DACT Treasury Beurs 2010Optimal financing strategy anno 2010

Cefas van den Tol and Rob Frijlink

12 November 2010

November 2010 1

Presenting today

Rob FrijlinkManaging Director Event Finance

• Rob joined ING Event Finance in Feb 2008 and is responsible for structuring, coordination and execution of transformational deals for European Corporates, such as major acquisitions, refinancings and restructurings

• Previously Rob worked for 13 years at ABN AMRO in Corporate Advisory, Capital Structuring, Structured Finance and Corporate Centre/Consultancy. Before joining ABN AMRO he worked for 4 years at Fokker Aircraft

• Rob holds a masters degree in Industrial Engineering & Management Science from the Technical University of Eindhoven

T: +31 (0)20 564 7784M: +31 (0)6 3048 4843E: Rob.Frijlink@ingbank.com

Cefas van den TolManaging Director DCM

• Cefas joined the Debt Capital Markets team in 2007 and is heading the investment grade corporate bond origination for ING in Western Europe. The role includes related interest and currency hedging advisory

• Previously Cefas worked at ING Financial Institutions from 2001 after being at ING Lease since 1997

• Cefas holds a masters degree in Business Administration from the Erasmus University in Rotterdam and a post graduate from the Inter-Alpha Executive Banking Programme at Insead Fontainebleau

T: +31 (0)20 562 8977M: +31 (0)6 2185 0858 E: Cefas.van.den.Tol@ingbank.com

November 2010 2

Contents

2. Financing strategy & case study

1. Credit market update

3. Debt issuance considerations

1. Credit market update

November 2010 4

Source: Dealogic, Bloomberg

Benelux Syndicated Loans Redemption profile

Syndicated loan market outlook

• Most bank debt matures within 3 to 5 years and spreads are still elevated• Although spreads are reducing, corporates are looking for alternative funding sources

Funding perspectives

0

10

20

30

40

50

60

70

80

90

2010 2012 2014 2016 2018 2020020

406080100

120140160

180200

Volume in €bn (LHS) Number of deals (RHS)

0

50

100

150

200

250

300

350

1Q'00 3Q'01 1Q'03 3Q'04 1Q'06 3Q'07 1Q'09 3Q'10 S

prea

d in

bp

EMEA region only investment grade loansAll Western European Loans with 3-5 year tenure

November 2010 5

Funding levels and spreads into 2012 Interest rate forecasts

ING expects the first interest increase in Eurozone in 4Q’11 and in USA 2Q’12

Corporate bond markets remain in good shape and spreads are expected to further decrease

Credit spread forecasts

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12

5yr swap rate 5yr BBB corp yield 5yr A corp yield

0.00%

0.25%

0.50%

0.75%

1.00%

1.25%

1.50%

1.75%

2.00%

2.25%

2.50%

2.75%

3.00%

3.25%

3.50%

Oct-10 Jan-11 Apr-11 Jul-11 Nov-11 Feb-12 May-12 Aug-12 Dec-12

US$ Official rate US$ 3mLibor US$ 5yr swap rate€ Official rate € 3m Euribor € 5yr swap rate

November 2010 6

The demand angle for credit Redemptions and coupon payments leave credit markets looking for exposure

• Ample liquidity causes investors to look for investment opportunities• But senior unsecured bond bank issuance spread levels are lagging historic averages

320 315 415

310160

240

224250

210

500 570 575

129125 144

214273 208

210230 220

0

200

400

600

800

1,000

1,200

1,400

€bn

0

50

100

150

200

250

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10S

prea

d

0

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30

40

50

60

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80

Vol

ume

Fin Senior ASW spread (bp, LHS)Senior unsecured supply (€bn, RHS)

Average 2008

Average 2010Average 2009

2009R 2010F 2011F

Senior Corp redemptionsCovered Fin redemptions

Senior Fin redemptions Senior Corp supplyCovered Fin supply

Senior Fin supply

Coupon payments

2. Financing strategy & case study

November 2010 8

Various drivers influence the ‘optimal’financing strategy

Sector Financial profile

Business profile

Access to funding

1 3

4

2

Optimal Financingstrategy

November 2010 9

(in €m) 2008 2009 2010F 2011F 2012F

Sales 6,450 6,000 6,300 6,615 6,946 Y-o-Y Growth (7.0%) 5.0% 5.0% 5.0%

EBITDA 839 600 693 794 868 Margin (%) 13.0% 10.5% 11.0% 12.0% 12.5%

Capex 452 390 450 500 550

Dividend 200 200 200 200 200

Net debt 1,700 1,350 1,400 1,150 1,025

Net debt / EBITDA 2.0x 2.3x 2.0x 1.4x 1.2x

Total assets 7,050 7,000 7,050 7,125 7,225

Shareholders’ Equity

3,400 3,600 3,525 3,563 3,613

Case study example: Company X

300

750

0

200

400

600

800

2010 2011 2012 2013 2014

€m

2011 Syndicated facility 1

2012 Syndicated facility 2

Company information

• Top 10 player in the consumer sector

• Mostly active in the nutrition business, with main products being food supplements

• Enterprise value of €5.5bn

• No external rating in place; implied credit profile is estimated at investment grade (A-)

• Reporting under local GAAP

• Employees: 17,000 FTE

Current financing situation

• Leverage at year-end 2010 expected of 2.0x with €1.4bn of drawn net debt

• Limited funding diversification; >90% attracted in bank market

• Large upcoming refinancings in 2011 & 2012

Debt maturity profile

Key financials

How to optimize the financing strategy?

November 2010 10

Driver 1: Sector

The sector determines to a large extend the optimal capital structure and target leverage

Trends

Cyclicality and seasonality

Competitive environment

Capital intensity

• Growth, consolidation, dependence on R&D, etc impacting funding need evolution

• Influences funding and working capital needs and;• Target leverage and need for funding flexibility

• Highly competitive markets generally lead to more costs-conscious financing and pressure on operating margins

• Large investments and R&D expense could lead to higher funding needs and higher leverage, due to deferred EBITDA

Legislation and regulation

• Influences operating margins, yield potential, cash flow generation/visibility and investment needs

1 34

2

November 2010 11

Company X: top 10 player in European nutrition sectorGeneral trends in consumer sector

• Rising commodity prices put pressure on input prices and margins

• Active investment trend in emerging countries, whilst securing mature home markets

• A shift in preferences from main stream products to private labels is still going on

• Health, comfort and pleasure are trends in the nutrition subsector within consumer sector

• Corporate responsibility trend has not been affected by the crisis and is still increasing

Financing implications

• Key focus is on product innovation, requiring significant investments in product development and marketing

• Additionally, company X aims to internationally expand and invest in emerging countries

• Total investments to keep up with the trends in the sector, will total €1.5bn in the coming 3 years

November 2010 12

Driver 2: Business profile

Maintaining adequate financial flexibility to accommodate growthopportunities and uncertainties

Strategy

EBIT(DA) margin

Cash flow generation

Diversification

• Direction and scope of an organisation over the long-term

• Comparable to peers? Stable or improving margin?

• Cash flow visibility and stability

• Geographical and/or product diversification

Investment needs

Corporategovernance

• Maintenance and growth capex• Acquisitions, disposals and investment plans

• Solid corporate governance supports a larger investor base

1 34

2

November 2010 13

Company X: product innovation and growth in emerging markets are key priorities Business profile

• Strategic focus is on product innovation, aiming to generate €200m of innovation related sales in 2011 and building up onwards

• In addition, company X targets to invest significantly in emerging markets, to boast sales by another €300m as of 2011 and onwards

• Cost containment program started and continuing to select disposals of non-core assets in the next years to restore profitability to pre-crisis levels

Financing implications

• New financing of €250m required in 2011 to achieve this growth

• Securing adequate financing flexibility for M&A opportunities is key

• Company X’s debt capacity as per 2011 is – at target leverage of 2.0x –estimated at €440m

• Acquisition capacity is estimated at €600m – with assumed EV/EBITDA acquisition multiple of 7.0x

Europe75%

Other5%

Emer-ging5%

US15%

Nutrition50%

Health30%

Other20%

EBITDA by geography

EBITDA by business

Emerging

November 2010 14

Driver 3: Financial profile

Financial profile should be directed towards flexibility and liability diversification to retain adequate access to funding

Target credit profile

Financial objectives

Desired financial flexibility

Off B/S obligations

• Investment grade or sub-investment grade• Implied credit rating (i.e. leverage trade-off)

• What type of financial performance is aspired, e.g. RoE, RoCE, Costs of funding, EPS, DPS etc

• Growth aspirations, working capital swings• Preferred liquidity position to absorb negative cash flows

• Off B/S liabilities (e.g. pensions, leases) could create future funding needs and impact investor appetite

Hedging policies • What is risk appetite as embedded in hedging policy regarding interest, FX, commodity and inflation risks

1 34

2

Maturity profile• Maturities will need to be spread and match expected cash flows• Minimum required liquidity

November 2010 15

Company X: target leverage of 2.0x and aims for funding diversificationFinancial profile

• Strong revenue stream, relatively stable cash flow generation – the weakened leverage in 2009 of 2.3x is expected to recover to 2.0x in 2010, in line with target leverage

• At present a refinancing risk and concentrated debt maturity profile

• No extern rating, but an implied A- credit profile; wiling to apply for a rating if beneficial

• Overall targeting to diversify funding base, spread maturities and secure flexibility for M&A agenda

Modest Intermediate

Excellent

Strong

Satis-Factory

Financial risk profile

Bus

ines

s ris

k pr

ofile

A A-

BBBBBB+

X

Impact of lengthened maturity profile and funding diversification on credit profile

X0

200

400

600

800

2010 2012 2014 2016 2018 2020 2022 2024

2011 Syndicated facility 2012 Syndicated facilityNew 5 year credit facility New LT DCM products

€m

A+ A300

750

250 250

500

November 2010 16

Driver 4: Access to funding

Access to bank and public markets is highly dependent on the (implied) credit profile, investor appetite, timing and costs the company is willing to accept

Company size

Funding need over time

Investment case

Shareholder structure

• Larger companies have easier access to funding outside the banking market and (statistically) lower risk of defaulting

• Amount, visibility and flexibility requirement• Growth aspirations with (large) investments in the next years

• Historical track-record and return, as well as forward looking outlook and investment plans / market forecasts

• Type and concentration of shareholders – yield or growth oriented. Management influence, governance and disclosure

(Implied) rating profile

• An external credit rating gives access to a larger investor base• Investment grade companies will have easier access

1 34

2

November 2010 17

Company X is aiming to access debt capital markets to diversify its funding mixConsiderations

• To diversify its funding base, spread maturities and secure flexibility Company X plans to refinance €750m of its existing debt and attract €250m of new debt, for working capital swings

• Company X aims to diversify away from the bank market and is willing to consider an external credit rating

Flexible, simple and efficient instrumentNo rating or public disclosure requiredB

ank

Mar

ket

Syndicated Loan

No public documentationTypically $50m to $500m

Deb

t Cap

ital M

arke

t

US PP

Non Rated EUR Bond

Rated EUR Bond

EUR PP Both loan (customized) and note (standardized) format

No public rating requiredNo financial maintenance covenants

Deep market depthLonger tenor possibleNo financial maintenance covenants

Typically corporate tenors up to 5yrFinancial covenants

Maintenance covenantsPrepayment penalty (make-whole)

Limited market depthNot a liquid instrument for investors

More execution riskPremium paid for absence of rating

Minimum issuance size €300mRequires efforts to obtain and maintain public rating

Pros ConsInstrument

November 2010 18

Financing strategy drivers

Sector Financial profile

Business profile

1

2

Optimal financingstrategy & structure• Target leverage• Funding mix• Maturity profile• Working capital financing• Dividend policy

Access to funding4

3

November 2010 19

Optimal financing strategy for Company X

Business profile Financial profileSector Access to funding

• Significant investments in innovation and emerging markets

• Cost containment

• Target leverage 2.0x• Implied rating A-• Concentrated

maturity profile• Bank dependency

• Rising input prices• Investment trend in

emerging markets• Shift in product

preferences

• Solid track-record and positive outlook

• Refinancing and new funding need in 2011

• No external rating

• 5yr € 250m Revolving Credit Facility

• 5yr € 500m Unrated Bond

• 10yr $ 300m (€ 250m equivalent) US Private Placement (incl. cross-currency swap)

• 5yr € 250m Revolving Credit Facility for working capital swings

• 15yr € 500m Rated Bond

• 10yr € 250m EUR Private Placement

Option 1: No rating obtained Option 2: Rating obtained

Fact

ors

Com

pany

X

Total financing need of € 1bn: € 750m refinancing and € 250m growth funding

1 2 43

3. Debt issuance considerations

November 2010 21

Credit rating considerations

• An independent, credible third party assessment of credit quality, comparable on a global scale

• Increase transparency of operations, providing comfort to existing lenders

• Overcome regulatory restrictions for potential investors

• Increase commercial awareness and financial discipline within company

• Broadening of financing options and potential investor base (incl. cost benefits)

• As preparation for future activities (e.g. M&A), when time pressures on management might be greater

• Having an external credit rating brings along additional costs – initially and annually

• Management time is required to obtain and maintain a relationship with the rating agency

• Rating actions cannot be controlled or timed

• Will the agency be able to adequately assess and monitor the credit quality

Pros Cons

November 2010 22

0

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160

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320

1 2 3 4 5 6 7 8 9

Log. (Unrated triple-B credit curve)

Log. (Consumer BBB/BBB- credit curve - Ahold / Bacardi / Carlsberg / Casino / Edenred / Imperial Tobacco / Metro / Michelin / Sara Lee /Swedish Match / Delhaize / Kraft Foods / PPR)

Credit curve of rated vs unrated issuers

Investors typically require a premium over rated sector peers’ credit curves for unrated issuers which for a triple B company could be between 50-100bp and for a low A rated between 10-50bp

November 2010 23

Bond characteristics for Company XEUR Public Bond USD Private PlacementEUR Private Placement

Tenor: 5 & 15yr Amount: € 500m - 1bn

Tenor & Amount

Availability

Disclosure

Simplicity

Flexibility

Documentation considerations

Cost

Time to market / execution

Tenor: 10yr Amount: € 250m

Tenor: 10yr Amount: $ 300m

Premium for inaugural issue

Premium for illiquidity & unfamiliarity

Illiquidity premium over public bonds

Current market dynamics are supportive

Current market dynamics are supportive Stable market

Base Prospectus Bilaterally agreedOffering memorandum only provided to prospective investors

Documentation process is straightforward

Bilateral dialogue with investor

Documentation process is straightforward

Prepayment could trigger break-funding costs

Direct dialogue possible with investor

Bullet & amortizing structures available

4 to 6 weeks 4 to 6 weeks 6 to 8 weeks

Typically covenant light Typically covenant light 1 to 3 financial covenants typical

November 2010 24

Documentation requirements

EUR Public Bond USD Private PlacementEUR Private Placement

• Risk Factors• Terms &Conditions• Business Description issuer• Financial Information

Required

Required

Required

Required

• Representations, warranties’and undertakings given by issuer

• Conditions precedent to the issuance of notes

Agency Agreement

Preferred

Preferred

Preferred

Preferred

Not required

Preferred

Required

Required

ICMA Standard

ICMA Standard

Details to be negotiated / ICMA preferred

Details to be negotiated / ICMA preferred

NAIC Model Note Agreement serves as base to negotiations

NAIC Model Note Agreement serves as base to negotiations

Required Required N.A.

Offering Document

Placement Agreement

Legal document

Marketing document

Legal document

November 2010 25

Pricing considerations

Indicative pricings

MS + 90bp areaMS + 104bp areaMS + 84bp areaUnrated $ PP over (Euro) MSUST + 140bp areaUST + 130bp areaUST + 130bp areaUnrated $ private placementMS +145bp areaMS +105bp areaMS +85bp areaRated € private placementMS +125bp areaMS +90bp areaMS +75bp areaRated € bondMS +170bp areaMS +140bp areaMS +120bp areaUnrated € bond

15 year10 year5 yearTenors

Pricing reference graph

ADSGR

AFFP

ANDRTZ MAERSK

ASKLEPBEKBBB

BEKBBB

BEKBBB

CASINO

CLSGR

CDIFP DCPRIM

DIETEDIETE

GEDISC

EGGER

EVONIK

FLUXBB

FRAGR

GBLBBB

HAVAS

HEIANA

HEIANA HEIANA

ITELOY

KTCGAV

LENV

LUXIM

NESTEONESTEO

NYRB

OTTOGR

OUTOK

PRYSMI

SAPGR

SAPGR

SAPGR

SKSLN

SIXT

SYMRISUCBBB

UCBBB

VOEST

0

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0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Option 1: Indicative unrated $ PP pricingLog. (A/A- rated Consumer credit curve)Log. (Option 1: Indicative unrated € public pricing)Log. (Unrated credit curve)Log. (Option 2: Indicative rated € public pricing)Log. (Option 2: Indicative rated € PP pricing)

Appendix

November 2010 27

Inaugural issuers lead by ING

Sector Rating Tenor Size Issuance Spread Coupon

Utility Baa1 10yr € 500m 15-Oct-10 127bp 3.875%

Real Estate Baa1/BBB+ Long 7yr € 500m 13-Oct-10 240bp 4.625%

Pharma NR 7yr € 500m 16-Apr-10 180bp 4.500%

IT NR4yr

7yr

€ 500m

€ 500m

31-Mar-10

31-Mar-10

45bp

70bp

2.500%

3.500%

Logo

Logo

SAP

Commodities NR 5yr € 400m 30-Mar-10 410bp 6.375%Logo

Natural Resources NR 5yr € 225m 26-Mar-10 285bp 5.500%Logo

November 2010 28

Inaugural issuers lead by ING (Cont’d)

Sector Rating Tenor Size Issuance Spread Coupon

Utility A3/A-5yr

12yr

€ 500m

€ 500m

2-Feb-10

2-Feb-10

70bp

100bp

3.250%

4.500%

Utility Baa3/BBBPerp

NC7-NC12€ 500m 2-Feb-10 360bp 6.655%

Pharma NR 5yr € 750m 26-Oct-09 285bp 5.750%

Maritime NR 5yr € 750m 23-Oct-09 205bp 4.875%

Utility A2/A3yr

7yr

€ 500m

€ 750m

6-Apr-09

6-Apr-09

175bp

230bp

4.000%

5.500%Alliander

UCB

Utility Aa2/AA- 5yr € 1bn 23-Jul-08 195bp 6.000%Gasunie

November 2010 29

Disclaimer

This presentation of ING Bank N.V. (“ING”) shall serve solely for the information of the participants of the DACT Treasury Beurs 2010 (the “Client”) as a platform for discussion. Copyright and intellectual property right protection of this presentation is reserved to ING. It may therefore not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.

While ING has taken reasonable care to ensure that the information contained herein is not untrue or misleading at the time of presentation to the client, ING makes no representation with regard to the accuracy or completeness of the information, part of which was obtained from the client and public sources and relied upon as such. The information contained in this presentation is subject to change without notice. Neither ING nor any of its officers or employees accepts any liability for any loss arising from any use of this presentation or its contents.

The information is further subject to there having been, in the sole opinion of ING, no material adverse change in the international capital or loan markets prior to the implementation of this proposal.

This presentation does not constitute an agreement or a commitment or an offer to commit to any transaction or any financing by ING. Any such commitment or agreement shall be subject to further negotiation, satisfactory completion of due diligence, ING credit and other approvals, execution of legal documentation acceptable to ING and receipt by ING of positive opinions from legal counsel.

ING calls for attention to the fact that it is part of ING Groep N.V. (“ING Group”). Members of ING Group may advise or provide services (including investment advice) and act as an active investor in equity shares and other securities. Please be informed that in order to avoid any possible conflicts of interest, investment decisions in securities are taken fully independently by the investment portfolio professionals.