Permission to reprint or distribute any content from this presentation

requires the prior written approval of Standard & Poor’s. Copyright © 2014

by Standard & Poor’s Financial Services LLC. All rights reserved.

Credit Ratings: Enhancing Transparency & Comparability

Richard Creed Director Corporate Ratings August 2014

2

Overview

1. Snapshot: Rated Infrastructure In Australia

2. Debt Investors: Appetite Is Strong

3. Criteria Framework: Ratings A Blend Of Business and Financial Risk

4. Australian Infrastructure: Typical Corporate Profile

5. Conclusion

3

Snapshot: S&P’s Rated Infrastructure Issuers

4

Snapshot Rated Infrastructure Entities: - Structured to be Investment Grade - Diversity of ownership: Onshore & Offshore

Issuer Sector Rating Comment

AusNet Services Networks A-/Stable Public Listed; Singapore Power

SGSP (Australia) Assets Pty Ltd Networks BBB+/Stable Singapore & State Grid

Southern Cross Airports Corp Sydney Airport BBB/Stable Public Listed

Australia Pacific Airports Corp Melbourne / Launceston Airports A-/Stable Diversified Fund Manager's

Transurban Toll Roads A-/Stable Public Listed

Adani Abbot Point Terminal Coal Port / Proj Finance BBB-/Stable Private: India's Adani Group

Ancora (RCH) PPP: Royal Children's Hospital BBB/Stable Availability Payments

Infrastructure: About 30% Of Rated Debt In Australasia

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Airports Australian Utilities Consumer RelatedCorporates

Materials & Energy New ZealandUtilities

Project Finance Real Estate

(Mil.

A$

)

Drawn bank debt Other drawn debt

Drawn Bank Debt For Rated Australasian Corporates And Infrastructure

© Standard & Poor's 2014.

6

Investor Appetite Is Strong

Australia Fulfils Debt Investors Requirements For:

Strong legal framework

Policy support

Enforcement

Fair judicial system

Independent regulator

• Empowered to enforce

• Adequately resourced

Political stability

Tariffs adjusted for low collection must cover operating costs plus maintenance

Investment Trends: Offshore Greater Financial Firepower?

• Offshore:

Emergence of Chinese (State Grid)

Canadian Pension Funds

Asian Conglomerates o CKI Group

o Singapore Power

Onshore:

Australian Super Funds o Liquidity requirements / redemption risk?

Listed Funds o Higher funding costs?

9

Criteria Framework

Business Risk Profile Assessment

“…the combined assessments for country risk, industry risk, and competitive position

determine a company’s business risk profile assessment”

10

11

Country Risk Assessments Assigned

Very low risk (1) Low risk (2) Intermediate risk (3) Moderately high risk (4) High risk (5) Very high risk (6)

Australia Austria Abu Dhabi Bahamas Albania Argentina

Canada Belgium Czech Republic Barbados Azerbaijan Bangladesh

Denmark Chile Estonia Brazil Bahrain Belarus

Germany Finland Ireland Bulgaria Cyprus Belize

Hong Kong France Israel China Dominican Republic Congo, Republic of

Netherlands Japan Macau Colombia El Salvador Ecuador

Norway Luxembourg Malaysia Costa Rica Georgia Egypt

Singapore New Zealand Malta Croatia Greece Laos

Sweden Slovakia Dubai Guatemala Pakistan

Switzerland South Korea Hungary Honduras Papua New Guinea

United Kingdom Taiwan Iceland Indonesia Ukraine

United States Qatar India Jamaica Venezuela

Italy Jordan

Kuwait Kazakhstan

Latvia Lebanon

Lithuania Mongolia

Mexico Mozambique

Morocco Nigeria

Oman Paraguay

Panama Russia

Peru Senegal

Philippines Sri Lanka

Poland Tunisia

Portugal Vietnam

Ras Al Khaimah Zambia

Romania

Saudi Arabia

Slovenia

South Africa

Spain

Thailand

Trinidad & Tobago

Turkey

Uruguay

--Ranging from Group '1' (lowest risk) to Group '6' (highest risk)--

Country Risk Assessments By Group And Country As Of Nov. 19, 2013

Industry risk assessments

Industry Classification Score

Transportation cyclical High risk 5

Metals and mining downstream Moderately high risk 4

Auto OEM Moderately high risk 4

Commodity chemicals Moderately high risk 4

Technology hardware and semiconductors Moderately high risk 4

Oil and gas refining and marketing Moderately high risk 4

Unregulated power and gas Moderately high risk 4 Engineering and construction Moderately high risk 4

Forest and paper products Moderately high risk 4

Auto suppliers Intermediate risk 4

Agribusiness and commodity foods Intermediate risk 3

Building materials Intermediate risk 3

Oil and gas integrated, exploration and production Intermediate risk 3

Leisure and sports Intermediate risk 3

Oil and gas drilling, equipment and services Intermediate risk 3

Capital goods Intermediate risk 3

Consumer durables Intermediate risk 3

Business and consumer services Intermediate risk 3

Technology software and services Intermediate risk 3

Containers and packaging Intermediate risk 3

Media and entertainment Intermediate risk 3

Retail and restaurants Intermediate risk 3

Transportation leasing Intermediate risk 3

Telecommunications and cable Intermediate risk 3

Health care services Intermediate risk 3

Health care equipment Low risk 2

Transportation infrastructure Low risk 2 Midstream energy Low risk 2

Real estate investment trusts Low risk 2

Branded nondurables Low risk 2

Pharmaceuticals Low risk 2

Regulated utilities Low risk 1

12

Industry Risk Assessments

Competitive Position

Preliminary

Competitive Position

Assessment

Competitive Advantage

Scale, Scope & Diversity

Operating Efficiency

Profitability

Absolute Profitability

Volatility Of Profitability

Profitability can

strengthen or weaken the

competitive position

Competitive

Position

Assessment

13

Business Risk Profile

Financial Risk Profile

Anchor Modifiers Group

methodology Financial Risk Profile Assessment

14

Benchmark Ranges Cash Flow Ratios

15

Australian Infrastructure:

Which benchmark metrics?

• Typically: the “low-volatility” ratios.

• Reflects sector based criteria factoring among

other things :

Regulated utilities: regulatory assessment

strength and “vast majority” of cash flow from

regulated operations (utilities)

Transportation Infrastructure: business risk of

at least “satisfactory” (airports, ports, toll roads)

Anchor

When two anchor outcomes are listed for a given combination of business risk profile assessment and financial risk

profile assessment, the anchor will be based on the:

– Comparative strength of its business risk profile if the financial risk profile is ‘4’ or stronger (i.e. 1-4)

– Comparative strength of its financial risk profile if its financial risk profile is ‘5-6’

16

Combining The Business And Financial Risk Profiles To Determine The Anchor

-- Financial risk profile --

-- Business risk profile -- 1

(minimal)

2

(modest)

3

(intermediate)

4

(significant)

5

(aggressive)

6

(highly

leveraged)

1 (excellent) aaa/aa+ aa a+/a a- bbb bbb-/bb+

2 (strong) aa/aa- a+/a a-/bbb+ bbb bb+ bb

3 (satisfactory) a/a- bbb+ bbb/bbb- bbb-/bb+ bb b+

4 (fair) bbb/bbb- bbb- bb+ bb bb- b

5 (weak) bb+ bb+ bb bb- b+ b/b-

6 (vulnerable) bb- bb- bb-/b+ b+ b b-

17

Australian Infrastructure Issuers: Typical Corporate Profile

Australian Infrastructure Issuers: Typical Corporate Profile

• Typically Investment Grade: Robust “Business Risk” profiles offset by inherent aggressive capital structures weighing on “Financial Risk” profiles

Business Risk Profile: “Excellent” to “Strong”

o Monopoly Assets, often regulated

o Predictable revenue streams

o Where competitive: Compelling asset rationale e.g. Toll roads

Financial Risk Profile: “Significant” to “Highly Leveraged”

o Stability of credit metrics:

Capex

Dividends

Equity Support

o Financial policies:

Liquidity & re-finance risk

Debt tenor

PPP’s Impact on Government Credit Quality

• SOE and local government debt are part of the government rating

• PPP’s can impact State/Local Rating

- Availability PPP’s - contractual obligation to pay

- PPP Obligation is considered tax-supported debt

• Materiality

• Degree of risk transfer

• Underlying motivation

- Volume based PPP – a possible contingent liability

- Design & Construct may lead to contingent liability for changes

- PPP’s largely bank funded; limited appetite from capital markets since demise of

monolines

• Privatization

• What proceeds used for?

• Value for money – replacement of existing revenue stream

20

Conclusion

- Investor appetite for infrastructure assets remains strong across the spectrum: regulated networks, airports, ports, toll roads, PPP’s

- Competition for mature assets is high, with offshore interest increasing

- Typically we see investment grade outcomes

- Infrastructure provides robust, stable cash flows conducive to high leverage

- Financial polices a key element in the ratings

21

Conclusion

Permission to reprint or distribute any content from this presentation requires the prior written approval of

Standard & Poor’s. Copyright © 2013 by Standard & Poor’s Financial Services LLC. All rights reserved.

Thank You

Richard Creed

Director T: 613.9631.2045 richard.creed@standardandpoors.com

22

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