Macquire Hybrid Securities Lured by Yield July2012
Transcript of Macquire Hybrid Securities Lured by Yield July2012
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MACQUARIE INVESTMENT MANAGEMENT
Hybrid Securities:Lured by Yield
Investment Perspectives - Issue No. 6
Adviser and wholesale investor use only - not to be distributed to retail investors
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About Macquarie Investment
ManagementMacquarie Investment Management offers securities
investment management expertise across a range of
asset classes including xed interest, listed equities
(domestic and international) and infrastructure securities.
It delivers a full-service offering to both institutional and
retail clients in Australia and the US, with selective
offerings in other regions. Macquarie Investment
Management is part of the Macquarie Group.
MIM FIC capabilities
Macquarie Investment Management Fixed Income andCurrency (MIM FIC) team of Macquarie Funds Group has
over $A30 billion under management across cash, credit,
xed income and currency.
Macquarie began managing xed income assets in 1980,
launching Australias rst cash management trust and
over time has grown to manage the full spectrum of xed
income investment styles. With teams based in London,
Sydney and Philadelphia we have substantial reach
and capability, offering global xed income investment
solutions.
We have signicant and experienced resources devotedto security analysis, portfolio management, xed
income modelling, risk management and research. We
are able to provide a range of xed interest solutions
from index targeting and enhanced portfolios to more
opportunistic strategies across the risk spectrum. We
manage investments for a diverse set of clients including
pension funds, insurance companies, government bodies,
managed account platforms, corporate treasuries, master
trusts and individuals.
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Executive Summary
Hybrid securities are complex capital instruments issued by companies to diversify their funding base and manage
their cost of capital. These securities possess characteristics of both debt and equity, and incorporate various featuresthat may make them more debt-like or more equity-like. This in turn impacts the performance of the income and
capital return components of the securities.
Hybrid securities have been promoted as investments that offer stable and defensive income streams. However,
unlike senior debt securities, the income on hybrids can be deferrable and hybrid instruments rank below senior debt
securities in the capital structure which makes them riskier investments. During the recent downturn, the income
yield provided by hybrid securities failed to offset the substantial decline in capital values, highlighting the downside
correlation of hybrid securities to equities during difcult times. This correlation demonstrates that hybrid securities are
not a substitute for xed income as the income ows are less certain whilst the principal value has been shown to be
volatile, akin to holding equity. Our analysis shows that hybrids perform like debt when equity markets perform well,
and perform like equity when equity markets perform poorly.
In this paper we explore some of the key features associated with hybrid instruments and identify risks associated
with investing in these securities. We compare the recent returns of hybrid securities against other instruments along
the capital structure, and look at the correlation between these asset classes. We also outline our investment process
which involves considering credit risk at the issuer level as well as analysing the features of a hybrid instrument against
safer senior debt and subordinated debt investments, to assess their value-add to a xed income portfolio.
Hybrids overview - what are hybrids?
Hybrid securities are instruments that feature characteristics of both debt and equity capital, and are generally complexand highly structured instruments. Hybrid security is the broad term used to describe an instrument that typically ranks
behind senior debt but ahead of equity, however they can incorporate numerous features that may make them more debt
like or more equity like. The characteristics of each hybrid security are important, as they determine the extent to which
the instrument will behave like debt or equity. Table 1 outlines the key characteristics of securities along the debt-to-equity
spectrum.
Table 1 - Summary of key terms of instruments along the debt-hybrid-equity spectrum
EquityHybrid
Shares
Residual claim
Dividends
Perpetual
Senior Debt
Unsubordinated
Regular
coupons
Fixed maturity
Upper Tier II
Deeplysubordinated
Deferrable but
cumulative
coupons
Fixed maturity
or perpetual
Hybrid Tier I
Deeplysubordinated
Deferrable and
noncumulative
coupons
Perpetual
Lower Tier II
Subordinated
Regular
coupons
Fixed maturity
Debt
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Diagram 1: Rating comparison between Hybrid Universe (LHS) and UBS Composite Credit Index (RHS)
Source: Macquarie investment Management, UBS
Hybrid marketBanks and insurance companies have traditionally
been issuers of hybrid capital, as it helps to balance the
conicting objectives of regulators that want strongly
capitalised nancial institutions, and shareholders that
are pressuring for improved returns. Hybrid securities
saw increasingly robust demand during 2005-2007 as
income investors, faced with record low credit spreads,
disregarded the downside potential of investing in riskier
securities in the chase for yield. In addition to the strong
investor demand for hybrid securities, issuers were
encouraged to structure hybrid securities to achieve:
Tax deductibility having tax authorities treat the
instrument as debt-like allows the payments to be tax
deductible at their marginal tax rate, which reduces
overall funding costs
Rating agency equity credit having the rating agencies
treat the instruments as equity-like is supportive of the
issuers credit ratings and allows them to reduce the
need to raise equity
Non dilution issuing hybrid securities that are non-dilutive is positive for earnings per share, and equity
prices
Accordingly, non-nancial corporates increasingly began to
issue hybrids alongside banks and insurers. Hybrids also
increased in complexity as issuers sought to achieve tax
efciency, which saw a number of stapled securities issued
into the Australian market, whereby the hybrid comprised
a preference share and an unsecured note in order to
achieve tax deductibility.
Although there is no hybrid market index in Australia, we
have identied 42 listed hybrid instruments with a market
value of approximately $19.8b. The majority of these hybridinstruments by value are rated A by S&P (Diagram 1),
reecting the large percentage of issuance by Australian
banks. A further 30% of instruments are unrated. When
compared against the credit quality of the UBS Composite
Credit Index, of which only 15% is rated below AA, it
is evident that investing in hybrid instruments exposes
investors to higher credit risk. Furthermore, based on the
issuers business and nancial proles, we estimate that
13% of the hybrid universe has a sub-investment grade
credit rating prole whilst the UBS Composite Credit Index
does not have any sub-investment grade debt issuers.
BBB
3%A
12%
AA
24%
AAA
61%
A
51%
BBB
16%
BB
2%
B
1%
Unrated
30%
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Over one quarter of issuers in the hybrid universe are corporates (Diagram 2), compared to only 9% of the UBS Composite
Credit Index. The lower risk of the UBS Composite Credit Index is further demonstrated with 55% of the index comprised
of supranational entities, which are highly rated and largely risk free issuers.
Diagram 2: Issuer comparison between Hybrid Universe (LHS) and UBS Composite Credit Index (RHS)
Corporates
26%
Banks & Financials
74%
Corporates
9%
Supras
55%
Banks & Financials
36%
Source: Macquarie Investment Management, UBS
Looking specically at the corporate segment of the hybrid universe (Diagram 3), there are 20 issues totalling $5.2b inthe market, with 32% issued by large scale borrowers such as Woolworths and Sydney Airport seeking further investor
diversication. 41% are issued by companies that have a sizeable private shareholder, which can constrain the issuers
nancial exibility due to the potential inability to raise new equity as the private shareholder will face dilution if they cannot
raise funds to subscribe to new shares. Of the remainder 27% of corporate hybrid issuers, more than half have, or would
likely have, a sub-investment grade rating prole, which suggests that their access to other forms of debt capital are
limited. It is also worth noting that two of Australias high prole corporate defaults had issued hybrid securities ABC
Learning and Babcock & Brown.
Diagram 3: Corporate issuers of the Hybrid Universe and other issuers based on credit quality
Large scale borrowers
seeking diversification32%
Other
27%
Sizeable privateownership, limiteddesire for dilution
41%
Investment grade
45%
Subinvestment grade
55%
Source: Macquarie Investment Management, UBS
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wider than the original margins on some of the hybrids.
This serves as a constraint on a hybrid securitys price
appreciation because if an investor has the choice
between two instruments paying a similar yield, but one
is senior and the other a deeply subordinated hybrid, the
senior debt will price closer to or at a premium to par
whilst the hybrid security will price at a discount to par.
Diagram 4: Performance of NAB equity, hybrid capital,
senior debt and subordinated debt
50
60
70
80
90
100
110
120
130
140
150
160Hybrid performancecomparable to debt
Hybrid performancecomparable to equity
Hybrid Equity Senior Debt Sub Debt
Dec-
05
Mar-
06
Jun-
06
Sep-
06
Dec-
06
Mar-
07
Jun-
07
Sep-
07
Dec-
07
Mar-
08
Jun-
08
Sep-
08
Dec-
08
Mar-
09
Jun-
09
Sep-
09
Dec-
09
Mar-
10
Source: Bloomberg, Markit, Company lings
1 National Income Securi ties originally issued in 1999 paying a margin 125 basis points over the Bank Bill Swap Rate with a perpetual maturit y
Hybrid performanceHybrids have often been sold to investors on the basis
of providing a higher yield and stable income ow.
Although this is generally true, it fails to consider the
other component of an investments total return the
capital return. Comparing the total return performance for
equity, hybrids, subordinated debt and senior debt issued
by the Big 4 Australian banks along with Macquarie
and Suncorp, hybrid securities perform like debt when
risk assets (i.e. equities) perform well, with their higher
coupon rates providing income returns that modestly
outperformed senior and subordinated debt, whilst
maintaining a relatively stable capital value. In the recent
downturn which affected all risk-based assets, capital
values of hybrid securities fell on a sustained basis to a
similar degree to equities whilst the performance of both
senior and subordinated debt only suffered relatively
negligible declines which were offset by the income yield.
Using National Australia Bank as an example (Diagram 4),
the performance of its equity, hybrid capital1, senior debt
and subordinated debt, over the past three and a half
years can be broken into two distinct periods: In the 26 months from December 2005 to February
2008, the hybrids performance was comparable to
debt. Throughout most of this period, total returns
were driven by income returns, which saw the higher
yielding hybrid instrument modestly outperform
subordinated debt, which in turn outperformed lower
yielding senior debt.
In the subsequent 27 months to May 2010, the hybrid
performed similar to equity, with its total return driven
by signicant losses in its capital value. Although the
subsequent rebound in capital values has driven the
performance of the hybrid, it is yet to catch up to theperformance returns of senior and subordinated debt.
Furthermore, it is important to remember that whilst
equity theoretically has unlimited upside, hybrid upside
is likely to be capped as its capital value approaches
100 cents in the dollar unless there is an equity
conversion feature or its yield is signicantly higher than
the base rate. We note that over the past two years,
some of the banks have issued senior debt at levels
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We also constructed an index2 in order to assess the
relative performance of equity, hybrid capital, senior debt
and subordinated debt over the past four and a half years
for the 6 largest banks in Australia. Looking at our index
(Diagram 5), similar observations can be drawn to that of
NAB. Despite the rally in hybrid capital values since early
2009, hybrid capital has underperformed senior debt by
18% since December 2005 (Diagram 6).
Diagram 5: Index performance of equity, hybrid capital,
senior debt and subordinated debt
Hybrid performancecomparable to debt
Hybrid performancecomparable to equity
Dec-
05
Mar-
06
Jun-
06
Sep-
06
Dec-
06
Mar-
07
Jun-
07
Sep-
07
Dec-
07
Mar-
08
Jun-
08
Sep-
08
Dec-
08
Mar-
09
Jun-
09
Sep-
09
Dec-
09
Mar-
10
50
60
70
80
90
100
110
120
130
140
150
Hybrid Equity Senior Debt Sub Debt
Source: Bloomberg, Markit, Company lings
Diagram 6: Out-performance of hybrid capital
compared with senior debt
50%
-45%
-40%
-35%
-30%
-25%
-20%
-10%
-15%
-5%
0%
5% Hybrid performancecomparable to debt
Hybrid performancecomparable to equity
Dec-
05
Mar-
06
Jun-
06
Sep-
06
Dec-
06
Mar-
07
Jun-
07
Sep-
07
Dec-
07
Mar-
08
Jun-
08
Sep-
08
Dec-
08
Mar-
09
Jun-
09
Sep-
09
Dec-
09
Mar-
10
Source: Bloomberg, Markit, Company lings
It is important to note that the hybrids that we have analysed
were issued by highly rated banks which have maintained
stable earnings performance throughout the global
economic downturn. These banks are also backed by very
strong capital positions which are closely monitored by the
local prudential regulator. Hybrid instruments tied to issuers
with weaker credit proles would have further doubts raised
over their ability to maintain coupon payments, whilst their
capital values would be affected by low recovery rates in the
event of default.
Correlation analysisThe up-market period previously identied from December
2005 to February 2008 shows a strong correlation between
hybrid capital, and senior and subordinated debt. Hybrid
capital also had a strong correlation against equities,
although to a lesser extent. The subsequent period from
February 2008 to May 2010 shows that the correlation
between hybrid capital and equities remained strong
at 81.9%, whilst the correlation against senior debt and
subordinate debt declined substantially to 19.1% and
28.6% respectively. This correlation demonstrates that
hybrid securities should not be substituted for xed incomeas the income ows are less certain whilst the capital value
is very volatile. Interestingly, from December 2005 to May
2010, senior debt and subordinated debt were negatively
correlated with both hybrid securities and equity. Diagram
7 and Table 2 illustrate the correlation analysis.
Diagram 7: Correlation analysis of hybrid capital index
against other instruments, broken down across two
distinct periods
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Equity Senior Debt Subordinated Debt
F rom Dec-2005 to Feb-2008 From Feb-2008 to May-2010
Source: Macquarie Investment Management
2 Refer to the appendix for notes on index construction
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Hybrids as part of a portfolioFrom a broad portfolio perspective, hybrid securities are
not a substitute for xed income as the income streams
are less assured whilst the value of the principal balance
has been shown to be volatile, akin to holding equity. For
a hybrid instrument that features a greater proportion of
equity-like features, investors are exposed to higher risks in
the form of interest payments (coupons could be deferred,
and possibly not accumulate) and principal repayment (the
principal repayment date could be deferred, or in the event
of a default, repayment of principal is subject to there being
any residual value after other higher ranking creditors have
been fully repaid). This is exacerbated if held alongside apredominantly equity-weighted portfolio given the positive
correlation between equities and hybrids during periods of
weak equity markets.
Our philosophyUnderpinning our approach to investing in hybrid
instruments is our core investment philosophy for credit
investing, whereby we focus on credit loss avoidance
rather than chasing yield. Our philosophy is to detect and
avoid deteriorating credits through robust and continuous
credit analysis. We aim to avoid losers, not chase winners,
because the downside risk from holding a deteriorating
credit overwhelmingly outweighs the small benet from
holding an improving one.
Analysis of the underlying credit risk of each hybrid forms
the basis of our investment philosophy. Put simply, if wedont believe that the issuer is creditworthy, we wont
invest anywhere along its capital structure. Assuming the
issuer is creditworthy, we only invest in hybrid instruments
if we believe that we are being fully compensated for
taking higher risks. We also undertake relative value
analysis whereby the risk-reward framework of a hybrid
security is compared against senior and subordinated
debt securities. These measures must be favourable for
hybrid instruments before we would look to invest in them.
Hybrid Senior Sub Equity Hybrid Senior Sub Equity
Hybrid Hybrid
Senior Senior
Sub Sub
Equity Equity
Hybrid
Senior
Sub
Equity
Hybrid Senior Sub Equity
From Dec-2005 to Feb-2008 From Feb-2008 to May-2010
From Dec-2005 to May-2010
100.0% 98.4% 98.8% 83.8%
100.0%
100.0% -23.0% -16.1% 85.8%
100.0 % 99.4% -15.8%
10 0.0 % -7.2 %
100.0%
100.0% 99.7% 77.3%
100.0 % 80.8 %
100.0% 19.1% 28.6% 81.9%
100.0% 99.3% 60.8%
100.0% 68.1%
100.0%
Table 2: Correlation analysis
Source: Macquarie Investment Management
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Appendix
Introduction to capital structure
Organisations can fund their assets and operations throughtwo main funding sources: debt or equity (Diagram 8).Debt nance is cheaper, as investors require lower rates ofreturn due to the lower risks of investing in debt comparedwith equity. Debt is also tax deductible. A company thatnances its operations with as much debt as possible canin theory maximise returns to shareholders. However, debt
introduces nancial risks to the organisation, and too muchdebt can result in bankruptcy. Therefore, organisationsneed to balance their desire to maximise shareholder
returns whilst minimising the negative implications ofhaving too much debt. Hybrid capital, in theory can helpachieve these conicting objectives by minimising dilution(by not issuing shares), strengthening the balance sheet(by structuring an instrument that the rating agencies viewas equity-like) and lowering the cost of funding (throughtax deductible coupon payments). Although the theory
shows that hybrid instruments work for issuers, recentperformance suggests that they do not work for xedincome investors.
Diagram 8: Comparison of capital structure with and
without hybrid capital
DebtDebt
Hybrid
Equity
Equity
Creditors(working capital)
Creditors(working capital)
Debtors
Inventory
Fixed Assets
Assets Liabilities / Equity Liabilities / Equity
(with hybrid capital)
Index methodology
In order to compare the performance across equity,
hybrid instruments, subordinated debt and senior debt,
we constructed equally weighted indices that comprised
instruments issued by highly rated borrowers with
comparable credit proles.
These four indices were calculated to ensure that coupon
or dividend payments do not generate a discontinuity in the
time series of index values, with coupons and dividends
reinvested in the universe of securities comprising theindices. In our coverage universe, indices were rebalanced
when a new hybrid was issued. The index divisor (n, as
shown in Table 3) is increased by the number of new
issues. If an issuer had a hybrid instrument in the hybrid
index, then the respective instrument was included in the
equity, subordinated debt and senior debt indices. For
example, CBA issued a hybrid instrument in April 2006.
CBA was excluded from all indices until this date.
Table 3: Hybrid Index valuation formula
In the absence of any new issue and maturities, the hybridindex at any time may be written as:
)1(*)( = tIndextreturnIndex
= +
+=
n
i titi
tti
CP
CP
ntreturn
1 1,1,
,,
)(
)(1)(
Where
Pi,t is the gross price per $100 of face value for the ith
hybrid security at time t.
Ci,t is the sum of all the coupons payment afterissuance per $100 face value plus reinvestment
gain (loss) of these coupons of the ith hybrid
security until the date t.
n is the number of hybrid securities in the index
portfolio at time t.
All hybrid securities will be consistently valued CUM for
the purpose of valuation
i
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Our senior and subordinate debt indices were constructed
using 5 year CDS spreads, which are highly reective of
medium term credit risks and highly liquid when compared
to holding physical securities (Table 4).
Coupon rates were based on the 5 year CDS spread on the
date of inclusion in the index plus the quarterly benchmark
rate (3 month BBSW). The gross price was calculated daily
based upon actual market movements in CDS spreads and
BBSW.
Table 4: Senior/Subordinated Debt Replication Formula
)1(*)( = tIndextreturnIndexDebtSenior
Where
B 3 months BBSW at coupon payment date.
IM Interest Margin (CDS spread at issuance as apercentage).
D the number of days in the current interest period.
TM Trading Margin (CDS spread at time t as a percentage).
K coupon frequency.
R 3 months BBSW at time t.
F the number of days from the beginning of thecurrent accrual period to the next interestpayment date.
A = (1 V) / i
V = 1 / (1+i)
i = (BBSW + TM)/ K
All instruments will be consistently valued CUM for the purpose
of valuation.
= +
+=
n
i titi
titi
CP
CP
ntreturn
1 1,1,
,,
)(
)(1)(
365
)(1
1001365/)(
,FTMR
Ak
TMIMDIMB
P
n
ti+
+
+
++
=
n
The hybrid instruments used for our index construction:
Table 5: Hybrid instruments used in our index
Issuer Instrument
S&P
Rating
Issuance
Date
Coupon
Spread
ANZ Convertible
Preference
Shares (ANZPB)
A+ 30 Sep
2008
2.50%
CBA PERLS III(PCAPA)
A+ 7 Apr2006
1.05%
MQG Macquarie
Income
Securities
(MBLHB)
BBB+ 25 Nov
1999
1.70%
NAB National Income
Securities
(NABHA)
A 8 Jul 1999 1.25%
SUN Floating Rate
Capital Notes(SUNHB)
A- 17 Dec
1998
0.75%
WBC Trust Preferred
Securities
(WCTPA)
A+ 21 Jun
2006
1.00%
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Table 6 provides an overview of some of the common characteristics observed in hybrid instruments and their ranking on a
debt-to-equity scale.
Table 6: Comparison of characteristics between hybrid instruments with debt and equity
Cumulative interest payments
Mandatory or optional conversion
Convertability
Deeply subordinated, both
legally and structurally (issued
by company further away fromoperating cashflows)
Subordination
Optional or contractually deferrable
No conversion
Unsubordinated and issued by
or guaranteed by operating companies
Non deferrable interest
Cumulative interest payments
Fixed maturity date
Deferability of interest payments
Noncumulative dividend payments
No maturity date perpetual
Maturity Date
Neither a debt or equitylike feature, however the pricing of the security can differ materially
depending on whether the instrument is priced to the option date or its legal maturity date
Investor Put / Investor Call
HybridDebt Equity
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Glossary
BBSW
Bank Bill Reference Rate. Typically used as the risk free
base rate in the pricing of many securities, including debt
and hybrid instruments
Capital return
The portion of an investment return derived from changes
in the capital value of the investment. This can be positive
or negative, and may not be realised until the asset is sold.
Credit Default Swap (CDS)
A bilateral agreement designed to transfer credit risk
between two parties. Put simply, it may be likened to an
insurance contract where in exchange for a premium,
the protection buyer transfers the risk of default to the
protection seller. CDSs are commonly used by a wide
range of nancial institutions as a means of hedging
and diversifying credit risks. For example, selling $1m of
protection on BHP Billiton at 0.50% presents the same risk/
rewards as buying a $1m BHP Billiton oating rate note that
pays a margin of 0.50% of the same maturity
Convertibility
Hybrid instruments may be convertible into shares of the
issuer. Conversion may be mandatory, ie there is no option
of getting repaid in cash, and may depend on certain
triggers being satised.
Cumulative interest payments
If deferred, certain instruments may carry the requirement
for the issuer to pay interest that has been deferred at a
later date i.e. interest payments are cumulative.
Deferability of interest
In a similar manner that a company decides if it wishes
to pay a dividend to equity holders, some hybrids give
companies the ability to defer paying interest on securities.
The interest on senior debt securities, on the other hand,
cannot be deferred without triggering an event of default.
Income return
The portion of an investment return derived from coupons
or dividends. This will be greater than or equal to zero.
Investor put
This is not a very common feature of hybrids but certain
instruments carry the option for the investor to sell the
hybrid instrument back to the issuer at a predetermined
price and date. This feature is not debt-like, nor equity-like.
Issuer callThis feature is similar to an investor put but in an issuer call
the issuer has the option to buy back the instrument from
the investor at a predetermined price and date.
Maturity date
Generally the maturity on hybrids can range from short
dated (up to 3 years) to perpetual maturities similar to that
on equities.
Stapled security
An instrument that comprises two or more underlying
securities, neither of which can be traded separately.
Some hybrid instruments comprise a preference share
and an unsecured note, which aids in their coupons being
deductible for tax purposes.
Subordination
Hybrid instruments rank behind senior debt and other
creditors of the issuer but are senior to ordinary shares
of the issuer. Subordination can include both legal and
structural subordination, with some hybrid instruments
subject to both.
Tier 1 Capital
Comprises the highest quality capital of a bank orinsurers balance sheet. Tier 1 Capital provides a
permanent capital base, is freely available to absorb
losses and ranks behind senior creditors in a liquidation
scenario. It typically comprises shareholders equity,
reserves and retained earnings.
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About the Authors
Adrian David is a Senior Credit Analystwithin Macquarie's FICCAM team inSydney. He undertakes fundamental creditanalysis on domestic and international
companies operating across a range
of nancial, industrial and infrastructuresectors. Adrian identies and quantiespotential issues that could impact the
credit quality of individual companies and
maintains an active investment view on allissuers across his portfolio of credits.
Prior to joining Macquarie, Adrian spent3 years with HSBC's Rating & CapitalAdvisory team in London. In this role,Adrian advised corporate debt issuers
across the rating spectrum on their credit
rating and funding requirements and
executed transactions across Europe,the Middle East, Asia and the Americas.Prior to HSBC, Adrian spent 4 years withStandard & Poor's in Melbourne andLondon as a corporate credit analyst.
Adrian is a CFA Charterholder and holds
a Bachelor of Business in Economics
and Finance with distinction from theRoyal Melbourne Institute of Technology
University
Asmita Kulkarni is a credit analyst withinMacquaries FICCAM team in Sydney.
Asmitas credit research is focused on
analysis of Australian and European
nancial institutions and securitisedtransactions including RMBS, CMBS andABS investments. Asmita actively monitorsall transactions in her portfolio with aspecic focus on identifying and avoidingdeteriorating credits.
Prior to joining the Credit team Asmitaworked in the FICCAM QuantitativeResearch team where she was involved inanalysis of new investment ideas and thedevelopment of analytical tools. Asmita
played an integral role in developing our
PCA Model and the Safety Factor Model
which is used in our analysis of mortgage-backed securities.
Asmita joined Macquarie as a graduateof the University of NSW, where shecompleted a BComm with Distinction,majoring in Finance and Actuarialstudies. Asmita is a CFA Charterholder
and an Associate of the Institute of
Acturies Australia.
ADRIAN DAVID
B.BUS, CFASenior credit analyst
Macquarie Investment
Management
ASMITA KULKARNI
B.COM, AIAA, CFACredit Analyst
Macquarie Investment
Management
The authors would like to extend a special thanks to Gary Ding for his research assistance with this publication.
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Important Notice
This document has been prepared in August 2010 by Macquarie Investment Management Limited (ABN 66 002 867 003, AFSL 237492) (MIML)
solely for general informational purposes. The information in this document is not, and should not be construed as, an advertisement, offer
or recommendation to participate in any investment strategy or take any other action. This document has been prepared without taking into
account any persons objectives, nancial situation or needs. Readers should not construe the contents of this document as investment or other
advice.
Future results are impossible to predict. This document contains conclusions, opinions, estimates and other forward-looking statements which
are, by their very nature, subject to various risks and uncertainties. Actual events or results may differ materially, positively or negatively, from
those reected or contemplated in such forward looking statements. Forward-looking statements are subject to change without notice.
No representation or warranty, express or implied, is made as to the suitability, accuracy or completeness of the information, opinions and
conclusions contained in this document. In preparing this document, reliance has been placed, without independent verication, on the accuracy
and completeness of all information available from external sources. To the maximum extent permitted by law, no member of the MacquarieGroup nor its directors, employees or agents accept any liability for any loss arising from the use of this document, its contents or otherwise
arising in connection with it.
MIML is not an author ised deposit-taking institution for the purposes of the Banking Act (Commonwealth of Australia) 1959, and MIML's
obligations do not represent deposits or other liabilities of Macquarie Bank Limited. Macquarie Bank Limited does not guarantee or otherwise
provide assurance in respect of the obligations of MIML.
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