Financial Services Authority and whichprovides services in certain EEA Member Statespursuant to the EU ISD. The communication is onlydirected at persons in the EEA who have professionalexperience in the investments which may be tradedover the systems or who are high net worthorganisations. The systems are not available to privatecustomers.

Fitch RatingsLevel 22300 Queen StreetBrisbane QLD 4000T 61 7 3222 8600

Level 43, AMP Centre50 Bridge StreetSydney NSW 2000T 61 2 8256 0300

Fitch Ratings, the international rating agency,has dual head offices in New York andLondon and maintains over 50 officesworldwide with over 1,600 employees.

Fitch is committed to providing the mostforward thinking and transparent ratings and research to the fixed income market.

With a rapidly growing coverage, Fitch nowrates entities from more than 85 countriesworldwide. These include more than 3,200 financial institutions, 91 sovereigns,

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1,200 corporate ratings and over 8,500structured financial deals under surveillanceworldwide.

Fitch has had an Australian presence since1994. Australian and New Zealand researchnow spans financial institutions, structuredfinance, sovereigns, insurance, mortgageinsurers, utilities, project finance, industrialsand telecommunications.

In an increasingly dynamic credit environmentFitch provides investors and issuers qualitycredit reports and surveillance.

For more information, please contact:

Andrew SmithManaging DirectorT 61 7 3222 8618E andrew.smith@fitchratings.com

Kevin StephensonManaging DirectorT 61 2 8256 0321E kevin.stephenson@fitchratings.com

Mallesons Stephen JaquesLevel 60Governor Phillip Tower1 Farrer PlaceSydney NSW 2000T 61 2 9296 2000

The capital markets team of MallesonsStephen Jaques offers clients extensivedomestic and international expertise andexperience in structuring, negotiating,documenting and advising on the full range of equity, debt equity-linked, hybrid, asset-backed, credit-linked and derivative productsthat are offered in the domestic andinternational capital markets.

The firm is widely acknowledged to haveAustralia's premier capital markets practiceand is at the forefront of developments in the Asia-Pacific region. Mallesons has beenranked in the top tier by independent marketsurveys due to its strength across the full spectrum of capital markets work andintimate knowledge of both the local andinternational markets. In many instances,documentation produced by the firm forcapital markets transactions has determinedthe marketplace model and standards.

Mallesons has the largest dedicated capitalmarkets practice in Australia and the Asia-Pacific region with a depth of talent andexperience that enables the firm to structure,advise on and document capital markettransactions to meet the commercialobjectives of a wide range of clients(including investment banks, arrangers,

domestic and "kangaroo" issuers, guarantors,trustees and investors). The firm's practiceextends to the issue of prospectuses forpublic equity and debt offerings in Australia,public debt and equity markets outsideAustralia as well as being leaders inwholesale and retail credit linked andsynthetic deals.

For more information, please contact:

David OlssonManaging Partner, PracticeT 61 3 9643 4330E david.olsson@mallesons.com

Scott FarrellPartnerT 61 2 9296 2142E scott.farrell@mallesons.com

Moody’s Investors ServiceLevel 1255 Hunter StreetSydney NSW 2000T 61 2 9270 8111

Moody's Investors Service is among theworld's most respected, widely utilisedsources for credit ratings, research and risk analysis. The firm publishes market-leading credit opinions, deal research andcommentary that reach more than 3,000institutions and 22,000 subscribers aroundthe globe.

Moody's ratings and analysis track more than$30 trillion of debt covering approximately150,000 corporate, government andstructured finance securities, 75,000 publicfinance obligations, 10,000 corporaterelationships, and 100 sovereign nations.

Moody's Investors Service is a subsidiary of Moody's Corporation (NYSE: MCO). The corporation had reported revenue of $1.2 billion in 2003.

For more information, please visit us at:www.moodys.com

Or Contact:

Brian CahillManaging Director, AustraliaT 61 2 9270 8105E brian.cahill@moodys.com

Tim SeeVice President/Senior Credit OfficerStructured Finance GroupT 61 2 9270 8104E tim.see@moodys.com

Marina IpAssociate AnalystFinancial Institutions GroupT 61 2 9270 8130E marina.ip@moodys.com

Vickie BrumwellAVP/Relationship ManagerT 61 2 9270 8117E vickie.brumwell@moodys.com

Hector LimAVP/Regional Communications ManagerT 61 2 9270 8102E hector.lim@moodys.com

Reuters60 Margaret StreetSydney NSW 2000T 61 2 9373 1500

Reuters (www.about.reuters.com), the globalinformation company, provides indispensableinformation tailored for professionals in the financial services, media and corporatemarkets. Our information is trusted anddrives decision-making across the globe. Our computation is based on speed,accuracy and freedom from bias.

Although Reuters is best known as theworld's largest international multimedia newsagency, it derives more than 90% of itsrevenue from its financial services business.Some 427,000 financial market professionalsaround the world rely on Reuters services,providing them with the information and toolsthey need to help them compete.

The company's core strengths lie in providingthe content, analytics, trading andcollaboration tools needed by financialprofessionals. Reuters open technology,based on industry standards, enables itscustomers to search, store and integrate its information with content from othersources, facilitating the way they work.Reuters also provides these users withspecially designed tools to help them reduce risk, distribute and manage the ever-increasing volumes of market data. It also offers bespoke automated tradingproducts for the Treasury market.

In addition to the financial marketprofessionals who rely on Reuters news to trade and make decisions, it supplies news – text, graphics, video and pictures – to media organisations and web sitesacross the globe.

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Reuters serves four customer areas:

Institutional Sales & Trading. The sales and trading community is Reuters largestmarket. It is the core of Reuters business and covers all financial asset classes. This segment serves customers who deal in the foreign exchange, fixed income,equities, commodities and energy, andrelated markets.

Asset Management & Research servesinvestment banking and researchprofessionals, asset managers andcorporates.

Enterprise targets the complete businessorganisation rather than the end-user. It provides systems which allow customers to pump real-time market data and otherinformation into their proprietary applicationsand around their organisations. It alsoprovides applications which allow customersto monitor and manage their risks.

Media, which includes Reuters traditionalwholesale agency business, serves theneeds of the world's newspapers, televisionand cable networks, radio stations, websitesand consumers.

For more information, please contact:

Diccon CloseSenior Company OfficerT 61 2 9373 1860E diccon.close@reuters.comRM diccon.close.reuters.com@reuters.net

Dave StewartSales Specialist T 61 2 9373 1589E david.stewart@reuters.comRM david.stewart.reuters.com@reuters.net

Standard & Poor’sLevel 37120 Collins StreetMelbourne VIC 3000T 61 3 9631 2000

Level 2656 Pitt StreetSydney NSW 2000T 61 2 9255 9800

Standard & Poor's is the world's foremostprovider of independent credit ratings,indices, risk evaluation, investment research,data, and valuations. With 5,000 employeeslocated in 20 countries, Standard & Poor's is an essential part of the world's financialinfrastructure. We provide investors with theindependent benchmarks they need to feelmore confident about their investment andfinancial decisions.

In Australia, Standard & Poor's has more than100 professional staff dedicated to servingthe local financial markets. We have recentlylaunched a range of products and servicestargeting the financial intermediary marketincluding ratings on managed funds, hybridsecurities and Collateralised DebtObligations (CDO's) sold to retail investors.We also manage and maintain Australia'sbenchmark equity indices, the S&P/ASXindices.

For the past five years, Standard & Poor'shas been awarded the title of 'RatingsAgency of the Year' in INSTO's annualDistinction Awards.

For more information, please visit us at:www.standardandpoors.com.au

Or contact:

Chris DaltonManaging DirectorStandard & Poor'sT 61 3 9631 2020E chris_dalton@standardandpoors.com

Ian ThompsonManaging DirectorFinancial Services RatingsT 61 3 9631 2100E ian_thompson@standardandpoors.com

Fabienne MichauxManaging Director and Team LeaderStructured Finance RatingsT 61 3 9631 2050E fabienne_michaux@standardandpoors.com

Brendan FlynnDirectorSovereign and Public Finance RatingsT 61 3 9631 2042E brendan_flynn@standardandpoors.com

Gavin Gunning Director Head of Financial Services RatingsT 61 3 9631 2092E gavin_gunning@standardandpoors.com

Paul StephenDirectorCorporate and Infrastructure Finance RatingsT 61 3 9631 2070E paul_stephen@standardandpoors.com

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Fixed Incomeand CreditYearbook

2005The BLOOMBERG PROFESSIONAL® service seamlessly integrates data, news, analytics, multimedia reports and email onto a single platform for fi nancial professionals around the world. In addition, we offer 24-hour, worldwide customer support to all our clients who use the BLOOMBERG PROFESSIONAL service as the defi nitive tool for achieving their goals.

Now, BLOOMBERG ANYWHERESM allows clients to access the BLOOMBERG PROFESSIONAL service from any computer in the world. Keep an eye on your positions, check email and get critical information whenever and wherever you have Internet access.

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