Irish Association of Corporate Treasurers

1. Irish Association of Corporate Treasurers Insights into Corporate Funding and Bank Lending 5th May 2005 Fergus McDonald Bank of Ireland Corporate Banking Bank of Ireland is regulated by the Irish Financial Services Regulatory Authority

2. Contents • Types of Bank Debt Funding and Current Market Trends • Financial Covenants – Current Usage and Impact of IFRS • Interest Rate and Credit Environment • Bank Assessment of Risk and Price • US Private Placement Market • Conclusion 2

3. Types of Debt Funding Bi-lateral Funding: • Small / Medium Sized Companies • Similar Terms & Conditions / Pari-Passu • Inter-Creditor Agreements for complex arrangements • Pricing Differential • Relationship Basis Current Trends: • Larger corporates are going this route • Increased debt appetites from banks • Ancillary business is key 3

4. Types of Debt Funding Syndicate Debt: • Large Corporates Primarily • Significant Debt Requirements • Active on acquisitions • Arranged or Underwritten Syndicates • One Loan Agreement • Majority Bank rule • Transferability of Bank Debt • Market Pricing • Efficient and Effective Process 4

5. 1000 900 800 700 600 500 Loan Volumes 400 300 200 100 0 2000 2001 2002 2003 2004 Source : International Financing Review Types of Debt Funding $bns Syndicate Volumes - EMEA $912.7bn $743.9bn $656bn $550bn $479.2bn 5

6. Types of Debt Funding 6

7. Types of Debt Funding Syndicate Debt – Current Market Trends • Emergence of France as a significant originator of syndicate debt 2004Q1 2005 France $189bn $67bn UK $226bn $51bn Reasons: • Opening of the French market • Different approach by borrowers • Greater bank competition • London is still number 1 bank centre 7

8. Types of Debt Funding Syndicate Debt – Current Market Trends • Significant element of re-financings • Accounts for 40% of global deal volume in Q1 2005, up from 33% • Q1 2005: 408 deals, $243bn Reasons: • Lower M&A activity • Deleveraging by corporates • Rationalisation of banks • Excess bank liquidity 8

9. Types of Debt Funding Syndicate Debt – Current Market Trends Resulting in: • Lower pricing and fees 9

10. Types of Debt Funding 2003 2004 2005 10

11. Types of Debt Funding Syndicate Debt – Current Market Trends Resulting in: • Lower pricing and fees • Lower syndicate amounts • Dilution of terms and conditions 11

12. Types of Debt Funding Syndicate Debt – Dilution of Terms & Conditions Current Trends • Acquisition / Investment Baskets • Material Adverse Change Clause • Limit on Disposals / Mandatory Pre-Payments • Capex Restrictions • Financial Covenants • Guarantee Structures 12

13. Types of Debt Funding Syndicate Debt – Current Market Trends Resulting in: • Lower pricing and fees • Lower syndicate amounts • Dilution of terms and conditions • Increase in self-arranged syndicates • Extension of terms: 3 + 5 year –: now 5 year 5 + 1 + 1 –: term out fee –: Discretion of banks or company • Invitation to participate: invitation to bid 13

14. Types of Debt Funding Syndicate Debt – Current Market Trends Underwritten Syndicates • Mandate Letter • Clear Market • Bookrunner • Market Flex • Price • Structure • Terms Current Trends • Mandated lead arranger hold levels • Market flex restrictions • Agreement not consulation on market flex • Exclusion of sub-underwrites 14

15. Financial Covenants • Standard: Net Debt / EBITDA EBITDA / Interest Net Worth • Non-Standard: Current Ratio, Debt / Net Worth • Covenant Headroom increased • Downward ratchet structures being replaced by one overall gearing covenant • Blurring of distinction between Corporate and Leveraged Deals – Crossover threshold is higher • Leveraged: “7¼ is the new 6” 15

16. Financial Covenants Impact of International Financial Reporting Standards [IFRS] • Implementation Date 1st January 2005 • Impacted Areas: • Net Debt: • EBITDA: • Interest • Net Worth • What are corporates and banks doing • Frozen GAAP • LMA Loan Agreement and Directive 16

17. Financial Covenants Frozen GAAP Provision • “That obligors ensure that all financial statements apply the same GAAP and accounting practices as used in the preparation of the financial statements delivered at the time the facility agreement is signed, • If there has been a change in GAAP or accounting practices, the banks/agent is entitled to receive information enabling there to be a comparison back to the original GAAP and accounting practices.” 17

18. Interest Rate Environment Euro Interest Rates • Improvement in consumer and investment spending recently • Still low confidence in Germany, France and Italy • Inflation at 2.1%, just above ECB’s 2% target • ECB would like to increase rates, but growth issues • No rate increases expected by markets in 2005 Current Rates: 3 Mth3 Year5 Year10 Year 2.12% 2.65% 2.95% 3.55% • Historic lows, potential increases end 2005/2006, a relatively benign interest rate environment leads to continued demand and strong bank/corporate appetite 18

19. Interest Rate Environment 19

20. Interest Rate Environment Sterling Interest Rates • Housing market has stabilised • Consumer spending weak • Labour market strong with little wage inflation • Inflation, at 1.9% within BOE’s target rate cycle Current Rates: 3 Mth3 Year5 Year10 Year 4.90% 4.92% 4.9% 4.90% As flat as it gets • At the end of interest rate hiking cycle, maybe one more hike, again benign interest rate environment 20

21. Interest Rate Environment 21

22. Interest Rate Environment US Dollar Interest Rates • Business activity expanding, real estate markets are active • Improving job market in line with strong new home sales • Good momentum in economy but concerns on oil price • Inflation, at 3% pa, concerning the FED Current Rates: 3 Mth3 Year5 Year10 Year 3.2% 4.15% 4.35% 4.65% • Rates to continue to increase at measured pace, to reach a plateau level at 3.5 / 3.75% 22

23. Interest Rate Environment 23

24. Bank Credit Quality An Improving Environment Non-Performing Assets / Loans % Leading to enhanced bank appetite 24

25. Bank Assessment of Risk & Price Traditional Approach • Know your client and business • Financial information • Judgement • Trust Increasing globalisation of debt markets and expanding of bank activities calls for a more sophisticated and objective approach “RAROC” Risk Adjusted Return on Capital 25

26. Bank Assessment of Risk & Price • Loan Portfolio Management: Determining the most efficient use of a bank’s capital • Generally applicable throughout the bank market • Rating agency models: S&P / Moodys / Fitch • Key Parameters [Objective & Subjective] • Size • Interest Cover • Gearing • Life Cycle • Management • Information Quality • Future Company & Industry risk • Market Position • Facility Terms & Conditions 26

27. Bank Assessment of Risk & Price • PD: Probability of Default • EDF: Expected Default Frequency • EL: Expected Loss: Given the probability of default and the nature of the facility • Return to the bank on a risk adjusted basis • BASLE II Accord 27

28. US Private Placement • Source of stable, long term capital • Significant capacity • Strong demand • High level of flexibility regarding: • Maturity • Structure • Terms • Pricing • Institutional investors are largely transactional • Bank of Ireland joint venture with Macquarie Securities (USA) Inc 28

29. US Private Placement 29

30. US Private Placement U.S. insurance companies are most active investors Mutual Funds / Pension Funds 12% Banks / Other 4% Insurance Companies 84% Source: Private Placement Letter 30

31. Credit Quality Distribution Percent US Private Placement Investors are receptive to a broad range of issues Source: Private Placement Letter 31

32. US Private Placement Irish Issuers in the US Private Placement market in recent years 2005 • Kingspan Group plc – $200 million 2004 • United Drug plc - $102 million • DCC plc - $257 million 2003 • ESB - $1,035 million • Bord Gais – US$440 million • Greencore Group plc - $302 million • Kerry Foods Financial Services plc - $650 million Source: Private Placement Letter 32

33. US Private Placement The most recent Irish issue in the US market: Kingspan Securities Ltd • Strong demand • Launched as US$150 million offering of senior notes • Upsized to US$200 million • 10 yr bullet, US Treasuries + 88 bps • 12 yr bullet, US Treasuries + 95 bps • BOI Swap Auction • Closed 29 March 2005 33

34. US Private Placement Current market conditions are very attractive for issuers • Strong demand • Supply and demand imbalance • Aggressive new issue pricing • Less restrictive covenants • Historically low U.S. Treasury yields • Relatively flat yield curve • However • Amendments can be difficult • Corporate non-performance • Make whole provision 34

35. Conclusion “IT’S A BORROWER’S MARKET” • Strong bank appetite • Lower pricing • Flexibility on structures and conditions • Benign interest and credit environment “IT WON’T ALWAYS BE LIKE THIS” 35

36. Contacts Finbarr O’Neill, Managing Director, Institutional Banking Ph: (01) 604 4020 Email: finbarr.o’neill@boimail.com Pat Gaynor, Managing Director, Domestic Corporate Ph: (01) 604 4100 Email: pat.gaynor@boimail.com Fergus McDonald, Director, Institutional Banking Ph: (01) 604 4104 Email: fergus.mcdonald@boimail.com 35