Corporate funding in the UK during and after the Financial Crisis by Adrian Marsh, Director of Tax, Treasury & Corporate Finance Tesco plc www.cfoevent.com

1. Corporate funding in the UK during and after the Financial Crisis 5 July 2011 Adrian Marsh, Director of Tax, Treasury & Corporate Finance Tesco plc Confidential Presentation

6. Lehman Brothers bankruptcy. BofA takeover of Merrill Lynch

8. Periods of sub-investment grade market closure 5 months 17 months Financial Crisis Impact on Corporate Funding As well as pricing implications, lower-rated companies, particularly non-investment grade, were exposed to liquidity risk in not being able to issue in times of financial distress Monthly GBP and EUR industrial issuance volumes and CDS index ___________________________ Source: Dealogic and Barclays. 17 month period of closure excludes small £75m issue in June 2008 2

9. Pre-crisis, many corporates over-exposed to bank market Driven by historic high liquidity and low pricing As liquidity dried-up, unable to refinance and forced into debt or equity capital markets Banks withdrew from the markets; bank groups shrank Refinanced bank deals typically smaller; 3 year tenor max Flight to quality Pricing differential between higher and lower rated credits widened Emergence of Forward Start Facilities as mechanism to access loan capital Weaker borrowers aiming to leverage the residual value of cheap facilities in exchange for renewed commitments What Happened to Corporate Funding? 3

11. During the crisis, availability of bank funding contracted significantly, however more than compensated by record breaking bond market issuance, particularly in 2009

12. Many UK corporates also forced to access the equity markets (e.g. Wolseley, CRH, Premier Foods, William Hill etc.)

13. Total debt capital raising has maintained relatively constant over the past 5 years (ex. 2007 spike driven by high volumes of bank funded M&A and PE sponsor deals)

14. Diversification into other funding less evident again from 2010 onwards - evidence of bank market recovery4 ___________________________ Source: Dealogic as at June 2011 Note: Data includes all capital raising by UK corporates i.e. IG & HY, excl. FIG

16. Capital supply/demand imbalance develops: available capacity but supply remains low as pricing remains elevated

17. Leads to competitive market behaviour to win business, and drives downward pressure on pricing

18. Volumes begin to recover as (i) discretionary refinancing can no longer be postponed and (ii) pricing appears to be stabilising

19. Loan pricing begins to increase to mirror increase in bank funding costs

20. Volumes fall sharply in response to higher pricing

21. Borrowers ceased discretionary refinancings

22. Acquisition and drawn funding met by debt capital markets

23. Further consolidation in highly fragmented European bank market

24. Volumes remain subdued on both supply and demand side

25. Bank capital raising and low volumes (asset run off) repair balance sheets5

26. Impact on Loan Market Tenors The profile of loan market tenors changed significantly during the crisis, although today appears to have returned to pre-crisis norms EMEA investment Grade Loan Tenors Loan Market Tenors Historically, a range of tenors up 7 year tenors were available for strong investment grade borrowers 5 years more normal, although corporates used a range of tenors, particularly to fund acquisitions Given capital sensitive environment , longer maturities were unavailable for even the strongest borrowers during the financial crisis Return of tenor despite inflationary capital impact of Basel III Testament to relative health of European bank balance sheets More limited post credit crisis examples of >3 year tenor for crossover and sub-investment grade borrowers owing to capital consumptive nature of sub-IG exposure under the Basel II regulatory capital regime Today’s loan market conditions are generally supportive of corporate refinancings ___________________________ Source: Dealogic and Barclays 6

28. Limited M&A financing to date

29. Bank lending budgets up 20% on average for 2011

30. Success of loan transactions in past 12 months

32. Dampening of sentiment, as evidenced by Central Bank lending surveys?

33. Cost of bailouts and contagion?

34. Additional exogenous shocks in macro and geo-political environment

35. Threat of double dip?

36. More expensive capital model for banks

37. New regulation directives yet to be ratified at local level

38. Impact of super-equivalence?

39. Impact of future bank stress tests?

40. Further capital raising by European banks to come?

41. Withdrawal of Government support schemes

42. Eurozone “debt crisis”

43. Costly liability extensions, as imposed by regulators

44. Elevated bank funding costs for >2 years – a long-term ‘shift’?

45. Securitised markets yet to recoverBank sector specific CHALLENGES 7

46. Sources of Liquidity haven’t changed Cash/working capital Bank Debt Public Debt Private debt Asset Finance Hybrid Equity 8

47. Lessons Learned? Many corporates got ‘burned’ during the crisis Liquidity management is key Corporates are refinancing earlier to avoid running up against maturities 2 -3 years prior to maturity not uncommon Corporates have increasingly diversified funding sources Debt Capital Markets a more important part of the funding mix De-levered balance sheets and increasing cash piles are more common as corporates seek to more actively manage their liquidity position 9

48. What do ‘Best in Class’ Treasurers / CFOs do? No quick fixes Understand business “rhythm” Align capital structure with business strategies and growth opportunities Consider the full spectrum of the capital structure when considering financing decisions Make financing decisions from both a strategic and tactical perspective Recognise that liquidity is king Maintain optionality Communicate regularly with past, current and potential capital providers & rating agencies Engage (and debate) with banks on structuring, not only execution 10

50. Engage on multiple fronts – don’t listen to just one advisor

51. Learn from past – don’t assume crisis lasts forever

52. Embed within business concepts of cash & liquidity – the company does not have a blank cheque book

53. Secure liquidity even if it is not yet required – the early bird catches the worm

54. Ensure the Board is up to speed and able to respond quickly – markets open and shut extremely quickly11