Treasury Management

Treasury Management 24 October 2013 Strictly confidential | October2013 Strictly confidential | October 2013 |

Agenda • Introduction and basic principles • Investment • Bank creditworthiness • Borrowing and interest rates • Sources of finance Strictly confidential | October 2013 |

Introduction and basic principles • “The management of the organization’s cash flows, its banking, money market and capital market transactions; the effective control of the risks associated with those activities; and the pursuit of optimum performance consistent with those risks” (CIPFA) Strictly confidential | October 2013 |

Decision making criteria • Risk protection • Increased costs • Running out of funds • Loss on investments • Flexibility • Repay loans • Access funds • Cost • High interest payable • Low interest received Strictly confidential | October 2013 |

Treasury management context Current position Business plan projections Economy and interest rate outlook Political and business outlook Conditions in the financial markets Strictly confidential | October 2013 |

Treasury risks • Liquidity • Credit, market • Interest, inflation, refinancing • … • Exchange rate • Legal and regulatory • Fraud, error, corruption, contingencies Strictly confidential | October 2013 |

Typical treasury trade-offs • Interest rate risk needs fixed rates, which increase inflation risk • Fixed rates provide certainty, but are inflexible • Committed facilities ensure liquidity, but have non-utilization fees • Risky investments have higher returns • Cash balances have a ‘cost of carry’ • ‘There’s no such thing as a free lunch’ Strictly confidential | October 2013 |

Uncertainty • Economists distinguish between uncertainty and risk • There has been unusually high uncertainty over the last few years • Economy : when will rates rise? • Political : elections, wars, US budget/debt ceiling • Natural disasters • Difficult to hedge against ‘unknown unknowns’ • Trade off between certainty and flexibility Strictly confidential | October 2013 |

Investment • Sound principles of investment • Spread risks • Check counterparties’ creditworthiness • Ensure ability to access when required • Policies • Limit amount invested with each institution • Establish minimum credit criteria • Limit term of investments • Based on preparation of cash flows Strictly confidential | October 2013 |

Cash management • Need to ensure sufficient cash available • Costs involved in holding cash • Cash flows can be difficult to predict • Minimum ‘safe’ balance is not likely to be nil Strictly confidential | October 2013 |

Financial sector is still fragile following credit crunch Economy is still smaller than before crisis Unresolved structural problems within eurozone Change in regulatory attitude Major banks all suffering rating downgrades Bank creditworthiness Strictly confidential | October 2013 |

Independent view of creditworthiness aimed at investors Ratings paid for by company being rated Criticized after sub-prime fiasco Independence questioned Can be slow to react Rating agencies Strictly confidential | October 2013 |

How risky are the banks? – raters’ views Strictly confidential | October 2013 |

Implications • The credit risk will be included in the margin that banks pay • This cost is high and volatile • Hence lending margins have increased Strictly confidential | October 2013 |

Market view of cost of ‘insurance’ More timely than ratings Used for speculation as well as protection Price affected by matters other than pure credit factors Can be used to gauge the banks’ cost of funds Credit default swaps Strictly confidential | October 2013 |

The market view Strictly confidential | October 2013 |

Borrowing and interest rates • Sources • Banks and building societies • Capital markets • Structures • Bullet and amortizing • Short and long-term • Capital holidays Strictly confidential | October 2013 |

Underlying interest bases • Floating (variable) • LIBOR (London Interbank Offered Rate) • Base rate • Rate changes (quarterly, annually) • Fixed • Priced from interest rate swaps (plus spread) • Rate fixed for term of fix • Index-linked • Rate payable linked to RPI used for rents • Changes annually in April Strictly confidential | October 2013 |

Variations on fixed rates • Forward rates • Start in the future • Rate calculated from today’s rates • Commits to drawdown • Cancellable fixed rates • Fixed rate with the lender’s option to break • If rates go up, fix is broken • Achieves lower rate for the borrower Strictly confidential | October 2013 |

Other financial instruments • Caps • Sets a maximum interest rate payable Collars • Sets both a maximum and minimum rate payable Interest rate swap • Another way of fixing rates Strictly confidential | October 2013 |

Interest rate environment Strictly confidential | October 2013 |

Fixed rates are higher than last year Strictly confidential | October 2013 |

Still historically low Strictly confidential | October 2013 |

Economic forecasts Strictly confidential | October 2013 |

Market expectations for LIBOR Strictly confidential | October 2013 |

Sources of funding • Banks (now only short-term) • Bilateral • Syndicated • Financial institutions (capital markets) • Own name public issues (£100 million) • Private placements (£30 million) • Aggregated issues (£1 million) • Direct lending • Typical refinancing structure • Keep existing fixed rate debt • Short-term revolver • Long term from capital markets Strictly confidential | October 2013 |

Public issue • Large issue size • Formal credit rating required • Listed on a stock exchange • Bought mainly by UK pension and life companies • Usually long-term bullet loan with no financial covenants • Some of the initial issue can be retained for future use • Subsequent amounts can be raised through a ‘tap’ issue Strictly confidential | October 2013 |

Private placement • Smaller issue amount • Credit rating not a requirement (but it may help) • Not listed (and not designed to be traded) • Can involve US based investors • Can involve tranches of different maturities • Covenants may mirror required by the bank lenders • Further amounts can be raised • Quicker than a public issue Strictly confidential | October 2013 |

Aggregated issue • The Housing Finance Corporation (usually) • Public issue on lent to associations • Can be for as little as £1 million • High level of asset cover (150%) • Income test on security • Cash reserve • Annual management fee • Long-term bullet loans Strictly confidential | October 2013 |

US private placements • Several US institutions interested in investing in UK housing associations • Small number (about 6) investors in sterling direct • ‘Real’ GBP investors • Investor makes arrangements to convert sterling to US dollars • Amounts £50m to £100m (or more) • Issue under a Master Note Purchase Agreement (can use again) • Asset cover and covenants mirror borrower’s bank facilities • Make-whole provisions include currency swap Strictly confidential | October 2013 |

US private placement process • Approach to investors through Placement Agent • Master Note Purchase Agreement is governed by English law • Private Placement Memorandum circulated to investors • Investors invited to bid: • Amount • Tenor • Rate • Revisions to terms • Objective to ‘hit sweet spots’ reducing average cost of funds • Result is funding structure with different maturity tranches • Requires NAIC-1 designation (after the issue) Strictly confidential | October 2013 |

Banks and advisers • Private placement • Investment bank acting as placing agent • Lawyers for borrower (UK and US) • Lawyers acting for investors • Valuers • Public issue • Investment bank acting as bookrunner • Lawyers for borrower • Lawyers for the bookrunners • Valuers • Auditors • Rating agency Strictly confidential | October 2013 |

Regulatory information / Legal disclaimer • Capita Asset Services is a trading name of Sector Treasury Services Limited which is authorised and regulated by the Financial Conduct Authority only for conducting advisory and arranging activities in the UK as part of its Treasury Management Service. • Capita does not warrant, either expressly or impliedly, the accuracy, timeliness, or appropriateness of the information contained in this document. Capita disclaims any responsibility for content errors, omissions, or infringing material and disclaims any responsibility associated with relying on the information provided in this document. All materials, content and forms contained in this document are the intellectual property of Capita and may not be copied, reproduced, distributed or displayed without Capita’s express written permission. If you have not received this document from Capita you must not disseminate, copy or take any action in reliance on it and should notify Capita immediately. Strictly confidential | October 2013 |

Treasury Management