Direct Fixed Income Solutions with the Institutional Bank.

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1 Direct Fixed Income Solutions with the Institutional Bank. Westpac Institutional Bank Cash Tailored Term Deposits Fixed Income

2 Direct fixed income solutions Direct fixed income solutions Westpac Institutional Bank combines powerful market and economic insight with a deep understanding of investors needs to create a suite of potential solutions developed by product specialists. Our extensive expertise and experience in fixed income and debt capital markets enables you to access: A complete range of direct fixed income investment solutions that can be tailored to meet specific client needs Market leading fixed income analysis and research that is ranked number one in Australia 1 The infrastructure, systems, technology and trading capabilities of Westpac Institutional Bank to deliver your fixed income investment The strength of Westpac Institutional Bank s relationships with Australian corporate borrowers No.1 Bookrunner No.1 Listed Debt 1 Domestic Bank of choice in Fixed Income Markets 2 Why invest in fixed income? Fixed income investments play a critical role in a diversified portfolio. The key characteristics of a fixed income investment provide many benefits. Regular income A fixed income investment refers to debt securities that pay a defined distribution (coupon) at fixed intervals for a given period of time (term). At maturity, the investment is repaid (unless the issuer defaults). The most common fixed income investment is called a bond. Fixed income investments provide investors with certainty that they will receive a regular income payment allowing them to more easily manage their cash flow. Capital stability Investors in fixed income are repaid the principal of the security at maturity or in some cases over the term of the security. The fixed schedule of principal repayments and interest payments may give rise to stability of capital valuation. Capital valuations are primarily influenced by the level of interest rates, and an assessment of the capacity of the issuer to meet their scheduled payments. The result is that returns on fixed income securities are less volatile than shares. Diversification benefits Fixed income investing provides exposure to a range of sectors from government guaranteed deposits to high quality Australian corporates. The returns on fixed income investments generally have a low correlation to the performance of equities. Fixed income provides investors with an effective way to diversify their investment portfolio. Enhanced risk adjusted returns Investors can target yield focused investments with an opportunity to enhance returns or reduce risk based on overall portfolio considerations. The relative performance of government/corporate bonds, listed debt and hybrid securities and equities since 2005 can be seen in Figure KangaNews A$Listed Debt League Table 2014, including self led deals. 2 Peter Lee Associates Debt Securities Investors Australia Survey Rank vs. top 4 major domestic banks. Based upon the most active investors in each type of security. Based upon Westpac achieving a no.1 ranking amongst the four major domestic banks for estimated market share across Corporate Bonds, Asset Backed Securities, CPI Linked Securities and CPI Linked Derivatives, a no.1 ranking for Relationship Strength amongst the four major domestic banks across Commonwealth Treasury and Semi Government Bonds and Asset Backed Securities. 2

3 Westpac Institutional Bank Types of income Zero coupon bonds These securities pay no interest to the investor and are issued at a discount to par or face value. The interest earned is the difference between the purchase price of the bond and the par value received at maturity. Examples include short-term investments such as Bank Bills. Fixed rate bonds A fixed rate bond is a security that pays a fixed distribution (coupon) at fixed intervals during the term of the bond. The coupon is expressed in percentage terms, e.g. 5.0%. Ranking and priority in the capital structure It is important to be aware of where various securities rank in the capital structure of the borrower. This ranking determines the priority of payment in the event of liquidation. The higher up the capital structure, the more senior the entitlement and the lower the risk of the investment. Debt which is lower down the capital structure should offer investors a higher coupon. Additionally, certain debt securities are secured over assets (tangible and intangible) of the issuer, which may enhance the ultimate return of funds if the borrower defaults. Figure 1: Ranking and priority in liquidation or receivership Floating rate notes A floating rate note is a security that pays a floating distribution (coupon) at fixed intervals during the term of the security. The coupon is calculated with reference to a floating rate benchmark (e.g. RBA Cash Rate, BBSW) plus a fixed margin determined at the issue date, e.g. BBSW + 2.0%. Inflation-linked bonds Capital Indexed Bonds (CIBs) pay a fixed coupon on a principal value that is indexed to inflation and Indexed Annuity Bonds (IABs) pay a regular payment that is comprised of interest and a partial return of principal. This payment is indexed with inflation. Term Deposits Senior Secured Debt Senior Unsecured Debt Subordinated Debt Hybrids, Preference Shares Ordinary Equity/Shares Higher ranking Lower ranking Source: Westpac Figure 2: Relative performance of key indices Source: Elstree, Iress February Jan 05 May 05 Sep 05 Jan 06 May 06 Sep 06 Jan 07 May 07 Sep 07 Jan 08 May 08 Sep 08 Jan 09 May 09 Sep 09 Jan 10 May 10 Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12 Jan 13 May 13 Sep 13 Jan 14 May 14 Sep 14 Jan 15 ASX200 Accumulation Index S&P/ASX Australian Fixed Interest Index Elstree Hybrid Index 3

4 Direct fixed income solutions Fixed income investments Fixed income is not a homogenous asset class. It includes everything from cash, term deposits through to government securities into investment grade credit corporate bonds and the tiered capital universe of hybrids. The potential trade off between risk and return is illustrated in Figure 3. Westpac Institutional Bank provides access to a range of listed and unlisted direct fixed income investments. Listed opportunities Australian government bonds Corporate bonds High yield notes Hybrid securities Unlisted opportunities Term deposits Tailored deposits Credit linked notes Wholesale bonds Access to fixed income investments Investors can invest in fixed income directly or through a managed fund. Direct fixed income investments are classified as wholesale or retail investments. Wholesale investments typically have minimum denominations of $500k. Retail investments typically have minimum denominations of smaller amounts. Diversification and direct fixed income Direct fixed income investing allows investors to invest across the capital structure of a company, to allocate by sector and in some cases individual securities to establish a genuinely diversified portfolio. Figure 3: Risk vs. return the trade off Source: Westpac Low Potential return High Cash Government Bonds Corporate Bonds Hybrids Equities Low Risk/Volatility High Figure 4: Indicative yield to call/maturity Source: RBA, Westpac February 2015 Aust Government Bond (5yr) Cash Rate 2.05% 2.25% Major Bank Term Deposit (5yr) A rated Corporate Bond (5yr) 3.10% 3.35% Westpac Subordinated Notes ll (3.5yr) BBB rated Corporate Bond (5yr) Suncorp Subordinated Notes (3.8yr) 4.10% 4.17% 4.32% Challenger Capital Notes (5.3yr) Westpac Capital Notes 2 (7.6yr) CommBank PERLS Vll Capital Notes (7.8yr) 6.19%* 6.24%* 6.28%* 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 4 *Grossed up to include franking credits

5 Westpac Institutional Bank Portfolio considerations Applying diversification principles is as equally important in building a debt portfolio as it is in an equity portfolio. Importantly, a debt portfolio has a number of different metrics that can be diversified such as credit, maturity and interest rate exposure. A well-constructed fixed income portfolio will effectively manage the risks specific to fixed income investing. Consideration Summary How to manage in a portfolio Credit risk The risk that the borrower fails to meet their scheduled payment obligations (default risk). Generally the higher the credit risk the higher the interest rate. The extent of a security s credit risk is influenced by several factors including: -- the creditworthiness of the underlying borrower; and -- whether the borrowing is secured or unsecured. The credit spread represents the additional margin an investor demands to hold a risky asset over a similar term Commonwealth Government bond. Investors are subject to credit spread risk, which is the risk that the value of an issuer s debt obligations will decline due to an increase in the credit spread. For example, during economic recessions, investors are concerned that issuers will face a decline in cash flows that would be used to service their bond obligations. As a result the credit spread tends to widen for non-commonwealth Government issuers. An unanticipated downgrade of an issue or issuers credit rating increases the credit spread and results in a decline in the price of the issue or the issuer s bonds. Default risk associated with certain fixed income investments can be mitigated by investigating in highly rated securities and in a highly diversified portfolio. Diversification of borrower s within a fixed income portfolio this is analogous with stock selection in equity investing. Invest across a borrower s capital structure to dial up or down credit risk. Reinvestment risk Liquidity risk Interest rate and market value risk Term structure/ yield curve The risk that the proceeds from the payment of principal and interest on a fixed income investment have to be reinvested at a lower rate than the original investment. Falling interest rates may prevent the reinvestment of coupon payments from earning the same rate of return as the original investment. Investors holding short term cash and/or deposits are particularly exposed to this risk. Callable securities (e.g. callable bonds and redeemable hybrids) provide borrowers with the option to call or redeem their debt obligations earlier than the scheduled maturity. This risk is more acute in a low interest rate environment as borrowers may attempt to call their bonds to refinance at a lower interest rate. The ability of an investor to redeem/sell their investment prior to the scheduled maturity. Listed investments will have greater liquidity than unlisted investments. Illiquid investments can earn a premium over more liquid investments. The price of a typical bond will change in the opposite direction to the change in the general level of market interest rates or yields. That is, when interest rates rise, a bond s price will fall; when interest rates fall, a bond s price will rise. The value of fixed coupon securities is significantly more sensitive to changes in the level of interest rates than floating coupon securities (e.g. floating rate notes). In general terms, interest rates or bond yields increase in line with maturity, given rise to an upward sloping yield curve or a normal yield curve. The term structure of interest rates reflects market expectations about future changes in interest rates and their assessment of monetary policy conditions. Invest across longer horizons to reduce the frequency at which funds need to be reinvested. Stagger investments across multiple maturities to reduce the amount of funds needing to be reinvested at any one time. Balance the trade off between liquidity and return for example, obtain greater liquidity in shortdated investments, or capture liquidity premium by investing in longer terms. Diversify between securities with different maturities, payment types and coupon frequency. Fixed income investments are available in fixed rate, floating rate and inflation linked formats. The multiple formats provide diversification benefits in reducing the overall sensitivity of the portfolio values to changes in the level of market interest rates. The shape of the yield curve will influence investor s decision to purchase long term or short term fixed income investments. For example, during a recession (inverted yield curve) investors may choose to buy high quality or risk-free assets such as government bonds or term deposits. 5

6 Direct fixed income solutions Fixed income solutions Westpac Institutional Bank provides direct access to a range of listed and unlisted fixed income investments. Listed Interest Rate Securities Listed interest rate securities offer fixed income exposure to a range of issuers that provide fixed and floating interest rate payments. Investors can access listed securities through new issuance, with a minimum investment of A$5,000, or in the secondary market via Australian Stock Exchange (ASX). The listed nature of the securities offers investors the same price transparency and ease to transact as ordinary shares. Australian Government Bonds (AGBs) Corporate Bonds Hybrids Debt securities issued by the Australian Government Varying coupons and maturities, typically ranging from less than one year to over fifteen years Lowest possible credit risk, offering investors stable and highly secure cashflows Available in an inflation linked form, whereby the face value of the bond is adjusted for movements in CPI providing investors with protection against inflation Typically more vanilla style debt securities issued by companies (including financial institutions) Range from senior to subordinated debt Range of maturities and coupon types Provides investors with access to a company s debt obligations and an opportunity to increase potential returns based on the credit quality of the particular issuer Securities that have both debt and equity characteristics Wide range of maturities and structures Usually offer potential for higher returns than more senior securities in the capital structure such as senior and subordinated debt Examples include convertible notes and convertible preference shares Unlisted Wholesale Bonds Wholesale bonds refer to fixed income investments available only to sophisticated or wholesale investors. They can provide exposure to a single company or a pool of assets across a range of tenors. These investments are not traded through an exchange, rather transacted over the counter (OTC), typically in parcels upward of $100,000. Corporate Bonds Credit Linked Notes Capital Indexed Bonds Asset Backed Securities (ABS) Residential Mortgage Backed Securities (RMBS) A broad range of securities issued by Australian corporates (including financial institutions) Issued across the capital structure ranging from senior secured bonds to subordinated bonds Provide exposure to investment grade credit risk that may not be readily accessible through the bond market Pay a premium over term deposits in a variety of interest rate structures Secondary market liquidity is provided by Westpac The principal repayment is adjusted for inflation that occurs over the life of the bond A fixed coupon rate is paid on this inflation adjusted principal Cashflows to investors are sourced from the receivables generated from a specified pool of assets Provides access to potentially non-tradable assets A subset of Asset Backed Securities Cashflows to the investors are sourced from the payments of interest and principal from a portfolio of residential mortgages 6

7 Westpac Institutional Bank Cash and Tailored Deposits Cash and tailored deposits cover secure and specialised investments tailored for individual investor circumstances, with an emphasis on principal protection. Tailored deposits can be customised for terms of up to 15 years, with the principal repaid at maturity or during the term of the investment. 11am Account* An at call deposit paying a variable rate based off the prevailing cash rate Manage excess liquidity at market rates, readily at call Minimum investment of A$10,000 Term Deposit* Coupon Select Deposit* A fixed rate investment from 7 days to 5 years, paying monthly or annual interest Secure, low risk investment backed by Westpac Minimum investment of A$5,000 Investors elect to receive coupons in the form of fixed rate, floating rate or a combination of both Diversifies interest rate exposure through a low risk deposit Replicates the cashflows of an annuity, so investors receive a known (or inflation linked) Westpac Retirement Deposit* income stream for up to 15 years Suitable for retirees Inflation Linked Deposit* CPI Plus Deposit* Interest payments that vary with changes in inflation Protects the purchasing power of your income stream Pays a fixed rate above annual inflation for the term of the deposit Ensures that the return remains above inflation Principal Indexed Inflation Deposit Pays a fixed rate of return and adjusts the principal for inflation at maturity Protects investment capital from the effects of inflation over the life of the investment Available to wholesale investors only Range Accrual Deposit* Pays an enhanced rate for each day the reference index remains within the pre-determined range, while protecting the principal for the term Investors choose a range in line with their interest rate view and risk appetite Suitable for sophisticated investors only * Investors may be entitled to payment under the Australian Government s Financial Claims Scheme. Require a minimum investment of A$50,000, unless otherwise stated. 7

8 Direct fixed income solutions More information To find out more, please contact your. Simon Teong Head of Investments & Deposits Sales T: M: E: Tiffany Bosco T: M: E: VIC Simon Clark Head of Sales VIC, SA, WA and QLD T: M: E: NATIONAL Ryan Evans Director Retail Syndicate T: M: E: Paul Moonlight T: M: E: Mark Osborne T: M: E: VIC Brendan Fairbanks T: M: E: NATIONAL T: E: Andrew Trewhella T: M: E: QLD Alessandra Bertora T: M: E: VIC/SA/TAS Vanessa Jaber Director T: M: E: Mark Tyrril T: M: E: QLD James Bambrick T: M: E: WA Ian Dodson Associate Director, T: M: E: Things you should know: Westpac Institutional Bank is a division of Westpac Banking Corporation ABN , AFSL , incorporated in Australia ( Westpac ). The information contained in this document: does not constitute an offer, or a solicitation of an offer, to subscribe for or purchase any securities or other financial instrument; does not constitute an offer, inducement or solicitation to enter a legally binding contract; and is not to be construed as an indication or prediction of future results. The information is general and preliminary information only and while Westpac has made every effort to ensure that information is free from error, Westpac does not warrant the accuracy, adequacy or completeness of the information. The information may contain material provided directly by third parties and while such material is published with necessary permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. In preparing the information, Westpac has not taken into consideration the financial situation, investment objectives or particular needs of any particular investor and recommends that investors seek independent advice before acting on the information. Before deciding, read the disclosure documents for your selected product or service, including the Terms and Conditions or Product Disclosure Statement (for any product that a Product Disclosure Statement is required) that is available on Certain types of transactions, including those involving futures, options and high yield securities give rise to substantial risk and are not suitable for all investors. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice. Information current as at February

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