Institute for Municipal Finance Officers Conference 9 October 2012 Prasanna Nana ZAR Bond Market Discussion

2 Outline  Overview of ZAR DCM  Key Considerations for Municipal Issuers  Ekurhuleni Case Study

3 ZAR DCM: R1.5 trillion in Listed Bonds Outstanding Issuer TypeTerm to maturity

4 Three Municipalities have Accessed the DCM City Debut year Amount outstanding (ZAR’bn) % Size of DMTN* (ZAR’bn) Johannesburg %13 Cape Town %7 Ekurhuleni %4 Over R14 billion of outstanding municipal issuance in the market Source: JSE *Domestic Medium Term Note Programme

5 Municipalities/ Entities rated by Moody’s Aa3.za  City of Cape Town  Ekurhuleni A1.za A2.zaA3.za  City of Johannesburg  City of Tshwane  Nelson Mandela Bay Metropolitan  East Rand Water Care Company (ERWAT)  Rustenburg  Amathole  Mbombela Baa1.zaBaa2.za  Breede Valley  George  KwaDukuza  Matlosana  Greater Tzaneen  Knysna  Maluti-a-Phofung  Umgeni  Sol Plaatje  Swartland  Lephalale

6 Pricing: Base Rates Foreign inflows into Government bonds at all time highs Driving down long term government bond yields _______________________ Source: Bloomberg, October 2012

7 Pricing: Credit Spreads _______________________ Source: JSE, INET, Absa Capital Research, September 2012 Credit spread cycle bottomed-out from the second half of 2011 Corporate spreads recover from peak 2009 levels on the back of improved economic prospects and investor demand for credit SOE spreads stabilise at higher levels Spread blow-out from the credit crisis

8 Fixed Rate vs. Floating Rate Fixed Rate Issuance  Margin(Credit Spread) over Government bonds  Coupon payable every six months for duration of bond Floating Rate Issuance  Margin over 3 month Jibar rate  Coupon payable every 3 months for duration of bond

9 Outline  Overview of ZAR DCM  Key Considerations for Municipal Issuers  Ekurhuleni Case Study

10 Factors for Consideration Credit rating Products Issuer  Commercial paper  Secured /Unsecured bonds  Fixed / Floating rate bonds  Inflation-Linked bonds  MFMA  JSE Listing Requirements  Commercial Paper Regulations  Asset Managers, Pension Funds, Insurance Comapnies  Mandate requirements  Credit Appetite  Portfolio Liquidity  Peer pricing  Competing issuance  Timing Investors Market conditions Legislation  Investment / Sub-investment grade  Moody’s, S&P, Fitch, GCR Documentation Basel III  Impact on bank funding costs  DMTN programme  Listed on JSE

11 DCM Checklist: Key Prerequisites  Financial Management  Governance Framework  Risk Management  Unqualified/Clean Audits  Transparency  Good Credit Rating (single A and above): preferably from an international rating agency: Moody’s, Fitch Ratings, S&P

12  Bonds generally have a bullet profile  Pay interest/ coupons during the duration of the bond  Pay principal at maturity  Bullet Profile needs to be carefully managed to avoid liquidity squeeze at maturity due to a single big principal payment  Sinking fund: set aside periodic payments for future retirement of principal  Should be externally managed  Preferably guaranteed growth contract from a party with a strong credit profile Sinking Fund

13 Commercial Paper: Short Term Funding Needs RequirementCommercial Paper Tenors  1 month to 12 months Investors  Money market funds, bank conduits Required rating  Short term rating of P1/P2 (equivalent of A- long term and above) Rating requirements  Committed Bank lines MFMA requirements  Bridge shortfalls within financial year in expectations of anticipated income  Repaid via funds from enforceable allocations or long term debt  Debt must be paid off within financial year  Debt cannot be refinanced with other short term debt

14 Role of an Arranger: Strategic Advisor Documentation Investor Marketing AuctionStrategic AdviceClosing  Assist with appointing all third parties  Relevant Disclosure  Terms and Conditions of bonds  Preparation and listing of DMTN programme  Marketing Materials  Investor Roadshow  Investor preferences  Price guidance  Volume  Auction/ Bookbuild  Settlement  Optimal volume, pricing and tenor  Timing to market  Auction Strategy  Investor negotiations on DMTN terms and conditions  Settlement  JSE listing

15 Timing: 8 to 10 weeks Auction Internal Approvals Appoint Working Parties Documentation Investor Marketing Settlement & JSE Listing Week 1 Week 2-6Week 4 to 7Week 9Week 10 City Manager Council Information Statement Arranger Debt Sponsor Legal Counsel Agents: Settlement, Transfer etc) JSE Submissions Ancillary documentation DMTN listing Roadshow 2-3 days: Cape Town 2-3 days: Johannesburg & Pretoria Present credit story Opportunity for investors to meet management and establish a relationship Dutch Auction 9am – 11am T+5: Flow of funds Disclosure Statement

16 Roadshow: Presentation to Potential Investors  4 to 6 day one-on-one meetings  Roadshow team: City Manager, Chief Financial Officer, Head of Departments (up to 4 attendees) & Lead Arranger  Key Objectives:  Gives investors an opportunity to meet the leadership team responsible for strategic decisions  Develop and maintain ongoing investor relationships – similar to bank relationships  Keep investors appraised on credit story  Determine investor appetite and preferences  Explore potential for lead orders (private placement)  roadshows per annum recommended  Deal Specific roadshow: discuss upcoming bond issue and garner interest  Non-deal specific roadshow: update investors on strategy, financials etc

17 Investor Base  Cape Town, Johannesburg & Pretoria Cape Town Johannesburg Pretoria

18 Outline  Overview of ZAR DCM  Key Considerations for Municipal Issuers  Ekurhuleni Case Study

19 Strictly Private and Confidential Ekurhuleni Metropolitan Municipality (“Ekurhuleni”) Inaugural bond debt issuance July 2010 Ekurhuleni Metropolitan Municipality (“Ekurhuleni”) R815 mn 10-year Inaugural bond debt issuance July 2010 Case Study

20 Expand and Diversify Funding Sources Key reasons to access DCM Good Timing  Expand funding base (current investor base of 20 investors across 3 bonds)  Less restrictive covenants, terms and conditions: no financial covenants  Single documentation and terms platform for all lenders  Improve City profile  Historically low base rates  Scarcity value  Investor demand for term issuance

21 Key Highlights Documentation  ZAR4bn Domestic Medium Term Note Programme (“DMTN”) Approvals  Municipal approvals (Disclosure statements etc.)  Johannesburg Stock Exchange  Moody’s rating agency notification Marketing  Roadshow marketing presentation  Investor roadshow (1 day in Johannesburg and 2 days in Cape Town)  Investor credit review process Issuance  Termsheet  Auction  Settlement

22 Ekurhuleni Inaugural Bond Auction – Salient Features JSE Instrument CodeEMM01 Programme RatingMoody’s : National Long-term Aa2.za Issuance Listing & SettlementListed Offered SecuritiesSenior Unsecured notes Term10 year Fixed Settlement/Issue Date28 July 2010 Targeted Issue SizeZAR 815mn Issued AmountZAR 815mn Total Bids Received ZAR 1,516mn (Investor diversity with 1.86x oversubscribed) Pricing BenchmarkR208 Issue margin+185bps

23 Broader Funding Base Investor participation Bookbuild progression

24 Disclaimer This presentation has been prepared by Barclays Capital - the investment banking division of Barclays Bank PLC and its affiliates worldwide (‘Barclays Capital’). This publication is provided to you for information purposes, any pricing in this report is indicative and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The information contained herein has been obtained from sources believed to be reliable but Barclays Capital does not represent or warrant that it is accurate and complete. The views reflected herein are those of Barclays Capital and are subject to change without notice. Barclays Capital and its respective officers, directors, partners and employees, including persons involved in the preparation or issuance of this document, may from time to time act as manager, co-manager or underwriter of a public offering or otherwise deal in, hold or act as market-makers or advisors, brokers or commercial and/or investment bankers in relation to the securities or related derivatives which are the subject of this report. Neither Barclays Capital, nor any officer or employee thereof accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents. Any securities recommendations made herein may not be suitable for all investors. Past performance is no guarantee of future returns. Any modeling or backtesting data contained in this document is not intended to be a statement as to future performance. Investors should seek their own advice as to the suitability of any investments described herein for their own financial or tax circumstances. This communication is being made available in the UK and Europe to persons who are investment professionals as that term is defined in Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion Order) It is directed at persons who have professional experience in matters relating to investments. The investments to which is relates are available only to such persons and will be entered into only with such persons. Barclays Capital - the investment banking division of Barclays Bank PLC, authorised and regulated by the Financial Services Authority (‘FSA’) and member of the London Stock Exchange. Copyright in this report is owned by Barclays Capital (© Barclays Bank PLC, 2005) - no part of this report may be reproduced in any manner without the prior written permission of Barclays Capital. Barclays Bank PLC is registered in England No Registered office 1 Churchill Place, London, E14 5HP.EUxxx

25 This page has intentionally been left blank.