credit ratings services bill

Credit Ratings Services BillMay 2012

Agenda

l Introduction to Futuregrowth

l Background

l Summary of key points

‐ Registration of Credit Ratings Agencies (“CRA’s”)

‐ Key Individual Accountability

‐ Hiring/firing of CRA’s

l Conclusion

2

3

Introduction to Futuregrowth

OMES & Trust

Black shareholding

18.2%74.7%

25.3%Black

shareholding7.6%

4

Futuregrowth shareholding

What are our specialist areas?

| Core Money Market| Enhanced Money Market| Flexible Income| Inflation Linked Bonds| Passive Bonds| Core Bonds| Yield Enhanced Bonds| Interest Rate Asset Allocation| Aggressive Fixed Interest

FUTUREGROWTH PRODUCTS & SERVICES

SPECIALISTFIXED

INCOME

SRI PRODUCT SUITE

| Infrastructure & Development Bond | Community Property| Development Equity | SRI Balanced | SA Agri-Fund Equity| SA Agri-Fund Debt

| As at 30 April 2012 approx. AUM R111.4 billion in assets

| Currently SRI Funds of R10.7 billion

5

| 46 staff members

Assets under management

R billion

Infrastructure and Development Bond 5.4

Community Property 4.2

Development Equity 0.9

Agri-Fund 0.2

Money Market 22.0

Yield Enhanced Money Market 24.6

Yield Enhanced Bond Fund 5.1

Active Bonds 23.3

Passive Bonds 1.1

CPI Linked 4.6

Income Funds 3.1

Enhanced Income Fund 3.4

Interest Rate Asset Allocation 0.1

Money Market/Inflation Linked 10.8

Money Market/Core Bonds 2.6

Total 111.4

Bond Mandates

Balanced Mandates

SRI Mandates

Money MarketMandates

6

As at 30 April 2012

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Background

All debt is not created equal…

SeniorUnsecured

Subordinated

Hybrid/ Prefs

Equity

Senior Secured

Senior UnsecuredMaturity date:

December 2010

Senior UnsecuredMaturity date:

June 2011

Access to

cash flow

& assets

Bonds get

Paid first

…but debt is fragmented,

conflicted and non-standard

A share is a share is a share…

Bank loans have less defaults

and higher recovery rates

8

Credit is not going away SA is under-geared…

Average debt: equity of U.S. non-financial companies

9

2010 Median: 109%

SA average gearing

Source: RMB

1m

Debt is about fear... Equity is about hope

...fear of repayment... fear of inflation

60 000 60 000 60 000 60 000 60 000 60 000 60 000 60 00060 000 60 000 60 000 60 000 60 000 60 000 60 000 60 00060 000

60 000

60 000

60 000

60 000

60 000

60 000

60 000

-1m“a bundle of cash flows” 4 year, 12% (paid semi-annually) coupon bond

| Bonds are used to match long-term liabilities... | but “Bond” & “Credit” now conflated.| The best we can do is get the money back

10

Bonds in retirement funds

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Summary of Futuregrowth Response

Consultants/Advisors/Auditors/Lawyers/Actuaries/etc

Fund Trustees

Multi-Managers

Investors/ClientsRegulators

Asset Managers

Individuals

Banks/Merchant BanksBanks/Merchant BanksBrokers/DealersBrokers/DealersIssuers/Project Sponsors

Fiduciaries

Not

Companies

Credit Rating Agents

The Fiduciary Chain & Credit Ratings Agents

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Credit Ratings Services Bill

l “Exemption of applicant whose holding company is registered/approved by foreign regulatory authority from providing some or all of the information ....”

l South African implication - 3 out of 4 could be exempt?

l Investor concerns:

‐ Duty of care and accountability to local investors

‐ High degree of transparency and comparability needed

‐ Local jurisdiction and regulation (purpose of Bill!)

Para 5(3) – Registration exemption

Credit Ratings Services Bill

l Include provisions requiring Key Individual accountability

‐ Includes MD/CEO and analyst

‐ Similar to those required in Asset Management industry

l Promotes accountability and transparency

l Fiduciary role

Key Individual Accountability

Credit Ratings Services Bill

l CRA primary role: perform analysis for 3rd party lenders

l Gatekeeper for issuers to access public capital...

l ... but not fiduciaries & not accountable

Lenders ability to replace CRA

Credit Ratings Services Bill

l Proposals:

‐ Issuer’s Audit Committee approves hiring/firing/replacement of CRA

‐ Majority lender vote needed to replace a CRA

l Implications:

‐ Makes CRA’s more responsive to investor’s concerns

‐ Improves accountability to investors

‐ Includes a layer of governance between issuer management and CRA

‐ Improves CRA’s fiduciary role

Lenders ability to replace CRA

17

Conclusion

Conclusion

l Improve CRA fiduciary role

l Improves transparency and accountability

l Improves SA capital markets

Chief Investment Officer (20yrs exp) B Sc, CFATel: 021 659 5427E-mail: acanter@futuregrowth.co.za

Credit Team

Credit Process Manager (11yrs exp)B Bus Sci (Hons), PGDA, CA (SA) Tel: 021 659 5428E-mail: olgac@futuregrowth.co.za

Portfolio Manager (14yrs exp)B A, B Comm. (Hons)Tel: 021 659 5462E-mail: jasonl@futuregrowth.co.za

Olga ConstantatosAndrew Canter Jason Lightfoot

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Portfolio Manager (9yrs exp)M Bus Sci (Economics)Tel: 021 659 5421E-mail: mliou@futuregrowth.co.za

Mei-Chi Liou Paul Semple Hema Natha

Credit Analyst (13yrs exp)B Com, CAIBTel: 021 659 5424E-mail: pauls@futuregrowth.co.za

Credit Analyst (3yrs exp)B Com, PGDA, CATel: 021 659 5415 E-mail: heman@futuregrowth.co.za