(QHUJ\PDUNHWLQYHVWLJDWLRQ
$QDO\VLVRIFRVWRIFDSLWDORIHQHUJ\ILUPV
)HEUXDU\
7KLVLVRQHRIDVHULHVRIFRQVXOWDWLYHZRUNLQJSDSHUVZKLFKZLOOEHSXEOLVKHGGXULQJWKHFRXUVHRI
WKHLQYHVWLJDWLRQ7KLVSDSHUVKRXOGEHUHDGDORQJVLGHWKHXSGDWHGLVVXHVVWDWHPHQWDQGWKHRWKHU
ZRUNLQJSDSHUVZKLFKDFFRPSDQ\LW7KHVHSDSHUVGRQRWIRUPWKHLQTXLU\JURXS¶VSURYLVLRQDO
ILQGLQJV7KHJURXSLVFDUU\LQJIRUZDUGLWVLQIRUPDWLRQJDWKHULQJDQGDQDO\VLVZRUNDQGZLOOSURFHHG
WRSUHSDUHLWVSURYLVLRQDOILQGLQJVZKLFKDUHFXUUHQWO\VFKHGXOHGIRUSXEOLFDWLRQLQ0D\WDNLQJ
LQWRFRQVLGHUDWLRQUHVSRQVHVWRWKHFRQVXOWDWLRQRQWKHXSGDWHGLVVXHVVWDWHPHQWDQGWKHZRUNLQJ
SDSHUV3DUWLHVZLVKLQJWRFRPPHQWRQWKLVSDSHUVKRXOGVHQGWKHLUFRPPHQWVWR
HQHUJ\PDUNHW#FPDJVLJRYXNE\0DUFK
© Crown copyright 2015
You may reuse this information (not including logos) free of charge in any format or
medium, under the terms of the Open Government Licence.
To view this licence, visit www.nationalarchives.gov.uk/doc/open-governmentlicence/ or write to the Information Policy Team, The National Archives, Kew, London
TW9 4DU, or email: [email protected].
The Competition and Markets Authority has excluded from this published version
of the working paper information which the Inquiry Group considers should be
excluded having regard to the three considerations set out in section 244 of the
Enterprise Act 2002 (specified information: considerations relevant to disclosure).
The omissions are indicated by [].
Contents
Page
Introduction ................................................................................................................ 2
General approach to estimating the WACC ............................................................... 3
CMA estimation of WACC .......................................................................................... 5
Interpretation of WACC ............................................................................................ 27
Appendix A: Firms’ submissions on their cost of capital ........................................... 30
Appendix B: Corporate tax rates .............................................................................. 35
1
,QWURGXFWLRQ
7KHDSSURDFKWRDVVHVVLQJSURILWDELOLW\DVVHWRXWLQWKH*XLGHOLQHVLVWR
FRPSDUHWKHSURILWVHDUQHGZLWKDQDSSURSULDWHFRVWRIFDSLWDO,QWKLVZRUNLQJ
SDSHUZHVHWRXWRXUHVWLPDWHRIWKHQRPLQDOSUHWD[ZHLJKWHGDYHUDJHFRVW
RIFDSLWDO:$&&IRUWKHYDULRXVHOHPHQWVRIWKHHQHUJ\YDOXHFKDLQLQ*UHDW
%ULWDLQ*%EDVHGRQGDWDIRUWKHSHULRG-DQXDU\WR0DUFK
2XUHVWLPDWHRIWKH:$&&RIDYHUWLFDOO\LQWHJUDWHGHQHUJ\ILUPRSHUDWLQJLQ
*%LVEHWZHHQDQGVHH7DEOH:HDOVRFRQVLGHUHGZKDWWKH
:$&&RIDVWDQGDORQHHOHFWULFLW\JHQHUDWRUDQGDVWDQGDORQHHQHUJ\UHWDLO
VXSSOLHUZRXOGEH2XUFXUUHQWYLHZLVWKDWDVWDQGDORQHJHQHUDWRUZRXOG
KDYHDVOLJKWO\KLJKHU:$&&WKDQDYHUWLFDOO\LQWHJUDWHGHQHUJ\ILUPRI
EHWZHHQDQGGXHWRDKLJKHUFRVWRIGHEWZKLOHDUHWDLOVXSSO\
EXVLQHVVZRXOGEHHQWLUHO\HTXLW\IXQGHGZLWKDFRVWRIHTXLW\RIWR
7$%/(&0$HVWLPDWHVRIWKH:$&&IRUWKHHOHPHQWVRIWKHHQHUJ\YDOXHFKDLQ
9HUWLFDOO\
LQWHJUDWHG
*HQHUDWLRQ
±
±
±
±
±
±
±
±
±
±
±
±
±
±
5HDOULVNIUHHUDWH
1RPLQDOULVNIUHHUDWH
(TXLW\ULVNSUHPLXP
$VVHWEHWD
3UHWD[.H
3UHWD[FRVWRIGHEW.G
*HDULQJ
7D[UDWH
3UHWD[:$&&
5HWDLO
VXSSO\
±
±
±
±
±
6RXUFH&0$DQDO\VLV
:HFRQVLGHUWKHDERYHUDQJHWREHDUHDVRQDEOHHVWLPDWHRIWKHFRVWRI
FDSLWDOWKDWZRXOGKDYHEHHQIDFHGE\DW\SLFDOILUPRSHUDWLQJDWWKHUHOHYDQW
VWDJHVRIWKHHQHUJ\YDOXHFKDLQLQ*%
)LYHRIWKH6L[/DUJH(QHUJ\)LUPV&HQWULFD(215:(QSRZHU6FRWWLVK
3RZHUDQG6FRWWLVKDQG6RXWKHUQ(QHUJ\66(SURYLGHGWKH&RPSHWLWLRQ
DQG0DUNHWV$XWKRULW\&0$ZLWK:$&&HVWLPDWHVRQDYDULHW\RIEDVHV
7KHVHDUHVHWRXWLQGHWDLOLQ$SSHQGL[$:HPDNHUHIHUHQFHWRWKHVH
HVWLPDWHVDQGWKHYLHZVSXWIRUZDUGE\WKHVHILUPVDQGRWKHUVDFWLYHLQWKH
*%HQHUJ\VHFWRUDVDSSURSULDWHLQWKLVSDSHU
7KHUHPDLQGHURIWKLVVHFWLRQVHWVRXWRXUPHWKRGRORJ\DQGWKHDQDO\VLVZH
KDYHFRQGXFWHG$VVHWRXWLQWKH*XLGHOLQHVZHJHQHUDOO\ORRNWRWKHFDSLWDO
DVVHWSULFLQJPRGHO&$30ZKHQFRQVLGHULQJWKHFRVWRIFDSLWDODQGWKLVLV
*XLGHOLQHVIRUPDUNHWLQYHVWLJDWLRQV7KHLUUROHSURFHGXUHVDVVHVVPHQWDQGUHPHGLHV&&
&&$QQH[$SDUDJUDSK
WKHDSSURDFKZHKDYHDGRSWHGLQHVWLPDWLQJWKHFRVWRIHTXLW\IRUWKHHQHUJ\
ILUPV:HKDYHHVWLPDWHGWKHFRVWRIGHEWZLWKUHIHUHQFHWRERWKWKHDFWXDO
LQWHUHVWUDWHVSDLGE\WKHHQHUJ\ILUPVDQGFRUSRUDWHERQG\LHOGVRYHUWKH
SHULRG
*HQHUDODSSURDFKWRHVWLPDWLQJWKH:$&&
7KHUHDUHVHYHUDOIDFWRUVWKDWZHKDYHWDNHQLQWRDFFRXQWLQHVWLPDWLQJDQ
DSSURSULDWHEHQFKPDUNFRVWRIFDSLWDOIRUWKHYDULRXVDFWLYLWLHVXQGHUWDNHQ
ZLWKLQWKHHQHUJ\VHFWRU7KHVHLQFOXGH
D KRZWRHVWLPDWHWKH:$&&±XVHRIWKHFDSLWDODVVHWSULFLQJPRGHO
&$30
E ZKLFKFRVWRIFDSLWDOSURYLGHVDQDSSURSULDWHEHQFKPDUN±VSHFLILFDWLRQRI
WKHEDVLVRIWKH:$&&DQG
F RYHUZKLFKWLPHSHULRGVKRXOGWKHFRVWRIFDSLWDOEHPHDVXUHG±DWWKH
VWDUWRIWKHUHOHYDQWSHULRGRUDQDYHUDJHIRUWKHUHOHYDQWSHULRG"
&DSLWDODVVHWSULFLQJPRGHO
7KH*XLGHOLQHVKLJKOLJKWWKDWZHJHQHUDOO\XVHWKH&$30ZKHQFRQVLGHULQJ
WKHFRVWRIHTXLW\VLQFHWKLVLVDZLGHO\XQGHUVWRRGWHFKQLTXHZLWKVWURQJ
WKHRUHWLFDOIRXQGDWLRQV
7KH&$30UHODWHVWKHFRVWRIHTXLW\(>5L@WRWKHULVNIUHHUDWH5UIWKH
H[SHFWHGUHWXUQRQWKHPDUNHWSRUWIROLR5PDQGDILUPVSHFLILFPHDVXUHRI
LQYHVWRUV¶H[SRVXUHWRV\VWHPDWLFULVNEHWDRUȕDVIROORZV
(>5L@ 5UIȕ5P±5UI
,IDEXVLQHVVZHUHHQWLUHO\IXQGHGE\HTXLW\WKHH[SHFWHGUHWXUQRQHTXLW\
FRXOGEHFRQVLGHUHGWREHLWVµFRVWRIFDSLWDO¶+RZHYHUPRVWILUPVDUHIXQGHG
E\DFRPELQDWLRQRIERWKGHEWDQGHTXLW\VXFKWKDWWKHDSSURSULDWHFRVWRI
FDSLWDOWRFRQVLGHULVWKHZHLJKWHGDYHUDJHFRVWRIGHEWDQGHTXLW\7KH
:$&&LVJLYHQE\WKHIROORZLQJH[SUHVVLRQ
:$&& (>5L@[('(.G[''(
&&SDUDJUDSK
:KHUH'LVGHEW(LVHTXLW\DQG.
GLVWKHFRVWRIGHEW
)LQDOO\WKHFRVWRIFDSLWDOPXVWWDNHLQWRDFFRXQWWKHHIIHFWVRIWD[RQUHWXUQV
WRFDSLWDOSURYLGHUV7KH UHWXUQVWRGHEWKROGHUVWDNHWKHIRUPRILQWHUHVW
SD\PHQWVZKLFKDUHXVXDOO\WD[GHGXFWLEOH7KHUHWXUQVWRHTXLW\KROGHUV
GLYLGHQGVRQWKHRWKHUKDQGDUHWD[HG+HQFHZKHUHWKHFRVWRIFDSLWDOLV
H[SUHVVHGµSUHWD[¶WKHFRVWRIHTXLW\XVHGPXVWUHIOHFWWKHIDFWWKDWWKHDFWXDO
UHWXUQWRVKDUHKROGHUVZLOOEHUHGXFHGE\WKHUDWHRIWD[:HKDYHHVWLPDWHG
WKHFRVWRIFDSLWDORQDQRPLQDOSUHWD[EDVLV
3UHWD[:$&& >W[(>5L@[('(@>.G[''(@
6SHFLILFDWLRQRIWKHEDVLVRIWKH:$&&
2XUSURILWDELOLW\DQDO\VLVPHDVXUHVWKHUHWXUQVHDUQHGE\DOOVRXUFHVRIFDSLWDO
RQWKHFDSLWDOHPSOR\HGE\WKHEXVLQHVV$VWKHVHUHWXUQVDUHPHDVXUHG
EHIRUHLQWHUHVWDQGRUWD[LVSDLGWKH\DUHQRWDIIHFWHGE\WKHFDSLWDOVWUXFWXUH
RIWKHEXVLQHVV7KH:$&&RIDQLQGLYLGXDOEXVLQHVVRQWKHRWKHUKDQGLV
DIIHFWHGE\LWVFDSLWDOVWUXFWXUHLHWKHSURSRUWLRQRIGHEWDQGHTXLW\XVHGWR
ILQDQFHWKHEXVLQHVV7KHVHILQDQFLQJFKRLFHVPD\EHGULYHQE\DQXPEHURI
IDFWRUVLQFOXGLQJWKHDELOLW\RIWKHEXVLQHVVWRUDLVHGHEWWKHULVNDSSHWLWHRI
HTXLW\KROGHUVDQGWKHUHODWLYHFRVWVRIGHEWDQGHTXLW\ILQDQFLQJ,QRXU
DQDO\VLVZHXVHWKH:$&&DVDEHQFKPDUNIRUWKHOHYHORIµQRUPDO¶SURILWV
$VDUHVXOWZHFRQVLGHUWKDWLWLVDSSURSULDWHWRXVHWKHVDPH:$&&DVWKH
EHQFKPDUNIRUDOORSHUDWRUVUDWKHUWKDQHVWLPDWLQJDILUPVSHFLILFFRVWRI
FDSLWDOIRUHDFKRSHUDWRU
,QFRPLQJWRDYLHZRQWKLVEHQFKPDUN:$&&ZHKDYHVRXJKWWRUHIOHFWD
VXVWDLQDEOHOHYHORIJHDULQJFRVWRIHTXLW\DQGFRVWRIGHEWWKDWDK\SRWKHWLFDO
VWDQGDORQHRSHUDWRULQ*%ZRXOGLQFXUZKHQXQGHUWDNLQJWKHUHOHYDQW
DFWLYLWLHV:KHUHSRVVLEOHWKHUHIRUHZHKDYHXVHG*%RU8.EHQFKPDUNV
DQGWDLORUHGWKHYDULDEOHHOHPHQWVRIWKHFRVWRIFDSLWDOWRUHIOHFWERWKWKH
QDWXUHRIWKHDFWLYLWLHVXQGHUFRQVLGHUDWLRQDQGWKHIDFWWKDWVRPHRIWKH
EHQFKPDUNVZHKDYHXVHGWRHVWLPDWHWKH:$&&UHODWHWRPXOWLQDWLRQDOILUPV
ZLWKDEURDGUDQJHRIDFWLYLWLHVLHPD\IDFHGLIIHUHQWULVNVIURPDVWDQGDORQH
*%ILUP
5:(QSRZHUH[SUHVVHGFRQFHUQZLWKWKLVDSSURDFKQRWLQJWKDWE\VHOHFWLQJD
SDUWLFXODUFDSLWDOVWUXFWXUHWRLQFOXGHLQLWV:$&&FDOFXODWLRQWKH&0$PD\
GLVFULPLQDWHDJDLQVWFHUWDLQILUPV,WSXWIRUZDUGWKHYLHZWKDWLWZRXOGEH
LQDSSURSULDWHWRPDNHDILQGLQJRIH[FHVVLYHSURILWDELOLW\RQWKHEDVLVRI
7KLVDYRLGVWKHQHHGWRDGMXVWQRPLQDOILQDQFLDOLQIRUPDWLRQWRUHPRYHWKHHIIHFWVRILQIODWLRQ
7KHFDSLWDOVWUXFWXUHDIIHFWVKRZHDUQLQJVEHIRUHLQWHUHVWDQGWD[LVGLYLGHGEHWZHHQWKHYDULRXVSURYLGHUVRI
FDSLWDO
7KLVDSSURDFKHQVXUHVWKDWDOOILUPVLQDQLQGXVWU\DUHWUHDWHGHTXDOO\
7KHVHDUHWKHEHWDYDOXHJHDULQJDQGFRVWRIGHEW
FKRRVLQJDSDUWLFXODUJHDULQJZKHQDILUPPD\KDYHDGLIIHUHQWEXWVWLOO
DSSURSULDWHOHYHORIJHDULQJ:HGRQRWFRQVLGHUWKDW5:(QSRZHU¶VFRQFHUQV
LQWKLVUHVSHFWDUHZHOOIRXQGHG2XUDSSURDFKWRHVWLPDWLQJWKH:$&&LV
EDVHGRQWKHREVHUYHGOHYHORIJHDULQJDQGDVVRFLDWHGFRVWRIGHEWLQWKH
LQGXVWU\DQGZHZRXOGH[SHFWWKHUHIRUHWKDWLWZRXOGUHSUHVHQWDWOHDVW
DSSUR[LPDWHO\WKHHIILFLHQWFDSLWDOVWUXFWXUHIRUDJLYHQLQGXVWU\,QRXUYLHZ
WKLVLVWKHDSSURSULDWHEHQFKPDUN$OWKRXJKVRPHILUPVPD\KDYHFKRVHQ
GLIIHUHQWFDSLWDOVWUXFWXUHVZLWKSRWHQWLDOO\KLJKHU:$&&VZHGRQRWFRQVLGHU
WKDWWKHVHFRVWVUHSUHVHQWWKHFRPSHWLWLYHEHQFKPDUN
:HKDYHPHDVXUHGWKHSURILWDELOLW\RIWKHHQHUJ\ILUPVRQWKUHHVHSDUDWH
EDVHVDVWDQGDORQHJHQHUDWLRQRIHOHFWULFLW\EVWDQGDORQHUHWDLOVXSSO\RI
JDVDQGHOHFWULFLW\DQGFYHUWLFDOO\LQWHJUDWHGHQHUJ\EXVLQHVVHVLHWKRVH
XQGHUWDNLQJERWKJHQHUDWLRQDQGUHWDLOVXSSO\DFWLYLWLHV:HQRWHWKDWZH
ZRXOGH[SHFWWKHUHWREHYDULDWLRQVLQEHWDYDOXHVJHDULQJDQGFRVWRIGHEW
DFURVVJHQHUDWLRQDQGUHWDLODVZHOODVIRUYHUWLFDOO\LQWHJUDWHGRSHUDWRUV
7KHUHIRUHZHKDYHHVWLPDWHGWKUHHVHSDUDWH:$&&VRQHIRUHDFKRIWKH
JHQHUDWLRQUHWDLODQGYHUWLFDOO\LQWHJUDWHGRSHUDWLRQV
5HOHYDQWWLPHSHULRG
:HDUHDQDO\VLQJWKHSURILWDELOLW\RIWKHILUPVRYHUWKHSHULRGEHWZHHQ
DQGILUPV¶UHVXOWVIRU)<WR)<:KHQDFRVWRIFDSLWDOLVVHWIRU
UHJXODWRU\SXUSRVHVLWLVJHQHUDOO\IRUZDUGORRNLQJ,QDPDUNHWLQYHVWLJDWLRQ
LQFRQWUDVWZHDUHORRNLQJEDFNZDUGVWRXQGHUVWDQGZKHWKHUWKHSURILWVPDGH
E\WKHILUPVKDYHH[FHHGHGWKHFRVWRIFDSLWDORYHUWKHUHOHYDQWSHULRG5:(
QSRZHUSXWIRUZDUGWKHYLHZWKDWHDFKRIWKHFRPSRQHQWSDUDPHWHUVRIWKH
:$&&VKRXOGUHIOHFWWKHUHDVRQDEOHH[SHFWDWLRQVRIWKHILUPVRYHUWKH
UHOHYDQWSHULRGDQGQRWDQH[SRVWDVVHVVPHQWRIWKHDFWXDORXWWXUQDVDW
µ)RUH[DPSOHIRUWKHULVNIUHHUDWHRUWKHHTXLW\ULVNSUHPLXPWKH
HQHUJ\ILUPVZRXOGKDYHEDVHGWKHLULQYHVWPHQWGHFLVLRQVRQWKHUHDVRQDEOH
H[SHFWDWLRQVRIWKHPDUNHWDWWKHWLPH¶:HDJUHHWKDWWKLVLVWKHFRUUHFW
DSSURDFK:HKDYHQRWVRXJKWWKHUHIRUHWRHVWLPDWHWKH:$&&DWD
SDUWLFXODUSRLQWLQWLPHEXWUDWKHUZHKDYHFRQVLGHUHGWKHDYHUDJHFRVWRI
FDSLWDOIRUWKHUHOHYDQWSHULRGDVDZKROH
&0$HVWLPDWLRQRI:$&&
7KLVVHFWLRQVHWVRXWWKHDQDO\VLVWKDWZHKDYHXQGHUWDNHQLQRUGHUWR
HVWLPDWHWKHFRPSRQHQWVRIWKH:$&&FDOFXODWLRQZKLFKLQFOXGHVERWK
JHQHULFDQGLQGXVWU\VSHFLILFFRPSRQHQWV7KHIRUPHUFRPSULVHWKHULVNIUHH
UDWH5)5WKHHTXLW\ULVNSUHPLXP(53DQGWKHWD[UDWHWKHODWWHU
FRPSULVHEHWDFRVWRIGHEWDQGJHDULQJ:HQRWHWKDWWKHIRUPHUDUHFRPPRQ
WRDOOHOHPHQWVRIWKHYDOXHFKDLQZKLOHWKHODWWHUYDU\GHSHQGLQJRQZKHWKHU
WKHILUPRSHUDWHVLQJHQHUDWLRQUHWDLOVXSSO\RUERWK
,QFRQGXFWLQJRXUFRVWRIFDSLWDODQDO\VLVZHKDYHKDGUHIHUHQFHWRRXUSULFH
GHWHUPLQDWLRQIRU%ULVWRO:DWHUZKLFKZDVXQGHUWDNHQLQLHGXULQJ
WKHUHOHYDQWSHULRGIRURXUDQDO\VLVDVZHOODVRXUSULFHGHWHUPLQDWLRQIRU1,(
ZKLFKZDVXQGHUWDNHQLQ
5LVNIUHHUDWH
,QSULQFLSOHZHUHJDUGLQGH[OLQNHGJLOW\LHOGVWREHWKHPRVWVXLWDEOHVRXUFH
IRUHVWLPDWLQJWKHUHDO5)5VLQFHLQGH[OLQNHGJLOWVKDYHQHJOLJLEOHGHIDXOW
DQGLQIODWLRQULVN+RZHYHURXUSURILWDELOLW\DQDO\VLVPHDVXUHVWKHQRPLQDO
UHWXUQVPDGHE\HQHUJ\ILUPVUDWKHUWKDQUHDOUHWXUQV$VDUHVXOWZHKDYH
DOVRH[DPLQHGWKH\LHOGVRQQRPLQDOJLOWV7KHVHDOVRKDYHQHJOLJLEOHGHIDXOW
ULVNEXWDUHVXEMHFWWRLQIODWLRQULVNIRUZKLFKZHZRXOGH[SHFWLQYHVWRUVWR
UHTXLUHDQLQIODWLRQULVNSUHPLXP
:HFRQVLGHUWKH\LHOGVRQORQJPDWXULW\JLOWVWREHPRVWUHOHYDQWWRWKH5)5LQ
WKHFRVWRIHTXLW\VLQFHHTXLWLHVDOVRKDYHORQJLQGHILQLWHPDWXULW\),*85(
VKRZVWKHLQGH[OLQNHG\LHOGFXUYHDWWKHVWDUWDQGHQGRIWKHUHOHYDQW
SHULRGDVZHOODVWKHVHYHQ\HDUDYHUDJHLHFRYHULQJWKHZKROHSHULRG)RU
PDWXULWLHVRI\HDUVDQGPRUHWKH\LHOGFXUYHVDUHEHWZHHQDQG
ZLWKDQDYHUDJHRIMXVWRYHU6KRUWHUGDWHG\LHOGVKDYHIDOOHQ
VLJQLILFDQWO\RYHUWKHODVWVHYHQ\HDUVUHIOHFWLQJDFWLRQE\WKHDXWKRULWLHVWR
DGGUHVVWKHFUHGLWFUXQFKDQGUHFHVVLRQZKLOH\LHOGVRQORQJHUGDWHGJLOWV
KDYHEHHQPRUHVWDEOHRYHUWKHSHULRG
%ULVWRO:DWHUSOFGHWHUPLQDWLRQRQDUHIHUHQFHXQGHUVHFWLRQDRIWKH:DWHU,QGXVWU\$FW$XJXVW
1RUWKHUQ,UHODQG(OHFWULFLW\1,(SULFHGHWHUPLQDWLRQ
,QSUHYLRXVUHSRUWVLQWKHODVWWHQ\HDUVZHSDLGDWWHQWLRQWRGLVWRUWLRQVLQWKHLQGH[OLQNHGPDUNHWVWKDWPD\
DIIHFWWKHVKDSHRIWKH\LHOGFXUYH,Q%ULVWRO:DWHUWKH&RPSHWLWLRQ&RPPLVVLRQ&&QRWHGWKDWVKRUWHU
GDWHGLQGH[OLQNHG\LHOGVZHUHDIIHFWHGE\DFWLRQE\WKHDXWKRULWLHVWRDGGUHVVWKHFUHGLWFUXQFKDQGUHFHVVLRQ
DQGZHUHWKHUHIRUHOHVVUHOHYDQWWRHVWLPDWLQJWKH5)5,QLQTXLULHVSULRUWRWKH&&SXWOHVVZHLJKWRQ
ORQJHUGDWHGPDWXULWLHVQRWLQJSRVVLEOHGLVWRUWLRQIURPSHQVLRQIXQGDVVHWDOORFDWLRQSROLFLHV$VZHH[SODLQHGLQ
1,(WKHHIIHFWVRIPRQHWDU\SROLFLHVDQGSHQVLRQIXQGG\QDPLFVDUHLQFUHDVLQJO\ZHOOXQGHUVWRRGE\WKHPDUNHWV
&RQVHTXHQWO\ZHH[SHFWWKHPDUNHWSULFHVRILQGH[OLQNHGJLOWVWRLQFRUSRUDWHHIIHFWLYHO\H[SHFWDWLRQVRIWKH
HIIHFWVRIWKHVHIDFWRUVDQGWKHUHIRUHWRSURYLGHDUHDVRQDEOHJXLGHWRIXWXUHUHWXUQV
),*85(
<LHOGFXUYHVRQ8.LQGH[OLQNHGJLOWVWR
=HURFRXSRQLQGH[OLQNHG\LHOG
0DU
'HF
\HDUV
0DWXULW\\HDUV
6RXUFH%DQNRI(QJODQGUHDOVSRW\LHOGFXUYHGDWD
1RWH7KHWKUHHOLQHVVKRZ\LHOGVRQ'HFHPEHU0DUFKDQGWKHDYHUDJH\LHOGVFRYHULQJWKHVHYHQDQGD
TXDUWHU\HDUSHULRGEHWZHHQ-DQXDU\DQG0DUFK
),*85(VKRZVQRPLQDOJLOW\LHOGVDWWKHVWDUWDQGHQGRIWKHUHOHYDQW
SHULRGDVZHOODVWKHVHYHQ\HDUDYHUDJHLHFRYHULQJWKHZKROHSHULRG)RU
PDWXULWLHVRI\HDUVDQGPRUHWKH\LHOGFXUYHVDUHEHWZHHQDQG
ZLWKDQDYHUDJHRI$VLPLODUSDWWHUQRIGHFOLQLQJ\LHOGVRQVKRUWHU
PDWXULWLHVFDQEHVHHQRQWKHVHQRPLQDOJLOWV
),*85(
1RPLQDO\LHOGFXUYHVRQ8.JLOWVWR
=HURFRXSRQQRPLQDO\LHOG
0DU
'HF
\HDUV
Maturity (years)
6RXUFH%DQNRI(QJODQGQRPLQDOVSRW\LHOGFXUYHGDWD
1RWH7KHWKUHHOLQHVVKRZ\LHOGVRQ'HFHPEHU0DUFKDQGWKHDYHUDJH\LHOGVFRYHULQJWKHVHYHQDQGD
TXDUWHU\HDUSHULRGEHWZHHQ-DQXDU\DQG0DUFK
,QDVVHVVLQJWKLVHYLGHQFHZHKDYHKDGUHJDUGWRWKHQDWXUHRIWKH
EHQFKPDUNWKDWZHUHTXLUHLHDUHDVRQDEOHQRPLQDOUHWXUQRQFDSLWDORYHU
WKHVHYHQ\HDUSHULRGIURP-DQXDU\WR0DUFK:HREVHUYHWKDWDQ
LQYHVWRUDWWKHVWDUWRIWKLVSHULRGZRXOGKDYHKDGUHJDUGWRDKLJKHUJLOW\LHOG
UHDORUQRPLQDOWKDQDQLQYHVWRUWRZDUGVWKHHQGRIWKHSHULRGDOWKRXJKWKH
GLIIHUHQFHLVOHVVPDWHULDOZKHQFRQVLGHULQJORQJGDWHGJLOWV2QWKLVEDVLVZH
FRQVLGHUWKDWDUHDVRQDEOHQRPLQDO5)5IRUWKHSHULRGLV7KHDYHUDJH
\LHOGRQORQJGDWHGLQGH[OLQNHGJLOWVKDVEHHQDSSUR[LPDWHO\RYHUWKH
SHULRGZKLFKLVFRQVLVWHQWZLWK5HWDLO3ULFHV,QGH[53,LQIODWLRQRI
+RZHYHULQWKH1,(SULFHGHWHUPLQDWLRQZHXVHGDUHDO5)5RIEHWZHHQ
DQGZKLFKZDVFRQVLGHUDEO\DERYHUDWHVRQORQJGXUDWLRQLQGH[OLQNHG
GHEWLQRUGHUWRDOORZIRUWKHSRVVLELOLW\WKDWUDWHVPLJKWULVHGXULQJWKH
UHPDLQGHURIWKHSULFHFRQWUROSHULRG,QWKLVFDVHZHDUHQRWVHHNLQJWR
GHWHUPLQHDQDSSURSULDWHFRVWRIFDSLWDOIRUDIXWXUHSHULRGDQGWKHUHIRUHGR
QRWIDFHWKHXQFHUWDLQWLHVDVVRFLDWHGZLWKIRUHFDVWLQJ:HKDYHKLVWRULF
LQIRUPDWLRQRQZKLFKWREDVHRXUHVWLPDWHV7KLVFRXOGSURYLGHDUHDVRQIRU
XVLQJDORZHUUHDO5)5
:HQRWHWKDWWKLVLVFRQVLVWHQWZLWKWKHXSSHUHQGRIWKHHVWLPDWHVXVHGIRUWKHQRPLQDO5)5LQERWKWKHSULYDWH
KHDOWKFDUHDQGWKHDJJUHJDWHVPDUNHWLQYHVWLJDWLRQV
+RZHYHUZHKDYHDOVRWDNHQLQWRDFFRXQWWKHIDFWWKDWWKH\LHOGVREVHUYHGRQ
LQGH[OLQNHGJLOWVDUHOLNHO\WREHDIIHFWHGE\WKHLPSHUIHFWLRQVDVVRFLDWHGZLWK
WKH53,DVDPHDVXUHRIXQGHUO\LQJLQIODWLRQ:HQRWHWKHKLVWRULFDOJDS
EHWZHHQ53,DQG&RQVXPHU3ULFH,QGH[&3,PHDVXUHVRILQIODWLRQRIDURXQG
EHWZHHQDQG7RWKHH[WHQWWKDWWKH&3,EHWWHUUHIOHFWV
XQGHUO\LQJLQIODWLRQPHDVXUHVRIUHWXUQUHODWLYHWRWKH53,RIZKLFKLQGH[
OLQNHGJLOWVDUHRQHVXFKPHDVXUHPD\EHUHGXFHGDVDUHVXOWRIWKDWJDS
7KLVPD\EHDIDFWRUEHKLQGQHJDWLYHVKRUWWHUPUHDO\LHOGV,QRXU1,(
GHFLVLRQZHQRWHGWKDWJLYHQWKDWWKHUHJXODWHGDVVHWEDVHRIWKHFRPSDQ\
ZDVDOVRLQGH[HGE\WKH53,ZHGLGQRWQHHGWRDGMXVWRXUHVWLPDWHRIWKH
5)5IRUWKLVHIIHFW+RZHYHULQWKLVLQYHVWLJDWLRQWKHILQDQFLDOLQIRUPDWLRQRI
WKHFRPSDQLHVLVOLNHO\WRKDYHEHHQDIIHFWHGE\WKHJHQHUDOUDWHRILQIODWLRQLQ
WKHHFRQRP\ZKLFKZHFRQVLGHUWREHPRVWDFFXUDWHO\PHDVXUHGE\WKH&3,
7KHUHIRUHZHFRQVLGHUWKDWLWLVDSSURSULDWHWRXVHWKHQRPLQDO\LHOGRQJLOWV
DQGGHGXFWWKH&3,RYHUWKHSHULRGWRFRPHWRDQHVWLPDWHRIWKHUHDO5)5
%HWZHHQ-DQXDU\DQG0DUFKWKH&3,DYHUDJHGEHWZHHQ
JHRPHWULFDQGDULWKPHWLF7KHUHIRUHZHKDYHXVHGDUDQJHRIWR
ZKLFKJLYHVDUHDO5)5RIEHWZHHQDQG
(TXLW\ULVNSUHPLXP
7KH(53LVWKHDGGLWLRQDOUHWXUQWKDWLQYHVWRUVUHTXLUHWRFRPSHQVDWHWKHPIRU
DVVXPLQJWKHULVNDVVRFLDWHGZLWKLQYHVWLQJLQHTXLWLHVUDWKHUWKDQLQULVNIUHH
DVVHWV:KHQVHHNLQJWRXQGHUVWDQGZKDWWKH(53ZDVRYHUDKLVWRULFSHULRG
RIWLPHLWLVQHFHVVDU\WRLGHQWLI\WKHUHWXUQVZKLFKLQYHVWRUVH[SHFWHGWR
PDNHRQWKHPDUNHWDQGGHGXFWWKHUHOHYDQW5)5DVHVWLPDWHGDERYH
7KHUHDUHWZRW\SHVRIDSSURDFKWKDWFDQEHXVHGWRHVWLPDWHWKH(53
+LVWRULFDOPHWKRGVVHHNWRGHULYHWKH(53IURPDORQJUXQRIGDWDRQUHDOLVHG
UHWXUQVRQHTXLWLHV)RUZDUGORRNLQJDSSURDFKHVVHHNWRHVWLPDWHWKH
H[SHFWHG(53EDVHGRQHLWKHUWKHUHSRUWHGH[SHFWDWLRQVRIPDUNHW
SDUWLFLSDQWVRUWKH(53LPSOLHGLQDVVHWSULFHVDWWKHVWDUWRIWKHSHULRG
+LVWRULFDODSSURDFKHVH[SRVWDQGH[DQWH
7KHNH\DVVXPSWLRQVEHKLQGWKHKLVWRULFDOH[SRVWDSSURDFKDUHWKDWH[SHFWHG
UHWXUQVUHPDLQFRQVWDQWRYHUWLPHDQGWKDWDYHUDJHUHDOLVHGUHWXUQVUHIOHFWWKH
H[SHFWHGUHWXUQ'LPVRQ0DUVKDQG6WDXQWRQHVWLPDWHGWKHDYHUDJH(53IRU
DQXPEHURIFRXQWULHVLQFOXGLQJWKH8.RQWKHEDVLVRIHTXLW\DQGJLOW\LHOGV
6HH%DQNRI(QJODQGLQIODWLRQUHSRUWS
:HQRWHWKDWWKLVUDQJHLVFRQVLVWHQWZLWKWKHUHDO5)5WKDWZRXOGUHVXOWIURPDGGLQJWKHGLIIHUHQFHEHWZHHQ
WKH53,DQGWKH&3,WRWKHDYHUDJH\LHOGRQLQGH[OLQNHGJLOWVRILH
RYHUWKHSDVW\HDUV7KHVH(53VDUHHVWLPDWHGDVWKHGLIIHUHQFH
EHWZHHQWKHUHDOUHWXUQRQHTXLWLHVDQGWKHUHDOUHWXUQRQJLOWVRYHUWKH
SHULRG
7DEOHVKRZVWKHJHRPHWULFDQGDULWKPHWLFDYHUDJHUHWXUQVRQ8.HTXLWLHV
ERQGVDQGELOOVRYHUWKHSHULRGEHWZHHQDQGWRJHWKHUZLWKWKH
KLVWRULFHTXLW\ULVNSUHPLXPLPSOLHGE\WKHVHUHWXUQV
7$%/(5HDOUHWXUQVRQ8.HTXLWLHVDQGJRYHUQPHQWGHEWWR
8.UHDOUHWXUQV
(TXLWLHV
%RQGV
%LOOV
(53
%RQGV
%LOOV
*HRPHWULF
PHDQ
$ULWKPHWLF
PHDQ
6RXUFH'LPVRQHWDO&UHGLW6XLVVH*OREDO,QYHVWPHQW5HWXUQV6RXUFHERRN
:HQRWHWKDWWKHDULWKPHWLFPHDQUHIOHFWVWKHUHWXUQVWKDWDQLQYHVWRUFRXOG
H[SHFWWRPDNHLQDQ\JLYHQ\HDUZKLOHWKHJHRPHWULFPHDQUHIOHFWVWKH
FRPSRXQGUHWXUQVWKDWDQLQYHVWRUZRXOGKDYHPDGHLIWKH\KDGLQYHVWHGRYHU
WKHIXOO\HDUSHULRGFRYHUHGE\WKH'LPVRQHWDOGDWDVHW,WLVXVXDOWR
TXRWHILJXUHVIRUWKHDYHUDJHRIRQH\HDUUHWXUQVEXWLQYHVWRUVLQWKHHTXLW\
PDUNHWXVXDOO\H[SHFWWRLQYHVWLQWKHPDUNHWIRUORQJHUWKDQD\HDU$VWKH
KROGLQJSHULRGLQFUHDVHVWKHH[SHFWHGUHWXUQGHFOLQHVIURPWKHDULWKPHWLF
PHDQWRZDUGVWKHJHRPHWULFPHDQ7KHUHIRUHLQFRPLQJWRDYLHZRQWKH
DSSURSULDWHPDUNHWUHWXUQZHKDYHKDGUHIHUHQFHWRWKHUDQJHRIPHDQ
UHWXUQVJHRPHWULFWRDULWKPHWLF
$QDOWHUQDWLYHDSSURDFKWRLGHQWLI\LQJWKH(53VXJJHVWHGE\)DPDDQG
)UHQFKLVWRHVWLPDWHGLUHFWO\WKHPDUNHWUHWXUQVH[SHFWHGE\LQYHVWRUV
KLVWRULFDOO\LHH[DQWHUHWXUQV7KH\GRWKLVE\XVLQJDYHUDJHGLYLGHQG\LHOGV
&UHGLW6XLVVH*OREDO,QYHVWPHQW5HWXUQV6RXUFHERRN$V'LPVRQHWDOH[SODLQSµ7RXQGHUVWDQGULVN
DQGUHWXUQZHPXVWH[DPLQHORQJSHULRGVRIKLVWRU\7KLVLVEHFDXVHDVVHWUHWXUQVDQGHVSHFLDOO\HTXLW\UHWXUQV
DUHYHU\YRODWLOH(YHQRYHUSHULRGVDVORQJDV\HDUVRUPRUHZHFDQVWLOOREVHUYHµXQXVXDO¶UHWXUQV¶2QWKLV
EDVLVZHKDYHXVHGWKHIXOO\HDUPHDQHTXLW\UHWXUQVHVWLPDWHVLQRXUDQDO\VLV7KHDGYDQWDJHRIWKLV
DSSURDFKLVDOVRWKDWWKHODUJHUVDPSOHVL]HLHQXPEHURI\HDUVLQFUHDVHVWKHDFFXUDF\RIWKHHVWLPDWHV±WKH
VWDQGDUGHUURUVRIWKHHVWLPDWLRQVDUHUHGXFHGQDUURZLQJWKHFRQILGHQFHLQWHUYDO
7KHIRUPXODXVHGWRHVWLPDWHWKH(53LV(TXLW\UDWHRIUHWXUQ5LVNOHVVUHWXUQ±ZKLFKLV
DSSUR[LPDWHO\HTXLYDOHQWWRGHGXFWLQJWKHULVNOHVVUHWXUQVIURPWKHUHWXUQVRQHTXLWLHV'LPVRQHWDOFDWHJRULVH
µJLOWV¶LQWRWZRJURXSVIRUWKHSXUSRVHVRIWKHLUDQDO\VLVVKRUWHUGDWHGµWUHDVXU\ELOOV¶DQGORQJHUGDWHGµWUHDVXU\
ERQGV¶7KHIRUPHUKDYHPDWXULWLHVRIXSWRWHQ\HDUVZKLOHWKHODWWHUKDYHDQDYHUDJHPDWXULW\RI\HDUV7KH
GLIIHUHQFHEHWZHHQµERQG¶DQGµELOO¶UHWXUQVLVUHIHUUHGWRDVWKHµPDWXULW\SUHPLXP¶
:HQRWHWKDWWKHUHDOJOREDOPDUNHWUHWXUQVRYHUWKHWRSHULRGDUHYHU\VLPLODUWRWKRVHRIWKH8.
ZLWKDJHRPHWULFPHDQUHWXUQRIDQGDQDULWKPHWLFPHDQUHWXUQRI6RXUFH&UHGLW6XLVVH*OREDO
,QYHVWPHQW5HWXUQV6RXUFHERRN
DQGHDUQLQJVJURZWKUDWHVWRPHDVXUHWKHH[SHFWHGUDWHRIFDSLWDOJDLQ
8VLQJWKHIXOOUXQRIKLVWRULFDOGDWDIRUWKH8.WKLVVXJJHVWVDQXQGHUO\LQJ
PDUNHWUHWXUQRI
)DPDDQG)UHQFK¶VZRUNRQ86VHFXULWLHVSURYLGHVHYLGHQFHRIDIDOOLQ
H[SHFWHGUHWXUQVRYHUWLPHZLWKH[SHFWHGUHWXUQVEHLQJORZHUVLQFH
WKDQEHIRUH7KHVWDWLVWLFDOHYLGHQFHIRUWKH8.LVOHVVH[WHQVLYHEXWDV
LOOXVWUDWHGLQ)LJXUHWKHGLYLGHQG\LHOGDVRIWKHVWDUWRIWKHUHOHYDQWSHULRG
RIDERXWZDVEHORZWKHKLVWRULFDODYHUDJH8QOHVVIXWXUH
GLYLGHQGJURZWKLVKLJKHUWKDQLQWKHSDVWWKLVZRXOGVXJJHVWWKDWH[SHFWHG
UHWXUQVDUHDERXWORZHUWKDQWKHSDVWDYHUDJHLPSO\LQJDPDUNHWUHWXUQRI
DERXWXVLQJ%DUFOD\VGDWD
),*85(
'LYLGHQG\LHOGIRU8.PDUNHW%DUFOD\VGDWD
6RXUFH%DUFOD\VHTXLW\JLOWVWXG\
())DPDDQG.5)UHQFKµ7KHHTXLW\SUHPLXP¶-RXUQDORI)LQDQFH$SULO
7KLVUHVXOWLVGHULYHGIURPDQDYHUDJHGLYLGHQG\LHOGRIDQGGLYLGHQGJURZWKRID\HDU%DUFOD\V
GDWD)DPDDQG)UHQFKQRWHWKDWWKHLUHVWLPDWHVRIWKH(53DUHPXFKORZHUWKDQWKRVHGHULYHGIURPWKH
DYHUDJHVWRFNUHWXUQ7KH\VXJJHVWWKDWDFKLHYHGUHWXUQVPD\KDYHEHHQKLJKHUWKDQH[SHFWHGUHWXUQVRYHUWKH
SHULRGEHWZHHQDQGGXHWRDGHFOLQHLQGLVFRXQWUDWHVWKDWSURGXFHGDODUJHXQH[SHFWHGFDSLWDOJDLQ
IRULQYHVWRUV
7ZRSDSHUVWKDWILQGHYLGHQFHRIDUHGXFWLRQLQWKHH[SHFWHGPDUNHWUHWXUQRU(53IRUWKH8.DOEHLWDW
GLIIHUHQWWLPHVDUH%XUDQDYLW\DZXW)UHHPDQDQG)UHHPDQµ+DVWKHHTXLW\SUHPLXPEHHQORZIRU
\HDUV"¶1RUWK$PHULFDQ-RXUQDORI(FRQRPLFVDQG)LQDQFHSS±DQG9LYLDQµ7KH8.HTXLW\
SUHPLXP±¶-RXUQDORI%XVLQHVVDQG)LQDQFLDO$FFRXQWLQJ±SS±7KHILUVWSDSHU
VXJJHVWVWKDWWKHH[SHFWHGHTXLW\SUHPLXPPD\KDYHIDOOHQLQWKHVLQWKH8.DQGRWKHUFRXQWULHVZKLOHWKH
VHFRQGSDSHUVXJJHVWVWKDWWKHUHZDVDSHUPDQHQWGHFOLQHLQWKH8.PDUNHWGLYLGHQGSULFHUDWLRGXULQJWKHHDUO\
V
7KHVHILJXUHVGRQRWWDNHLQWRDFFRXQWSD\PHQWVWRVKDUHKROGHUVRWKHUWKDQGLYLGHQGVHJVKDUHUHSXUFKDVHV
'LPVRQHWDOVRXJKWWRLQIHUZKDWLQYHVWRUVPD\KDYHEHHQH[SHFWLQJ
RQDYHUDJHLQWKHSDVWE\VHSDUDWLQJWKHKLVWRULFDOHTXLW\SUHPLXPLQWR
HOHPHQWVWKDWFRUUHVSRQGWRLQYHVWRUH[SHFWDWLRQVDQGHOHPHQWVRIQRQ
UHSHDWDEOHJRRGRUEDGOXFN7KHVHHOHPHQWVLQFOXGHWKHPHDQGLYLGHQG\LHOG
WKHJURZWKUDWHRIUHDOGLYLGHQGVWKHH[SDQVLRQRIWKHSULFHGLYLGHQGUDWLRDQG
FKDQJHLQUHDOH[FKDQJHUDWHV'LPVRQHWDOFRQFOXGHGWKDWWKHZRUOGZLGH
KLVWRULFDOSUHPLXPZDVODUJHUWKDQLQYHVWRUVZHUHOLNHO\WRKDYHDQWLFLSDWHG
EHFDXVHRIIDFWRUVVXFKDVXQIRUHVHHQH[FKDQJHUDWHJDLQVDQG
XQDQWLFLSDWHGH[SDQVLRQLQYDOXDWLRQPXOWLSOHV1RWLQJWKDWGLYLGHQG\LHOGVDUH
ORZHUWKDQLQWKHSDVW'LPVRQHWDOLQIHUUHGWKDWIRUWKHZRUOGLQGH[D
IRUZDUGORRNLQJULVNSUHPLXPRYHUWUHDVXU\ELOOVZRXOGEHWR*LYHQD
GLIIHUHQFHRIEHWZHHQDYHUDJHUHWXUQRQELOOVDQG(53VHH7$%/(
WKLVLPSOLHVDQH[SHFWHGUHWXUQRIWR
)RUZDUGORRNLQJDSSURDFKHV
7KH(53LVDOVRFRPPRQO\HVWLPDWHGXVLQJSURMHFWHGGLYLGHQGVIURP
DQDO\VWV¶IRUHFDVWVZKLFKH[WHQGRXWE\IRXURUILYH\HDUVDQGDORQJHUWHUP
GLYLGHQGJURZWKUDWH7KHH[SHFWHGUHWXUQLVWKHQWKHGLVFRXQWUDWHDWZKLFK
WKHSUHVHQWYDOXHRIIXWXUHGLYLGHQGVLVHTXDOWRWKHFXUUHQWPDUNHWSULFH$
OLPLWDWLRQRIWKLVDSSURDFKLVWKDWLWLVQHFHVVDU\WRPDNHDQDVVXPSWLRQDERXW
IXWXUHORQJWHUPJURZWKRIGLYLGHQGVZKLFKKDVDPDMRUHIIHFWRQWKH
FDOFXODWLRQVLQFHGLYLGHQGVEH\RQG\HDUIRXURUILYHDFFRXQWIRUDODUJHSDUWRI
SUHVHQWYDOXHDWSODXVLEOHGLVFRXQWUDWHV
)LJXUHVKRZVHVWLPDWHVRI(53XVLQJWKLVPHWKRGRORJ\SXEOLVKHGLQDQ
DUWLFOHLQWKH%DQNRI(QJODQG4XDUWHUO\%XOOHWLQ7KHVHHVWLPDWHVDUHEDVHG
RQWKHDVVXPSWLRQWKDWWKHIXWXUHORQJWHUPJURZWKLQGLYLGHQGVSHUVKDUHLV
HTXDOWRDQHVWLPDWHRIWKHSRWHQWLDOJURZWKRIWKHHFRQRP\+RZHYHUWKH
DXWKRUVRIWKHDUWLFOHQRWHGWKDWWKLVFKRLFHRIIXWXUHORQJWHUPJURZWKUDWHLV
HVVHQWLDOO\DUELWUDU\7KHHVWLPDWHVLQ)LJXUHVXJJHVWWKDWVLQFHWKH
H[SHFWHG(53KDVIOXFWXDWHGDURXQGWRZDUGVWKHXSSHUHQGRIWKH
KLVWRULFDOLQWHUTXDUWLOHUDQJHRIEHWZHHQDQG:HDWWHPSWHGWR
FDOFXODWHWKHH[SHFWHGPDUNHWUHWXUQLPSOLHGE\WKHVHHVWLPDWHVRIWKH(53
E\DGGLQJWKH\LHOGRQ]HURFRXSRQWHQ\HDUJLOWV&DOFXODWHGRQWKLVEDVLV
VLQFHWKHILQDQFLDOFULVLVWKHPDUNHWUHWXUQKDVIOXFWXDWHGDURXQG,W
KDVGHFOLQHGPDUNHGO\IROORZLQJWKHILQDQFLDOPDUNHWWXUPRLORIWRRU
OHVV,QGHHGWKH%DQNRI(QJODQG¶V1RYHPEHU)LQDQFLDO6WDELOLW\5HSRUW
&UHGLW6XLVVH*OREDO,QYHVWPHQW5HWXUQV6RXUFHERRNSDJHVSS±7KHWRUDQJHLVWKH
DULWKPHWLFPHDQ7KHHTXLYDOHQWJHRPHWULFPHDQLVWR
0,QNLQHQ06WULQJDDQG.9RXWVLQRXµ,QWHUSUHWLQJHTXLW\SULFHPRYHPHQWVVLQFHWKHVWDUWRIWKH
ILQDQFLDOFULVLV¶4
&DOFXODWHGE\WKH%DQNRI(QJODQGEDVHGRQDORQJHUWLPHVHULHVRIGDWDEHWZHHQDQG
QRWHVULVLQJHTXLW\SULFHVLPSURYHGHDUQLQJVH[SHFWDWLRQVDQGDIDOOLQHTXLW\
ULVNSUHPLDWRZDUGVORQJWHUPDYHUDJHOHYHOV
),*85(
(VWLPDWHG(53DQGDSSUR[LPDWHLPSOLHGUHDOPDUNHWUHWXUQ
6RXUFH%DQNRI(QJODQGDQG&0$FDOFXODWLRQV
:HDJUHHWKDWLWLVHVVHQWLDOO\DUELWUDU\WRDVVXPHIXWXUHORQJUXQJURZWKLQ
GLYLGHQGVSHUVKDUHHTXDOWRSRWHQWLDOHFRQRPLFJURZWK,QGHHGZHVHH
HPSLULFDOVXSSRUWIRUH[SHFWLQJORQJUXQJURZWKLQGLYLGHQGVSHUVKDUHWREH
OHVVWKDQSRWHQWLDOHFRQRPLFJURZWK7KHKLVWRULFDOJURZWKUDWHLQUHDO
GLYLGHQGVIRUWKH8.IURPWKH&UHGLW6XLVVH'LPVRQHWDOGDWDLVRQO\
DQGDURXQG]HURXVLQJWKH%DUFOD\VGDWD±WKLVLVVLJQLILFDQWO\OHVVWKDQUHDO
8.HFRQRPLFJURZWKRYHUWKHVDPHSHULRGWRRI,WLVDOVR
WKHFDVHWKDWJURZWKLQGLYLGHQGVSHUVKDUHKDVEHHQVLJQLILFDQWO\OHVVWKDQ
HFRQRPLFJURZWKLQPRUHUHFHQWSHULRGV6LQFHJURZWKLQGLYLGHQGVSHU
VKDUHKDVEHHQFRPSDUHGZLWKIRU*'3JURZWKZKLOHVLQFH
JURZWKLQGLYLGHQGVSHUVKDUHKDVEHHQFRPSDUHGZLWKIRU
*'3JURZWK
%HDULQJLQPLQGWKHVHSRLQWVDQGDOVRWKDWDQDO\VWV¶IRUHFDVWVPD\EHVXEMHFW
WRXSZDUGELDVZHFRQVLGHUWKDWWKHDSSUR[LPDWH(53DQGWR
)LQDQFLDO6WDELOLW\5HSRUWSDQG&KDUW
&UHGLW6XLVVH*OREDO,QYHVWPHQW5HWXUQV6RXUFHERRN7DEOH6+:LOOLDPVRQµ$QQXDOL]HG
JURZWKUDWHRIYDULRXVKLVWRULFDOHFRQRPLFVHULHV¶
$ODUJHERG\RIOLWHUDWXUHVXJJHVWVWKDWWKHUHPD\EHDWHQGHQF\IRUDQDO\VWV¶IRUHFDVWVWRRYHUUHDFWWRFKDQJHV
DQGRQDYHUDJHWREHWRRRSWLPLVWLFHJ:)0'H%RQGWDQG5+7KDOHUµ'RVHFXULW\DQDO\VWVRYHUUHDFW"¶
$PHULFDQ(FRQRPLF5HYLHZSS±
PDUNHWUHWXUQVXJJHVWHGE\),*85(DUHOLNHO\WREHDWWKHXSSHUHQGRI
H[SHFWHGUHWXUQV
&0$GLVFXVVLRQ
7KHLQWHUSUHWDWLRQRIWKHHYLGHQFHRQPDUNHWUHWXUQVUHPDLQVVXEMHFWWR
FRQVLGHUDEOHXQFHUWDLQW\+LVWRULFDSSURDFKHVH[SRVWDQGH[DQWHLQGLFDWHD
PDUNHWUHWXUQRIEHWZHHQDQGZKLOHIRUZDUGORRNLQJDSSURDFKHV
LQGLFDWHDPDUNHWUHWXUQRIEHWZHHQDQG,QWKHUHFHQW1,(
GHWHUPLQDWLRQZHFDPHWRWKHYLHZWKDWWKHDSSURSULDWHPDUNHWUHWXUQZDV
EHWZHHQDQGDQXSSHUOLPLWRI:HFRQVLGHUWKDWWKLVUHSUHVHQWVD
UHDVRQDEOHUDQJHLQWKLVFDVHDVZHOO7RJHWKHUZLWKDUHDO5)5RIEHWZHHQ
DQGWKLVUDQJHLPSOLHVDQ(53RIEHWZHHQDQG
7D[UDWH
7KHFRUSRUDWLRQWD[UDWHVDSSOLFDEOHRYHUWKHSHULRGDUHVHWRXWLQ7DEOH)RU
WKHSXUSRVHRIHVWLPDWLQJWKH:$&&ZHKDYHXVHGDQDYHUDJHRIWKHWD[
UDWHVRYHUWKHSHULRGRI
7$%/(8.FRUSRUDWLRQWD[UDWHV
6RXUFH+05&
(TXLW\EHWDV
7KHEHWDRIDQDVVHWPHDVXUHVWKHFRUUHODWLRQEHWZHHQWKHYRODWLOLW\RIWKH
UHWXUQVRQWKHDVVHWDQGWKHUHWXUQVRQWKHPDUNHWDVDZKROHRUWKH
H[SRVXUHRIWKHILUPWRV\VWHPDWLFRUµQRQGLYHUVLILDEOH¶ULVN,WLVLQUHWXUQIRU
DVVXPLQJWKLVPDUNHWULVNWKDWLQYHVWRUVUHTXLUHDQHTXLW\ULVNSUHPLXP
RYHUWKHULVNIUHHUHWXUQ
7KHEHWDYDOXHRIDOLVWHGILUPFDQEHGLUHFWO\HVWLPDWHGDVWKHFRYDULDQFH
EHWZHHQWKHVWRFN¶VUHWXUQVDQGWKHPDUNHW¶VUHWXUQVGLYLGHGE\WKHYDULDQFH
RIPDUNHWUHWXUQV+RZHYHUZKHQHVWLPDWHGLQWKLVZD\WKHEHWDYDOXH
UHIOHFWVWKHIXOOUDQJHRIDFWLYLWLHVXQGHUWDNHQE\DOLVWHGEXVLQHVVDQGDVD
UHVXOWPD\GLIIHUIURPWKHEHWDRIWKHUHOHYDQWDFWLYLWLHVIRUWKHSXUSRVHVRI
RXULQYHVWLJDWLRQ
:LWKLQD&$30IUDPHZRUNFKDQJHVLQJHDULQJDIIHFWHTXLW\EHWDV+HQFHLW
LVQHFHVVDU\WRDGMXVWIRUJHDULQJGLIIHUHQFHVLQRUGHUWRPDNHFRPSDULVRQV
EHWZHHQHTXLW\EHWDV:HGRWKLVE\FDOFXODWLQJWKHDVVHWEHWDLHWKHEHWDDW
]HURJHDULQJ,QWKLVVHFWLRQZHILUVWVHWRXWWKHUDQJHRIEHWDHVWLPDWHVWKDW
ZHKDYHFROOHFWHGRQDUDQJHRIOLVWHGHQHUJ\FRPSDQLHV7KHQZHGLVFXVV
WKHH[WHQWWRZKLFKZHFRQVLGHUWKHDFWLYLWLHVRIWKHVHILUPVWREH
UHSUHVHQWDWLYHRIWKRVHRIRXUK\SRWKHWLFDOVWDQGDORQH*%RSHUDWRUDQG
WKHUHIRUHWKHH[WHQWWRZKLFKWKHLUEHWDYDOXHVDUHOLNHO\WREHFRPSDUDEOH
%HWDHVWLPDWHV
7KHEHWDVRIWKHOLVWHGFRPSDQLHVDUHVKRZQLQ7DEOH:HKDYHHVWLPDWHG
WKHVHRQERWKDPRQWKO\DQGDTXDUWHUO\EDVLV7KLVDSSURDFKIROORZVWKH
UHVHDUFKILQGLQJVRI*LOEHUWHWDOZKLFKVKRZWKDWPRQWKO\DQGTXDUWHUO\EHWDV
DUHJHQHUDOO\PRUHUHOLDEOHWKDQWKRVHHVWLPDWHGRQWKHEDVLVRIKLJK
IUHTXHQF\GDWDLHGDLO\RUZHHNO\EHWDV
7KH6L[/DUJH(QHUJ\)LUPVZKLFKDUHDFWLYHLQ*%KDYHDQDYHUDJHDVVHWRU
XQOHYHUHGEHWDRIDSSUR[LPDWHO\WRZLWKDUDQJHRIEHWZHHQDQG
:HREVHUYHWKDWERWK&HQWULFDDQG66(KDYHVOLJKWO\ORZHUEHWDYDOXHV
WKDQWKHRWKHUIRXUILUPVDYHUDJLQJWRRQDTXDUWHUO\DQGPRQWKO\
EDVLVUHVSHFWLYHO\7KHDVVHWEHWDYDOXHVIRUWKHRWKHUQRQ*%YHUWLFDOO\
LQWHJUDWHGHQHUJ\ILUPVDQGIRUILUPVZKLFKPDLQO\IRFXVRQJHQHUDWLRQDUH
YHU\VLPLODUDYHUDJLQJDURXQG7KHHYLGHQFHFROOHFWHGIURPUHWDLOVXSSO\
EXVLQHVVHVGRHVQRWDSSHDUWRSURYLGHDUHOLDEOHEDVLVIRUWKHHVWLPDWLRQRIDQ
DVVHWEHWD
%HWDVKDYHEHHQHVWLPDWHGIRUWKHSHULRGEHWZHHQ-DQXDU\DQG0DUFKZKHQLQIRUPDWLRQLV
DYDLODEOHIRUWKHIXOOSHULRG,QVRPHFDVHVFRPSDQLHVKDYHEHHQOLVWHGIRUDVKRUWHUSHULRGRIWLPHLQZKLFK
FDVHEHWDVKDYHEHHQHVWLPDWHGVLQFHWKHGDWHRIOLVWLQJ%HWDHVWLPDWHVDUHEDVHGRQWKHFRYDULDQFHEHWZHHQ
WKHµH[FHVV¶WRWDOUHWXUQRQHDFKFRPSDQ\¶VVKDUHVDQGWKHµH[FHVV¶WRWDOUHWXUQRQWKHUHOHYDQWLQGH[LQHDFK
FDVHDVVXPLQJWKHUHLQYHVWPHQWRIGLYLGHQGV1RWHWKDWWKHµH[FHVV¶UHWXUQLVWKHUHDOLVHGUHWXUQOHVVWKH5)5
WDNHQWREHIRUWKHSXUSRVHVRIWKLVFDOFXODWLRQ:HKDYHQRWDSSOLHGDQ\DGMXVWPHQWVWRWKHEHWDYDOXHVHJ
PHDQUHYHUVLRQ
7*LOEHUW&+UGOLFND-.DORGLPRVDQG66LHJDO µ'DLO\GDWDLVEDGIRUEHWD2SDFLW\DQGIUHTXHQF\
GHSHQGHQWEHWDV¶5HYLHZRI$VVHW3ULFLQJ6WXGLHV
7$%/((TXLW\DQGDVVHWEHWDVRIHQHUJ\ILUPV
&RPSDQ\
/HYHUHGEHWD
0RQWKO\
4XDUWHUO\
6L[/DUJH(QHUJ\)LUPV
&HQWULFDSOF
66(SOF
(')6$
(RQ6(
,EHUGUROD6$‚
5:(QSRZHU$*
$YHUDJH
9,ILUPVQRQ*%
(QHO6S$
*DV1DWXUDO6$
(Q%:$*
9HUEXQG$*
)RUWXP2\M
&RQWDFW(QHUJ\/LPLWHG
7UXVW3RZHU/LPLWHG
15*(QHUJ\,QF
2ULJLQ(QHUJ\
$*/$XVWUDOLDQ*DV/LJKW&R
$YHUDJHH[FO$*/
*HQHUDWLRQILUPV
*')6XH]
'UD[SOF
$(6&RUS
$PHULFDQ(OHFWULF3RZHU&RUS
$YHUDJH
(QHUJ\UHWDLOHUV
7HOHFRP3OXVSOF
*RRG(QHUJ\
-XVW(QHUJ\
&ULXV(QHUJ\7UXVW
±
8QOHYHUHGEHWD
0RQWKO\
4XDUWHUO\
±
±
±
±
0.67
±
±
±
6RXUFH%ORRPEHUJGDWD&0$DQDO\VLV
%HWDVKDYHEHHQXQOHYHUHGXVLQJWKHIROORZLQJIRUPXOD8QOHYHUHG%HWD /HYHUHG%HWD±7D[5DWH[
'HEW(TXLW\ZKHUHWKHWD[UDWHXVHGLVWKHDYHUDJHVWDWXWRU\FRUSRUDWHWD[UDWHLQWKHFRXQWU\LQZKLFKHDFKILUPKDVLWV
KHDGTXDUWHUV7KHWD[UDWHVXVHGDUHVHWRXWLQ$SSHQGL[%7KHOHYHUHGEHWDLVDOVRFDOOHGWKHHTXLW\EHWDWKHXQOHYHUHGEHWD
LVDOVRFDOOHGWKHDVVHWEHWD
‚,EHUGUROD6$DFTXLUHG6FRWWLVK3RZHULQ
&RPSDUDELOLW\RIILUPV
)RUWKHSXUSRVHVRIRXUSURILWDELOLW\DQDO\VLVZHZLVKWRLGHQWLI\DSSURSULDWH
EHWDYDOXHVIRUDDYHUWLFDOO\LQWHJUDWHGHQHUJ\ILUPZLWKRSHUDWLRQVLQ*%
DORQHEDVWDQGDORQH*%HOHFWULFLW\JHQHUDWRUDQGFDVWDQGDORQH*%
HOHFWULFLW\DQGJDVUHWDLOVXSSOLHU&HQWULFDSXWIRUZDUGWKHYLHZWKDWXVLQJWKH
EHWDVRIGLYHUVHDQGYHUWLFDOO\LQWHJUDWHGEXVLQHVVHVPD\EHPLVOHDGLQJZKHQ
VHHNLQJWRHVWLPDWHWKH:$&&RIDVWDQGDORQHEXVLQHVV±SDUWLFXODUO\LQ
UHWDLOVXSSO\±EHFDXVHWKHIRUPHUZLOOEHQHILWIURPGLYHUVLW\LQWKHLURSHUDWLRQV
DQGKHQFHZLOOQRWEHFRPSDUDEOH
:HFRQVLGHUWKDWWKHUHDUHWZRPDLQGLPHQVLRQVWRWDNHLQWRDFFRXQWLQ
GHWHUPLQLQJWKHFRPSDUDELOLW\RIWKHEHWDVRIWKHILUPVFRYHUHGLQ7$%/(
D 7KHJHRJUDSKLFDOVFRSHRIRSHUDWLRQVLQFOXGLQJZKHWKHUWKHILUPVDUH
DFWLYHLQ*%DQGWKHH[WHQWWRZKLFKWKH\DUHGLYHUVLILHGDFURVVDQXPEHU
RIGLIIHUHQWFRXQWULHV
E 7KHW\SHDQGUDQJHRIDFWLYLWLHVXQGHUWDNHQE\WKHILUPVLQFOXGLQJ
ZKHWKHUWKH\DUHYHUWLFDOO\LQWHJUDWHGDQGZKHWKHUWKH\DOVRXQGHUWDNH
UHJXODWHGEXVLQHVVVXFKDVRZQLQJGLVWULEXWLRQQHWZRUNV
7$%/(VHWVRXWWKHSURSRUWLRQRIUHYHQXHVDQGSURILWVHDUQHGE\WKH6L[
/DUJH(QHUJ\)LUPVLQWKH8.DQGRYHUVHDVDVZHOODVWKHFRXQWULHVLQZKLFK
WKH\KDYHRSHUDWLRQV,WVKRZVWKDW66(DQG&HQWULFDKDYHWKHJUHDWHVW
UHODWLYHH[SRVXUHWR*%ZLWKWKHPDMRULW\RIWKHLUDFWLYLWLHVKHUH66(LVWKH
PRVWKHDYLO\*%IRFXVHGILUPZLWKRSHUDWLRQVLQ*%DQG,UHODQGRQO\ZKLOH
&HQWULFDKDVDURXQGWZRWKLUGVRILWVEXVLQHVVLQWKH8.,QFRQWUDVW(')
(QHUJ\RQO\JHQHUDWHVDURXQGWRRILWVVDOHVDQGSURILWVLQWKH8.
ZLWKWKHPDMRULW\RILWVRSHUDWLRQVLQ)UDQFH(21DQG5:(QSRZHUGHULYHD
VLPLODUO\ORZSURSRUWLRQRIWKHLUUHYHQXHVDQGSURILWVIURPWKHLU*%RSHUDWLRQV
7$%/(%UHDNGRZQRIFRPSDQ\UHYHQXHDQGSURILWVE\ORFDWLRQ
&RPSDQ\
3URSRUWLRQRIUHYHQXH
3URSRUWLRQRIRSHUDWLQJSURILWV
&RXQWULHVZLWKEXVLQHVVSUHVHQFH
8.
2YHUVHDV
8.
2YHUVHDV
&HQWULFD
FUG
FUG
FUG
FUG
8.861HWKHUODQGV1RUZD\&DQDGD
7ULQLGDG7REDJR
(')6$‚
)UDQFH8.,WDO\$XVWULD6ZLW]HUODQG
%HOJLXP+XQJDU\3RODQG5XVVLD
&KLQD86%UD]LO9LHWQDP/DRV
(21Á
F
F
F
F
*HUPDQ\8.6SDLQ,WDO\+XQJDU\
6ZHGHQ&]HFK5HSXEOLF6ORYDNLD
7XUNH\%UD]LO5XVVLD86)UDQFH
1HWKHUODQGV%HOJLXP3RODQG
'HQPDUN5RPDQLD3RUWXJDO
,EHUGUROD†
5:(QSRZHUˆ
6SDLQ3RUWXJDO8.86%UD]LO0H[LFR
*HUPDQ\8.1HWKHUODQGV%HOJLXP
&]HFK5HSXEOLF3RODQG$XVWULD
)UDQFH6SDLQ3RUWXJDO6ORYDNLD
6ORYHQLD5RPDQLD7XUNH\+XQJDU\
86,WDO\6LQJDSRUH
QD
QD
66(
8.,UHODQG
6RXUFH&RPSDQ\DQQXDOUHSRUWV
7KH&HQWULFD$QQXDOUHSRUWSLQGLFDWHGWKDWMXVWRYHURIUHYHQXHVZHUHGHULYHGIURP8.RSHUDWLRQVDQGMXVW
RYHUIURPRYHUVHDVRSHUDWLRQVZLWKWKHUHPDLQLQJFRPLQJIURPDPL[RI8.DQGRYHUVHDVDFWLYLWLHV6LPLODUO\WKH
DQQXDOUHSRUWLQGLFDWHGWKDWRIDGMXVWHGRSHUDWLQJSURILWVFDPHIURP8.RSHUDWLRQVZLWKIURPRYHUVHDVRSHUDWLRQV
DQGIURPDPL[RI8.DQGRYHUVHDVRSHUDWLRQV+HQFHWKHUGVUGVSOLWLVDQDSSUR[LPDWHHVWLPDWHRIWKHRYHUDOOVSOLW
RIWRWDOUHYHQXHVDQGWRWDORSHUDWLQJSURILWV
‚(')$QQXDOUHSRUWSS7KH8.SURSRUWLRQKLJKOLJKWHGLVIRU(')(QHUJ\µ2YHUVHDV¶LQFOXGHVWKHUHVXOWVRI(')
7UDGLQJZKLFKZLOOLQFOXGHDQDPRXQWIRU8.UHYHQXHVDQGSURILWV
Á(21$QQXDOUHSRUWS1RWHILJXUHVDUHIRU(21¶VVXSSO\DFWLYLWLHVRQO\:KLOHLWLVQRWSRVVLEOHWRVHSDUDWHRXW
(21¶V8.JHQHUDWLRQDQGWUDGLQJUHYHQXHVDQGSURILWVIURPWKRVHHDUQHGLQRWKHUWHUULWRULHVVXSSO\UHYHQXHVDQGSURILWVFDQ
EHLGHQWLILHG
†,EHUGUROD$QQXDOUHSRUWS
ˆ5:(QSRZHU$QQXDOUHSRUWSSSURSRUWLRQRIUHYHQXHFRQVLVWVRI*HQ&R8.¼PDQG6XSSO\8.
¼PGLYLGHGE\7RWDO5:(¼PSURSRUWLRQRIRSHUDWLQJUHVXOWFRQVLVWVRI*HQ&R8.¼PDQG6XSSO\
8.¼PGLYLGHGE\7RWDO5:(¼P7KHVHILJXUHVH[FOXGH8.5HQHZDEOHVZKRVHQXPEHUVDUHQRWVHSDUDWHO\
GLVFORVHGLQWKH5:($*$QQXDOUHSRUW
66($QQXDO5HSRUWS
7KLVGLIIHULQJUHODWLYHH[SRVXUHWRWKH8.FDQDOVREHVHHQLQWKH
UHVSRQVLYHQHVVRIWKHILUPV¶VKDUHSULFHVWRµVKRFNV¶WRWKHVHFWRULQWKH8.
)RUH[DPSOHRQ6HSWHPEHU(G0LOLEDQGDQQRXQFHGDSRWHQWLDO
HQHUJ\SUL]HIUHH]HLQWKHFDVHWKDWWKH/DERXU3DUW\ZRQWKH*HQHUDO
(OHFWLRQ)LJXUHVDQGVKRZWKHLPSDFWRIWKLVDQQRXQFHPHQWRQWKHVKDUH
SULFHVRIWKH6L[/DUJH(QHUJ\)LUPV7KHVKDUHSULFHVRI&HQWULFDDQG66(
XQGHUSHUIRUPHGWKHDOOVKDUHLQGH[E\DURXQGEHWZHHQWKHGDWHRIWKH
DQQRXQFHPHQWDQGPLG1RYHPEHUZKLOHWKRVHRI(')(215:(QSRZHU
DQG,EHUGURODZHUHUHODWLYHO\XQDIIHFWHGIROORZLQJWKHDQQRXQFHPHQW
),*85(
&HQWULFDDQG66(UHWXUQVDJDLQVW)76(DOOVKDUHLQGH[
6RXUFH%ORRPEHUJ
),*85(
5:(QSRZHU(21(')DQG,EHUGURODUHWXUQV
6RXUFH%ORRPEHUJ
7KLVHYLGHQFHVXJJHVWVWKDWWKHEHWDLQIRUPDWLRQWDNHQIURP&HQWULFDDQG
66(LVOLNHO\WRSURYLGHWKHFOHDUHVWLQVLJKWLQWRWKHV\VWHPLFULVNVIDFHGE\DQ
RSHUDWRULQ*%,QDGGLWLRQZHREVHUYHWKDW&HQWULFDDQG66(DUHWKHOHDVW
JHRJUDSKLFDOO\GLYHUVLILHGRIWKH6L[/DUJH(QHUJ\)LUPVDQGKHQFHDUHDOVR
OLNHO\WREHWKHFORVHVWFRPSDUDEOHVIURPWKHSRLQWRIYLHZRIDVWDQGDORQH
*%EXVLQHVV:HREVHUYHKRZHYHUWKDWWKHVHILUPVKDYHORZHUUDWKHUWKDQ
KLJKHUEHWDVWKDQWKHPRUHJHRJUDSKLFDOO\GLYHUVLILHGRSHUDWRUVDFWLYHLQ*%
:HQH[WFRQVLGHUHGWKHH[WHQWWRZKLFKWKH6L[/DUJH(QHUJ\)LUPV
JHQHUDWHGUHYHQXHVDQGSURILWVIURPDFWLYLWLHVZLWKDVLJQLILFDQWO\GLIIHUHQW
V\VWHPLFULVNSURILOHIURPWKDWRIJHQHUDWLRQDQGUHWDLOVXSSO\,QSDUWLFXODU
ZHKDYHVRXJKWWRXQGHUVWDQGZKLFKILUPVGHULYHVLJQLILFDQWUHYHQXHDQG
SURILWVIURPHFRQRPLFDOO\UHJXODWHGQRQFRPSHWLWLYHDFWLYLWLHV7$%/(VHWV
RXWDEULHIRYHUYLHZRIWKHDFWLYLWLHVRIWKH6L[/DUJH(QHUJ\)LUPV
7$%/('HVFULSWLRQRIFRPSDQ\DFWLYLWLHV
&RPSDQ\
'HVFULSWLRQRIDFWLYLWLHV
,PSRUWDQFHRIHFRQRPLFDOO\UHJXODWHGDFWLYLWLHV
&HQWULFD
$FWLYHLQ(3VWRUDJHJHQHUDWLRQDQG
UHWDLOVXSSO\DVZHOODVSURYLVLRQRIKRPH
VHUYLFHVDFURVVERWKWKH8.DQG1RUWK
$PHULFD
&HQWULFDGRHVQRWKDYHVLJQLILFDQWH[SRVXUHWRUHJXODWHG
DFWLYLWLHV
(')
$FWLYHLQJHQHUDWLRQDQGUHWDLOVXSSO\DV
ZHOODVWKHWUDQVPLVVLRQDQGGLVWULEXWLRQRI
SRZHU
(')KDVUHJXODWHGWUDQVPLVVLRQDQGGLVWULEXWLRQ
EXVLQHVVHVLQ)UDQFHDQG+XQJDU\‚
(21
$FWLYHLQ(3JHQHUDWLRQDQGUHWDLOVXSSO\
DVZHOODVGLVWULEXWLRQQHWZRUNV
(21KDVUHJXODWHGGLVWULEXWLRQEXVLQHVVHVLQDQXPEHURI
FRXQWULHVLQFOXGLQJ*HUPDQ\6ZHGHQDQG6SDLQ7KHVH
EXVLQHVVHVKDYHDWRWDOUHJXODWHGDVVHWEDVHRIF¼EQ
DQGDFFRXQWIRUDSSUR[LPDWHO\RIWRWDOJURXS
(%,7'$Á
,EHUGUROD
$FWLYHLQJHQHUDWLRQDQGUHWDLOVXSSO\
GLVWULEXWLRQQHWZRUNVDQGSRZHUJHQHUDWLRQ
HQJLQHHULQJDQGFRQVWUXFWLRQ
&RIUHYHQXHVDQGRIRSHUDWLQJSURILWVIURP
UHJXODWHGDFWLYLWLHV
5:(
QSRZHU
$FWLYHLQOLJQLWHPLQLQJSRZHUJHQHUDWLRQ
DQGUHWDLOVXSSO\DVZHOODVGLVWULEXWLRQ
QHWZRUNVDQGFRPPRGLW\WUDGLQJ
0RUHWKDQRQHWKLUGRI5:(QSRZHU¶VRSHUDWLQJSURILWVDUH
FXUUHQWO\GHULYHGIURPUHJXODWHGDFWLYLWLHV†
66(
$FWLYHLQ(3JHQHUDWLRQWUDQVPLVVLRQDQG
UHWDLOVXSSO\
$SSUR[LPDWHO\KDOIRIRSHUDWLQJSURILWVIURPLWVQHWZRUN
EXVLQHVV
6RXUFH&HQWULFDDQQXDOUHSRUW66(DQQXDOUHSRUW
*DVH[SORUDWLRQDQGSURGXFWLRQLHH[WUDFWLRQRIQDWXUDOJDV
‚(')HOHFWULFLW\GLVWULEXWLRQ
Á(21FKDUWV(21IDFWVDQGILJXUHV
†5:(QSRZHUSUHVHQWDWLRQ
,EHUGURODDQG66(KDYHDVLJQLILFDQWSURSRUWLRQRIWKHLUDFWLYLWLHVRU
PRUHLQHFRQRPLFDOO\UHJXODWHGVHFWRUVRIWKHHQHUJ\LQGXVWU\ZKLOH&HQWULFD
GRHVQRWKDYHVLJQLILFDQWH[SRVXUHWRWKHVHVHFWRUV:HREVHUYHWKDW66(¶V
DVVHWEHWDLVVLJQLILFDQWO\ORZHUWKDQWKHDYHUDJHIRUWKH6L[/DUJH(QHUJ\
)LUPVEXWWKDWRI,EHUGURODLVDURXQGWKHDYHUDJH
&0$GLVFXVVLRQRIEHWDHVWLPDWHV
7KHHYLGHQFHWKDWZHKDYHFROOHFWHGRQDVVHWEHWDLQGLFDWHVDUDQJHRI
EHWZHHQDQGZLWKDQDYHUDJHRIDURXQG:KLOHWKHUHLV
UHDVRQDEOHYDULDWLRQLQWKHDVVHWEHWDVRILQGLYLGXDOILUPVWKHGLUHFWLRQRI
WKHVHYDULDWLRQVLVQRWDOZD\VFRQVLVWHQWZLWKZKDWWKHRU\PD\VXJJHVW)RU
H[DPSOH,EHUGURODKDVDVLJQLILFDQWQHWZRUNEXVLQHVVDQGLVLQWHUQDWLRQDOO\
GLYHUVLILHGEXWKDVDQDERYHDYHUDJHDVVHWEHWDZKLOH&HQWULFDLVODUJHO\8.
IRFXVHGDQGGRHVQRWKDYHDQHWZRUNEXVLQHVVEXWKDVDORZHUWKDQDYHUDJH
EHWD2XULQLWLDOUHYLHZRIWKHHYLGHQFHLQUHODWLRQWREHWDYDOXHVLQGLFDWHVWKDW
D ILUPVZLWKDVLJQLILFDQWIRFXVRQ*%GRQRWDSSHDUWRKDYHKLJKHUEHWD
HVWLPDWHVWKDQWKRVHILUPVZKLFKDUHPRUHLQWHUQDWLRQDOO\GLYHUVLILHG
E WKHUHGRQRWDSSHDUWREHV\VWHPDWLFGLIIHUHQFHVEHWZHHQWKHDVVHWEHWDV
RIILUPVWKDWDUHYHUWLFDOO\LQWHJUDWHGDQGWKRVHWKDWIRFXVODUJHO\RQ
JHQHUDWLRQDQG
F WKHUHLVOLWWOHUHOLDEOHHYLGHQFHRQWKHDSSURSULDWHEHWDYDOXHIRUDVWDQG
DORQHHQHUJ\UHWDLOHU:HFRQVLGHUWKDWGHPDQGIRUHQHUJ\JDVDQG
HOHFWULFLW\LVOLNHO\WREHOHVVYDULDEOHWKDQRYHUDOOGHPDQGLQUHVSRQVHWR
WKHHFRQRPLFF\FOH+RZHYHUZHZLOOFRQVLGHUWKLVIXUWKHU
2QWKLVEDVLVZHFRQVLGHUWKDWWKHDSSURSULDWHDVVHWEHWDIRUDYHUWLFDOO\
LQWHJUDWHG*%HQHUJ\ILUPLVEHWZHHQDQG6LPLODUO\WKDWIRUDVWDQG
DORQH*%JHQHUDWLRQEXVLQHVVLVEHWZHHQDQG:HREVHUYHWKDWWKLV
LVLQOLQHZLWKWKHDVVHWEHWDHVWLPDWHVSURYLGHGE\WKH6L[/DUJH(QHUJ\
)LUPVVHH7$%/(DQG7$%/(%HFDXVHRIWKHODFNRIUHOLDEOHLQIRUPDWLRQ
RXUFXUUHQWDSSURDFKLVWRDVVXPHWKDWWKHDSSURSULDWHDVVHWEHWDIRUDVWDQG
DORQHHQHUJ\UHWDLOHULVHTXDOWRWKHDYHUDJHIRUWKHPDUNHWDVDZKROH7KLVLV
EHWZHHQDQGZKLFKLVHTXLYDOHQWWRDQHTXLW\EHWDRIWDNLQJLQWR
DFFRXQWWKHDYHUDJHOHYHORIJHDULQJ
*HDULQJ
:HH[DPLQHGWKHOHYHOVRIJHDULQJRIERWKWKH6L[/DUJH(QHUJ\)LUPVDFWLYH
LQ*%DQGDQXPEHURI(XURSHDQDQGQRQ(XURSHDQFRPSDUDEOHFRPSDQLHV
:LWKDEHWDRIE\GHILQLWLRQDQGDYHUDJHJHDULQJDPRQJILUPVRIDSSUR[LPDWHO\8.HTXLWLHVJHQHUDOO\
FDQEHWKRXJKWRIDVKDYLQJDQDVVHWEHWDRIDURXQG
7KHUHVXOWVRIWKLVDQDO\VLVDVVHWRXWLQ7$%/(VKRZWKDWWKHUHLVVLJQLILFDQW
YDULDWLRQERWKZLWKLQILUPVDFURVVWLPHDQGDFURVVHQHUJ\ILUPV
7$%/(*HDULQJOHYHOVRIHQHUJ\ILUPV
&RPSDQ\
$YHUDJH
6L[/DUJH(QHUJ\)LUPV
&HQWULFDSOF
66(SOF
(')6$
(216(
,EHUGUROD6$
5:(QSRZHU$*
$YHUDJH
9,ILUPVQRQ8.
(QHO6S$
*DV1DWXUDO)HQRVD
(Q%:$*
9HUEXQG$*
)RUWXP2\M
&RQWDFW(QHUJ\/LPLWHG
7UXVW3RZHU/LPLWHG
15*(QHUJ\,QF
2ULJLQ(QHUJ\
$*/&R
*HQHUDWLRQILUPV
*')6XH]
'UD[SOF
$(6&RUS
$(3&RUS
8.UHWDLORQO\ILUPV
*RRG(QHUJ\*URXSSOF
7HOHFRP3OXVSOF
-XVW(QHUJ\
6RXUFH%ORRPEHUJGDWD&0$DQDO\VLV
:HREVHUYHWKDWDFURVVWKHLQGXVWU\WKHUHZDVDJHQHUDOWUHQGRILQFUHDVLQJ
OHYHUDJHEHWZHHQDQGZLWKDVOLJKWGHFOLQHLQ7KLVZDV
FDXVHGDWOHDVWLQSDUWE\WKHILQDQFLDOFULVLVDQGGHFOLQHVLQWKHHTXLW\YDOXH
DQGWKHUHIRUHPDUNHWFDSLWDOLVDWLRQRIWKHVHILUPV),*85(VKRZVWKH
VKDUHSULFHVRIWKH6L[/DUJH(QHUJ\)LUPVRYHUWKHSHULRGUHEDVHGWR
5:(QSRZHU(21,EHUGURODDQG(')KDYHDOOH[SHULHQFHGVLJQLILFDQW
GHFOLQHVLQWKHLUHTXLW\YDOXHRYHUWKHSHULRGIDOOLQJE\RUPRUHIRUHDFK
IURPWKHYDOXHDVRIPLG7KHVKDUHSULFHVRI&HQWULFDDQG66(LQ
FRQWUDVWKDYHSHUIRUPHGEHWWHUHQGLQJWKHSHULRGDWDVLPLODUOHYHOWRWKDWDW
WKHEHJLQQLQJRIWKHSHULRG$VDUHVXOWZHFRQVLGHUWKDWWKHJHDULQJRIWKHVH
ILUPVLVOLNHO\WREHFORVHVWWRDORQJUXQVXVWDLQDEOHOHYHOIRUDYHUWLFDOO\
LQWHJUDWHGHQHUJ\ILUP
),*85(
Share price (rebased to 100)
6KDUHSULFHVRIWKH6L[/DUJH(QHUJ\)LUPVUHEDVHGWR
6HULHV
6HULHV
6HULHV
6HULHV
6HULHV
6HULHV
6RXUFH%ORRPEHUJGDWD&0$DQDO\VLV
:HKDYHDOVRWDNHQLQWRDFFRXQWWKHYLHZVRIWKH6L[/DUJH(QHUJ\)LUPV
UHJDUGLQJWKHORQJWHUPVXVWDLQDEOHOHYHORIJHDULQJDVVHWRXWLQWKHLUFRVWRI
FDSLWDOHVWLPDWHVVHH7$%/(DQG7$%/(7KHVHUDQJHIURPWR
)RUH[DPSOH&HQWULFDQRWHGWKDWLWVWDUJHWOHYHORIOHYHUDJHZDV>@
&0$GLVFXVVLRQ
2XULQLWLDOUHYLHZRIWKHHYLGHQFHRQJHDULQJVXJJHVWVWKDWWKHORQJWHUP
VXVWDLQDEOHOHYHORIJHDULQJIRUDYHUWLFDOO\LQWHJUDWHGILUPRUDVWDQGDORQH
JHQHUDWLRQEXVLQHVVLVEHWZHHQDQG,QDQGWKH
XQZHLJKWHGDYHUDJHOHYHORIJHDULQJIRUWKH6L[/DUJH(QHUJ\)LUPVZDV
EHORZLQFUHDVLQJRYHUWKHSHULRGWRDSHDNRILQ:KLOHZH
UHFRJQLVHWKDWFHUWDLQILUPVKDYHKDGOHYHOVRIJHDULQJWKDWKDYHEHHQRXWVLGH
WKLVUDQJHERWKDERYHDQGEHORZZHFRQVLGHUWKDWLWLVDUHDVRQDEOHUDQJH
IRURXUDQDO\VLVZKLFKVHHNVWRLGHQWLI\WKHFRVWRIFDSLWDOIRUDµW\SLFDO¶
RSHUDWRU
6HYHUDOSDUWLHVKDYHWROGXVWKDWDVWDQGDORQHUHWDLOVXSSOLHUZRXOGQRWEH
DEOHWRFDUU\DQ\GHEWRQLWVEDODQFHVKHHW&HQWULFDVWDWHGWKDWDVWDQGDORQH
UHWDLOEXVLQHVVWKHVL]HRI%ULWLVK*DVZRXOGQRWEHDEOHWRUDLVHGHEWILQDQFH
RZLQJWRLWVKLJKHUOHYHORIEXVLQHVVULVN6LPLODUO\>@2QWKLVEDVLVRXU
FXUUHQWYLHZLVWKDWDVWDQGDORQHUHWDLOVXSSOLHUZRXOGQRWEHDEOHWRVXSSRUW
DQ\PDWHULDOOHYHORIJHDULQJDQGWKHUHIRUHZHKDYHHVWLPDWHGWKH:$&&RID
VWDQGDORQHVXSSOLHURQWKHEDVLVWKDWLWLVHQWLUHO\IXQGHGE\HTXLW\
&RVWRIGHEW
,QRUGHUWRFRPHWRDYLHZRQWKHOLNHO\FRVWRIGHEWRID*%HQHUJ\ILUPZH
KDYHH[DPLQHGDUDQJHRIHYLGHQFHLQFOXGLQJ
D \LHOGVDQGVSUHDGVRQVWHUOLQJGHQRPLQDWHGFRUSRUDWHERQGVLVVXHGE\
WKH6L[/DUJH(QHUJ\)LUPVZLWKDPDWXULW\RIEHWZHHQDQG\HDUV
E VSUHDGVRQ8.FRUSRUDWHERQGVRIYDULRXVFUHGLWUDWLQJVRYHUWKHUHOHYDQW
SHULRGDQG
F WKHFUHGLWUDWLQJVRIWKH6L[/DUJH(QHUJ\)LUPVDVFRPSDUHGZLWKWKRVH
RIVPDOOHUOHVVGLYHUVLILHGRSHUDWRUV
),*85(VKRZVWKH\LHOGVRQWKHVWHUOLQJGHQRPLQDWHGFRUSRUDWHERQGVRID
QXPEHURIODUJHYHUWLFDOO\LQWHJUDWHG(XURSHDQHQHUJ\ILUPV&HQWULFD66(
5:(QSRZHU(21(')DQGWKH,WDOLDQEDVHGHOHFWULFLW\FRPSDQ\(QHO
:HKDYHH[DPLQHGUHWXUQVRQFRUSRUDWHERQGVZLWKUHODWLYHO\ORQJGDWHG
PDWXULWLHVLQRUGHUWRPDNHWKHPFRPSDUDEOHZLWKWKHJLOW\LHOGVH[DPLQHGLQ
SDUDJUDSKVWRLHPDWXULWLHVRIEHWZHHQDQG\HDUVRYHUWKHSHULRG
DVDZKROH<LHOGVKDYHIOXFWXDWHGRYHUWKHSHULRGLQFUHDVLQJGXULQJWKH
ILQDQFLDOFULVLVWREHWZHHQDQGEHIRUHIDOOLQJEDFNWRSUHFULVLVOHYHOV
EHWZHHQDQG,QDQG\LHOGVIHOOIXUWKHUWREHWZHHQ
DQG:HQRWHWKDWWKH\LHOGVRQ(QHO¶VERQGVURVHDERYHWKRVHRILWV
FRPSHWLWRUVEHWZHHQDQG*LYHQWKHSDWWHUQRI\LHOGVRQRWKHU
FRPSDQLHV¶ERQGVZHFRQVLGHUWKLVWREHLQGLFDWLYHRIFRPSDQ\VSHFLILF
IDFWRUVDQGZHKDYHWKHUHIRUHGLVFRXQWHG(QHO¶V\LHOGVLQUHDFKLQJDYLHZRQ
WKHUHOHYDQWFRVWRIGHEW
)RUWKHSHULRGDVDZKROHZHFRQVLGHUWKDWWKLVHYLGHQFHVXJJHVWVDFRVWRI
GHEWRIEHWZHHQDQGIRUFRPSDQLHVZLWKDQLQYHVWPHQWJUDGHFUHGLW
UDWLQJ7KLVLVHTXLYDOHQWWRDVSUHDGRIEHWZHHQDQGEDVLVSRLQWV
RYHUQRPLQDOJLOW\LHOGV
),*85(
(QHUJ\ILUPFRUSRUDWHERQG\LHOGVWR
<LHOGWRPDWXULW\
&1$/1
66(/1
(')
&1$/1
66(/1
(1(/,0
&1$/1
5:(
66(/1
(2$1*5
6RXUFH%ORRPEHUJGDWD&0$DQDO\VLV
),*85(VKRZVWKHUHGHPSWLRQ\LHOGVRQ8.FRUSRUDWHERQGVRIGLIIHULQJ
FUHGLWUDWLQJVIRUWKHPDMRULW\RIWKHSHULRGXQGHUUHYLHZ%HWZHHQDQG
\LHOGVRQ$UDWHGERQGVDYHUDJHGMXVWRYHUZKLOHWKRVHRQ%%%
UDWHGERQGVIOXFWXDWHGEHWZHHQDQGZLWKDQDYHUDJHRIDSSUR[LPDWHO\
7KHVHILJXUHVDUHFRQVLVWHQWZLWKWKH\LHOGVRQHQHUJ\FRPSDQ\ERQGV
),*85(
8.FRUSRUDWHERQGUHGHPSWLRQ\LHOGVWR
6RXUFH7KRPSVRQ5HXWHUVEDVHGRQWHQ\HDUFRUSRUDWHERQGV
:HQH[WFRQVLGHUHGWKHFUHGLWUDWLQJVRIWKH6L[/DUJH(QHUJ\)LUPVDQGWKH
H[WHQWWRZKLFKWKHVHPLJKWEHGLIIHUHQWIRUDVWDQGDORQH*%RSHUDWRUDQGIRU
DJHQHUDWLRQRQO\EXVLQHVV7$%/(VKRZVWKHFUHGLWUDWLQJVRIWKH6L[
/DUJH(QHUJ\)LUPVDVZHOODVVRPHRWKHUHQHUJ\EXVLQHVVHVDVRI
'HFHPEHU$OOWKHVHILUPVKDYHLQYHVWPHQWJUDGHFUHGLWUDWLQJVDSDUW
IURP'UD[DQG$(6&RUSZKLFKKDYH%%UDWLQJV
7$%/(&UHGLWUDWLQJVRI(XURSHDQHQHUJ\ILUPV
&RPSDQ\
&HQWULFDSOF
66(SOF
(')6$
(216(
5:(QSRZHU$*
,EHUGUROD6$
*')6XH]
(QHO6S$
'UD[
$(6&RUS
0RRG\
V
6WDQGDUG
3RRU
V
)LWFK
$
$
$D
$
%DD
%DD
$
%DD
$
$
$
$
%%%
%%%
$
%%%
%%
$
$
$
$
%%%
%%%
%%%
%%
6RXUFH%ORRPEHUJ
%XVLQHVV:LUH
)LWFKDIILUPV$(6
UDWLQJV
$VVHWRXWLQSDUDJUDSKLQRXUDQDO\VLVRIWKH:$&&RIHOHFWULFLW\DQGJDVUHWDLOVXSSOLHUVZHDUHDVVXPLQJ
WKDWWKH\DUHHQWLUHO\ILQDQFHGE\HTXLW\7KHUHIRUHZHGRQRWFRQVLGHUIXUWKHUWKHFUHGLWUDWLQJWKDWWKH\ZRXOG
DFKLHYH
:HFRQVLGHUWKDWDYHUWLFDOO\LQWHJUDWHGHQHUJ\ILUPZLWKRSHUDWLRQVRQO\LQ*%
ZRXOGDFKLHYHDVLPLODUFUHGLWUDWLQJWRDQLQWHUQDWLRQDOO\ GLYHUVLILHGEXVLQHVV
DQGWKHUHIRUHZRXOGLQFXUDFRVWRIGHEWRIEHWZHHQDQG7KHHYLGHQFH
RQ'UD[LQGLFDWHVWKDWDVWDQGDORQHJHQHUDWRULQ*%ZRXOGSUREDEO\DFKLHYH
DFUHGLWUDWLQJRI%%LHMXVWEHORZLQYHVWPHQWJUDGH7KHUHLVOLPLWHG
LQIRUPDWLRQDYDLODEOHRQWKH\LHOGVRQ%%UDWHGFRUSRUDWHERQGV:HKDYH
H[DPLQHGWKHGLIIHUHQFHVLQ\LHOGVDFURVVERQGVRIGLIIHUHQWUDWLQJVDQG
FRQVLGHUWKDWDQDGGLWLRQDOSUHPLXPRIEHWZHHQDQGEDVLVSRLQWV
ZRXOGEHUHTXLUHGE\OHQGHUVIRUILUPVZLWKVXFKDFUHGLWUDWLQJJLYLQJDFRVW
RIGHEWRIEHWZHHQDQGIRUDVWDQGDORQHJHQHUDWRU7KLVLVFRQVLVWHQW
ZLWKWKHDSSURDFKVXJJHVWHGE\(21
,QWHUSUHWDWLRQRI:$&&
2XUHVWLPDWHRIWKH:$&&SURYLGHVDEHQFKPDUNDJDLQVWZKLFKWRDVVHVVWKH
SURILWDELOLW\RIWKHLQGXVWU\$WWKLVVWDJHZHKDYHQRWVRXJKWWRGUDZ
FRQFOXVLRQVIURPRXUSURILWDELOLW\DQDO\VLV+RZHYHUVHYHUDOSDUWLHVKDYH
UDLVHGLVVXHVRILQWHUSUHWDWLRQRIWKH:$&&,QWKLVVHFWLRQZHSURYLGHD
VXPPDU\RIWKHVHSRLQWVWRJHWKHUZLWKRXUFXUUHQWYLHZRQWKHP
)DLUEHWSULQFLSOH
5:(QSRZHUQRWHGWKDWZKLOHWKHFRVWRIFDSLWDORQO\WDNHVLQWRDFFRXQWWKH
PDUNHWULVNIDFHGE\DQLQYHVWRUZKHQSHUIRUPLQJDQLQYHVWPHQWDSSUDLVDO
WKHVSHFLILFULVNVRIDSURMHFWDUHUHIOHFWHGLQWKHFDVKIORZIRUHFDVWVXVHG)RU
H[DPSOHDSURMHFWPD\KDYHDSUREDELOLW\RIVXFFHVVDQGD
SUREDELOLW\RIIDLOXUHZLWKH[SHFWHGUHWXUQVDQDYHUDJHRIWKHVHWZRRXWFRPHV
$FRPSDULVRQRIWKHH[DQWHFRVWRIFDSLWDOZLWKWKHH[SRVWUHWXUQVPDGHRQD
JLYHQSURMHFWPD\JLYHDPLVOHDGLQJYLHZRISURILWDELOLW\7KHREVHUYHGUHWXUQV
PD\UHIOHFWDVXFFHVVIXOSURMHFWZKHUHDVH[DQWHWKHUHZDVDUHDVRQDEOHULVN
WKDWWKHSURMHFWZRXOGEHXQVXFFHVVIXOVXFKWKDWWKHH[SHFWHGUHWXUQVGLGQRW
H[FHHGWKHFRVWRIFDSLWDO
:HDJUHHLQSULQFLSOHZLWKWKHDUJXPHQWSXWIRUZDUGE\5:(QSRZHU
+RZHYHUZHFRQVLGHUWKDWWKLVSULQFLSOHLVPRUHUHOHYDQWWRWKHDSSUDLVDORI
WKHSURILWDELOLW\RIDVLQJOHSURMHFWVXFKDVWKHFRQVWUXFWLRQDQGRSHUDWLRQRID
VLQJOHSRZHUVWDWLRQWKDQWKHDSSUDLVDORIWKHSURILWDELOLW\RIDQLQGXVWU\DVD
ZKROHZKLFKLVWKHH[HUFLVHWKDWZHDUHXQGHUWDNLQJ7KHODWWHUGHSHQGVRQD
ODUJHQXPEHURISURMHFWVZLWKGLIIHULQJULVNSURILOHVXQGHUWDNHQE\DQXPEHURI
(21VXJJHVWHGWKDWDSUHWD[FRVWRIGHEWRIDURXQG>@ZRXOGEHDSSURSULDWHIRUDVWDQGDORQHJHQHUDWLRQ
EXVLQHVVRQWKH>@EDVLVRI>@OLVWHGGHEWVHFXULWLHVZKLFKLWREVHUYHGKDGDVRI6HSWHPEHUD\LHOGWR
PDWXULW\RI>@RQ\HDUERQGV
ILUPVRYHUPDQ\\HDUV$V5:(QSRZHUVWDWHVµ>L@IWKLVSURMHFWZHUHUHSHDWHG
PDQ\WLPHVWKHQRQDYHUDJHZHZRXOGH[SHFWWKHZHLJKWHGRXWFRPH¶2XU
FXUUHQWYLHZLVWKDWLWLVUHDVRQDEOHWRH[SHFWDSSUR[LPDWHO\WKHZHLJKWHG
RXWFRPHLQWKLVFDVH
3ROLWLFDODQGUHJXODWRU\ULVN
(21DQG292SXWIRUZDUGWKHYLHZWKDWWKHUHZDVDQLQFUHDVHLQSROLWLFDO
DQGUHJXODWRU\ULVNRYHUWKHSHULRG(21VXJJHVWHGWKDWWKLVZLOOKDYH
LQFUHDVHGWKHUHWXUQWKDWERWKHTXLW\DQGGHEWLQYHVWRUVUHTXLUHGIRUEHDULQJ
WKHVHDQGRWKHUULVNV
7KHWKHRU\XQGHUO\LQJWKH&$30LVWKDWZKHQGHWHUPLQLQJWKHOHYHORIUHWXUQ
WKH\UHTXLUHLQYHVWRUVVKRXOGRQO\WDNHLQWRDFFRXQWWKHV\VWHPDWLFRUQRQ
GLYHUVLILDEOHULVNDVVRFLDWHGZLWKDILUP7KLVLVFDSWXUHGE\WKHILUP¶VEHWD
YDOXHDQGDWOHDVWLQWKHRU\GRHVQRWQHHGWREHDGMXVWHGIRULQDQ\RWKHU
UHVSHFW$VGLVFXVVHGLQSDUDJUDSKVDQGWKHVSHFLILFULVNVDVVRFLDWHG
ZLWKDSURMHFWVKRXOGEHUHIOHFWHGLQWKHFDVKIORZIRUHFDVWV,ISROLWLFDODQG
UHJXODWRU\ULVNVZHUHWRLQFUHDVHRYHUWLPHZHZRXOGH[SHFWILUPVWRWDNHWKLV
LQWRDFFRXQWLQWKHLUVHQVLWLYLW\DQDO\VHVEHIRUHXQGHUWDNLQJLQYHVWPHQWV2XU
FXUUHQWYLHZLVWKDWWKLVZRXOGQRWDIIHFWWKHXQGHUO\LQJFRVWRIFDSLWDO
6L]HDQGYDOXHSUHPLD
(21REVHUYHGWKDWWKHUHDUHH[DPSOHVRIGLYHUJHQFHVEHWZHHQUHWXUQVRQ
VPDOODQGODUJHFDSLWDOLVDWLRQVWRFNVDVZHOODVEHWZHHQUHWXUQVRQµYDOXH¶
DQGµJODPRXU¶VWRFNVVXFKWKDWWKH&0$PD\ZLVKWRFRQVLGHULQFOXGLQJVXFK
VL]HDQGYDOXHSUHPLDLQDUULYLQJDWDSSURSULDWH:$&&YDOXHV,WQRWHGWKDWD
VWDQGDORQHJHQHUDWRURUUHWDLOVXSSOLHUPD\EHDµVPDOO¶VWRFNZKHUHWKH
LQWHJUDWHGILUPFRPELQDWLRQRIWKHJHQHUDWLRQDQGVXSSO\EXVLQHVVPD\QRW
6LPLODUO\5:(QSRZHUVWDWHGWKDWDQDGGLWLRQDOULVNSUHPLXPPD\EH
DSSURSULDWHZKHQFRQVLGHULQJWKH:$&&RIDVWDQGDORQHJHQHUDWLRQ
EXVLQHVV
:KLOHZHUHFRJQLVHWKDWWKHUHPD\EHVRPHH[DPSOHVRIGLYHUJHQFHV
EHWZHHQWKHUHWXUQVRQµVPDOO¶DQGµODUJH¶VWRFNVDQGRQµYDOXH¶DQGµJODPRXU¶
VWRFNVRXULQLWLDOUHYLHZRIWKHOLWHUDWXUHLQGLFDWHVWKDW)DPD)UHQFKPRGHOV
JHQHUDOO\IDLOWRGHVFULEHUHOLDEO\WKHFURVVVHFWLRQRIUHWXUQVLQWKH8.
0RUHRYHUHYHQLIWKHUHZHUHVXFKHYLGHQFHLQUHODWLRQWRWKH8.PDUNHWZH
FRQVLGHUWKDWLWZRXOGQRWQHFHVVDULO\EHULJKWWRLQIHUIURPWKLVWKDWWKHW\SLFDO
6HH$*UHJRU\57KDU\DQDQG$&KULVWLGLV&RQVWUXFWLQJDQGWHVWLQJDOWHUQDWLYHYHUVLRQVRIWKH)DPD
)UHQFKDQG&DUKDUWPRGHOVLQWKH8.8QLYHUVLW\RI([HWHUDQG60RXVHOOL00LFKRXDQG$6WDUN2Q
WKHLQIRUPDWLRQFRQWHQWRIWKH)DPDDQG)UHQFKIDFWRUVLQWKH8.8QLYHUVLW\RI0DQFKHVWHU
stand-alone energy business (whether vertically integrated, or operating either
in generation or in retail supply) would require a size premium. In the first
instance, we note that the majority of the energy firms active in GB are
generally very large businesses. Second, it is not clear that these businesses
would necessarily share any (unknown) general characteristics of small firms
that increase their cost of capital due to higher risk. Our current view,
therefore, is that it is not appropriate to reflect a size or value premium. This is
in line with previous CMA (and CC) decisions in both market investigations
and price determinations, such as private healthcare and Bristol Water.
29
$SSHQGL[$)LUPV¶VXEPLVVLRQVRQWKHLUFRVWRIFDSLWDO
,QWKLVDSSHQGL[ZHVHWRXWWKHYLHZVRIERWKWKH6L[/DUJH(QHUJ\)LUPVDQG
WKHPLGWLHUJHQHUDWRUVDQGVXSSOLHUVRQWKHLUFRVWRIFDSLWDO7DEOHVKRZV
WKHFRVWRIFDSLWDOHVWLPDWHVRIIRXURIWKH6L[/DUJH(QHUJ\)LUPVIRUWKHLU
RSHUDWLRQVDVDZKROH:HQRWHWKDWWKHVHPD\LQFOXGHDFWLYLWLHVWKDWDUH
RXWVLGHWKHVFRSHRIRXULQYHVWLJDWLRQVXFKDVRYHUVHDVJHQHUDWLRQDQGUHWDLO
DFWLYLWLHVRU8.EDVHGH[SORUDWLRQDQGSURGXFWLRQJDVVWRUDJHRURWKHU
DFWLYLWLHV
7$%/(:$&&HVWLPDWHVIRUYHUWLFDOO\LQWHJUDWHGRUZKROHJURXSRSHUDWLRQV
5HDO5)5
1RPLQDO5)5
(53
$VVHWEHWD
(TXLW\EHWD
3RVWWD[.H
3UHWD[.H
3UHWD[FRVWRIGHEW.G
*HDULQJ
7D[UDWH
3UHWD[:$&&
3RVWWD[:$&&
&HQWULFD
(21
5:(
QSRZHU
66(
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
6RXUFH&HQWULFD(215:(QSRZHUDQG66(VXEPLVVLRQVWRWKH&0$
(')(QHUJ\GLGQRWSURYLGHDYLHZRILWVJURXS:$&&RUWKH:$&&RILWV
JHQHUDWLRQEXVLQHVVLQLWVUHVSRQVHVWRWKHJHQHUDWLRQDQGVXSSO\
TXHVWLRQQDLUHV,QLWVUHVSRQVHWRWKHJHQHUDWLRQTXHVWLRQQDLUH66(
VXJJHVWHGWKDWWKHDSSURSULDWHQRPLQDOSUHWD[:$&&IRUWKH66(JURXSDVD
ZKROHZDV>@
6FRWWLVK3RZHUSURYLGHGDUDQJHRIHYLGHQFHFROOHFWHGIURPEURNHUUHSRUWV
VRPHRIZKLFKHVWLPDWHGWKH:$&&RIWKHEXVLQHVVDVDZKROHDQGVRPHRI
ZKLFKIRFXVHGRQWKHJHQHUDWLRQDFWLYLWLHV7KLVHYLGHQFHLVVHWRXWLQ7DEOH
DQGRQDYHUDJHLQGLFDWHVDQRPLQDOSUHWD[:$&&RI
(')(QHUJ\GLGSURYLGHWKLVLQIRUPDWLRQIRU(')7UDGLQJ
7$%/(6FRWWLVK3RZHU¶VVXEPLVVLRQRQLWV:$&&EDVHGRQEURNHUUHSRUWV
%URNHU
5HSRUWGDWH
5HSRUW
UHI
6DQWDQGHU
%DQNRI$PHULFD
0HUULOO/\QFK
6RFLHWH*HQHUDOH
&UHGLW6XLVVH
&LWL
%DQNLD
1(TXLWLHV
0HDQ
0D\
-XQ
3DJH
3DJH
-XO
$XJ
2FW
2FW
0D\
3DJH
3DJH
3DJH
3DJH
3DJH
%XVLQHVV
8./LEHUDOLVHG
636XSSO\DQG
*HQHUDWLRQ
63:KROHVDOH
8.3RZHU*HQHUDWLRQ
8.3RZHU*HQHUDWLRQ
8./LEHUDOLVHG
833RZHU*HQHUDWLRQ
:$&&SRVWWD[
QRPLQDO
:$&&SUH
WD[QRPLQDO
6RXUFH6FRWWLVK3RZHU
6RPHRIWKH6L[/DUJH(QHUJ\)LUPVKLJKOLJKWHGWKDWWKHLUJURXS:$&&
HVWLPDWHVGLGQRWSURYLGHDSSURSULDWHEHQFKPDUNVIRUWKH&0$¶VSURILWDELOLW\
DQDO\VLVIRUDQXPEHURIUHDVRQV,QSDUWLFXODUWKH\HPSKDVLVHGWKDWDVWDQG
DORQHJHQHUDWLRQRUVXSSO\EXVLQHVVZRXOGIDFHDGLIIHUHQW:$&&DVZRXOGD
YHUWLFDOO\LQWHJUDWHGILUPWKDWZDVQRWGLYHUVLILHGLQWHUQDWLRQDOO\7KHUHIRUH
ZHQH[WVHWRXWWKHILUPV¶HVWLPDWHVRIWKHDSSURSULDWH:$&&IRUWKHLUVWDQG
DORQHJHQHUDWLRQDQGVXSSO\EXVLQHVVHV
,QFRQWUDVW6FRWWLVK3RZHUWROGXVWKDWWKHHYLGHQFHLWFROOHFWHGIURPEURNHU
UHSRUWVDQGLQGHSHQGHQWDGYLFHLWUHFHLYHGIURP2[HUDGLGQRWVKRZWKDWD
VXEVWDQWLDOGLIIHUHQFHH[LVWHGEHWZHHQWKH:$&&IRU6FRWWLVK3RZHU¶V
JHQHUDWLRQEXVLQHVVHVDQGLWVFRPELQHGXQUHJXODWHGEXVLQHVVDFWLYLWLHV,W
VWDWHGWKDW
>Z@KHQFRPELQHGZLWKWKHXQFHUWDLQW\LQHVWLPDWLQJWKH:$&&
PRUHJHQHUDOO\2[HUDUHFRPPHQGVWKDWWKHSODXVLEOHUDQJHIRU
WKH:$&&RIRXUZKROHYDOXHFKDLQLVEURDGO\VLPLODUWRWKHUDQJH
2[HUDHVWLPDWHGIRU*HQHUDWLRQ«6LPLODUO\WKHUHLVQRUREXVW
PDUNHWHYLGHQFHWRFRQFOXGHWKDWZHUH6FRWWLVK3RZHUWRRSHUDWH
RQDVWDQGDORQHEDVLVRXU:$&&ZRXOGEHPDWHULDOO\GLIIHUHQW
WRWKHHVWLPDWHVSURYLGHG$VH[SODLQHG>HOVHZKHUH@WKHUHDUH
OLNHO\WREHGLIIHUHQFHVLQULVNFDSLWDOUHTXLUHPHQWVEHWZHHQ9,
>YHUWLFDOO\LQWHJUDWHG@DQGQRQ9,EXVLQHVVHV
*HQHUDWLRQ:$&&
>@DQGVWDQGDUG8.WD[UDWHV>@,WQRWHGWKDWDVWDQGDORQH
JHQHUDWLRQEXVLQHVVZRXOGEHOLNHO\WRKDYHDORZHUFUHGLWUDWLQJDKLJKHUFRVW
3HU(216($QQXDOUHSRUW)RUH[DPSOH(21QRWHGWKDWWKHFRVWRIGHEWWKDWIRUPHGWKHEDVLVRI(21
6(JURXS¶VFRVWRIGHEWLVKHDYLO\LQIOXHQFHGE\KLVWRULFDOO\ORZ\LHOGVRQ*HUPDQEXQGVDQGWKHUHIRUHGRHVQRW
UHSUHVHQWDQDFKLHYDEOHFRVWRIGHEWLQWKH*%ILQDQFLQJPDUNHWSODFH
RIGHEWDQGRUGLIIHUHQWJHDULQJOHYHOVZKHQFRPSDUHGZLWKDYHUWLFDOO\
LQWHJUDWHGILUP>@
(21SXWIRUZDUGWKHYLHZWKDWWKHDSSURSULDWHSUHWD[QRPLQDO:$&&IRU
HLWKHUDVWDQGDORQH*%JHQHUDWLRQEXVLQHVVH[FOXGLQJ*%WUDGLQJZRXOGEH
DSSUR[LPDWHO\>@RQWKHEDVLVRI
D DQRPLQDO5)5RIEHWZHHQDQGDUHDO5)5RIWRDQG53,
LQIODWLRQRIRYHUWKHUHOHYDQWSHULRG
E DFRXQWU\ULVNVXUFKDUJHRI>@WREHDGGHGWRWKH(53WRUHIOHFWWKH
LPSDFWRIJUHDWHUSROLWLFDODQGUHJXODWRU\ULVNLQWKH8.
F DQDVVHWEHWDRI>@ZKLFK(21VWDWHVLVLQOLQHZLWKWKHDVVHWEHWDRI
>@RYHUWKHUHOHYDQWSHULRGDQG
G DFRVWRIGHEWRIDURXQG>@EDVHGRQWKHUHIHUHQFHSRLQWRI$(6
&RUSRUDWLRQ¶VOLVWHGGHEWVHFXULWLHVZKLFKKDGDVRI6HSWHPEHUD
\LHOGWRPDWXULW\RI>@RQ\HDUERQGV
>@
66(VXEPLWWHGDUHSRUWFDUULHGRXWE\)URQWLHU(FRQRPLFV)URQWLHUWKDW
VRXJKWWRLGHQWLI\DQDSSURSULDWH:$&&IRUDVWDQGDORQHJHQHUDWLRQ
EXVLQHVVEDVHGRQLQGXVWU\EHQFKPDUNV)URQWLHUVRXJKWWRH[FOXGHHYLGHQFH
ZKLFKZDVGHULYHGIURPYHUWLFDOO\LQWHJUDWHGDQGRUUHJXODWHGEXVLQHVVHV
EHFDXVHLWFRQVLGHUHGWKDWWKH:$&&VRIWKHVHZRXOGQRWQHFHVVDULO\EH
DSSURSULDWH,WDOVRIRFXVHGRQEXVLQHVVHVZLWKWKHUPDOJHQHUDWLRQUDWKHUWKDQ
QXFOHDURUUHQHZDEOHWHFKQRORJLHVZLWKWKHODWWHUYLHZHGDVEHLQJPRUHULVN\
)URQWLHUSURSRVHGDUDQJHRIQRPLQDOSUHWD[:$&&RIEHWZHHQDQG
DOWKRXJKLWGLGQRWSURYLGHDEUHDNGRZQRIWKHYDULRXVFRPSRQHQWVRI
WKHHVWLPDWHLH5)5(53HWF:HREVHUYHWKDWWKLVUDQJHLVEURDGO\LQOLQH
ZLWKWKHHVWLPDWHVSURYLGHGE\WKHRWKHUILUPVIRUWKHLUJHQHUDWLRQEXVLQHVVHV
7$%/(:$&&HVWLPDWHVIRUJHQHUDWLRQEXVLQHVVHV
(21
5:(QSRZHU
6FRWWLVK3RZHU
5HDO5)5
1RPLQDO5)5
(53
$VVHWEHWD
(TXLW\EHWD
3RVWWD[.H
3UHWD[.H
3UHWD[FRVWRIGHEW.G
*HDULQJ
7D[UDWH
3UHWD[:$&&
3RVWWD[:$&&
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
>@
6RXUFH(215:(QSRZHUDQG6FRWWLVK3RZHUVXEPLVVLRQVWRWKH&0$
1RWH>@
6XSSO\:$&&
:KLOH&HQWULFDTXHVWLRQHGWKHIHDVLELOLW\RIDVWDQGDORQHVXSSO\EXVLQHVVRI
WKHVFDOHRI%ULWLVK*DVLWHVWLPDWHGWKDWDK\SRWKHWLFDODSSURSULDWHFRVWRI
FDSLWDOIRUDVWDQGDORQHVXSSO\EXVLQHVVZRXOGEHEHWZHHQDQG
EDVHGRQ
D DFRPELQHGQRPLQDO5)5DQG(53JLYLQJDQLPSOLHGUHTXLUHGPDUNHW
UHWXUQRIEHWZHHQDQGMXVWRYHU
E DQHTXLW\EHWDRIEHWZHHQDQGDOWKRXJKLQWKHDEVHQFHRIGHEW
WKLVUDQJHZRXOGEHUHGXFHGDQG
F ZKHUHLWZDVSRVVLEOHIRUVRPHGHEWWREHUDLVHGDGHEWSUHPLXPRI
EHWZHHQDQGRYHUWKH5)5ZRXOGEHUHTXLUHG
(21SXWIRUZDUGWKHYLHZWKDWWKHDSSURSULDWHSUHWD[QRPLQDO:$&&IRUD
VWDQGDORQH*%VXSSO\EXVLQHVVZRXOGEHDSSUR[LPDWHO\>@RQWKHEDVLV
RI
D DQRPLQDOULVNIUHHUDWHRIEHWZHHQDQGDUHDOULVNIUHHUDWHRIWR
DQG53,LQIODWLRQRIRYHUWKHUHOHYDQWSHULRG
E DFRXQWU\ULVNVXUFKDUJHRI>@WREHDGGHGWRWKH(53WRUHIOHFWWKH
LPSDFWRIJUHDWHUSROLWLFDODQGUHJXODWRU\ULVNLQWKH8.
F DQDVVHWEHWDRIZKLFK(21VWDWHGZDVLQOLQHZLWKWKHDVVHWEHWDRI
>@RIDVHOHFWLRQRIUHWDLOHUVRYHUWKHUHOHYDQWSHULRGDQG
G DFRVWRIGHEWEHIRUHWD[HVRIDSSUR[LPDWHO\>@DQGJHDULQJRI>@
WDNLQJDVDUHIHUHQFHSRLQWWKHPDUJLQVRQGHEWREVHUYHGIRUDVHOHFWLRQ
RIUHWDLOHUV
5:(QSRZHUHVWLPDWHGDSUHWD[:$&&RI>@IRUDVXSSO\EXVLQHVV
EDVHGRQ
D DQ5)5RI>@HVWLPDWHGXVLQJWKHLQWHUHVWUDWH\LHOGFXUYHSXEOLVKHG
E\WKH%XQGHVEDQN
E DQ(53RI>@EDVHGRQD.30*VWXG\DQGDUHFHQW2IJHPGHFLVLRQ
F DEHWDRI>@EDVHGRQDQXPEHURIFRPSDUDWRUFRPSDQLHV
G DFRVWRIGHEWRI>@RQDSUHWD[EDVLVDQG>@RQDSRVWWD[EDVLV
WKHUHIRUHDVVXPLQJDWD[VKLHOGRI>@DQG
H JHDULQJRI>@ZKLFKLVJXLGHGE\WKH5:(QSRZHUWDUJHWFUHGLWUDWLQJ
DQGDOVRWDNHVLQWRDFFRXQWW\SLFDOILQDQFLQJVWUXFWXUHVJLYHQWKHRZQHG
DVVHWFODVVHVDQGVHFWRUQRUPV
66(GLGQRWSURYLGHD:$&&HVWLPDWHIRUDVXSSO\EXVLQHVVEXWGLGVXJJHVW
WKDWWKHPRVWQDWXUDOFRPSDUDWRUVIRUHQHUJ\UHWDLOHUVLQFOXGHGVXSHUPDUNHWV
KLJKVWUHHWUHWDLOHUVDQGDLUOLQHRSHUDWRUVEHFDXVHWKHVHEXVLQHVVHVWHQGWR
EHDVVHWOLJKWLQQDWXUHDQGIDFHVLPLODUOHYHOVRIULVNWRHQHUJ\UHWDLOHUV
+RZHYHU66(REVHUYHGWKDWHQHUJ\UHWDLOHUVPD\QRWEHDEOHWRFKDQJHUHWDLO
SULFHVLQUHVSRQVHWRULVLQJFRVWVDVUDSLGO\DVKLJKVWUHHWUHWDLOHUVVXFKWKDW
WKH\PD\EHH[SRVHGWRDGGLWLRQDOULVN
Appendix B: Corporate tax rates
Corporate tax rates
Country
2007
2008
2009
2010
2011
2012
2013
Average
UK
France
Germany
Australia
Hong Kong
Spain
Italy
Austria
Greece
Canada
Finland
US
NZ
30.00
33.33
38.36
30.00
17.50
32.50
37.25
25.00
25.00
36.10
26.00
40.00
33.00
30.00
33.33
29.51
30.00
16.50
30.00
31.40
25.00
25.00
33.50
26.00
40.00
30.00
28.00
33.33
29.44
30.00
16.50
30.00
31.40
25.00
25.00
33.00
26.00
40.00
30.00
28.00
33.33
29.41
30.00
16.50
30.00
31.40
25.00
24.00
31.00
26.00
40.00
30.00
26.00
33.33
29.37
30.00
16.50
30.00
31.40
25.00
20.00
28.00
26.00
40.00
28.00
24.00
33.33
29.48
30.00
16.50
30.00
31.40
25.00
20.00
26.00
24.50
40.00
28.00
23.00
33.33
29.55
30.00
16.50
30.00
31.40
25.00
26.00
26.00
24.50
40.00
28.00
27.00
33.33
30.70
30.00
16.60
30.40
32.20
25.00
23.60
30.50
25.60
40.00
29.60
Source: KPMG global tax rates.
35