COMPUTERSHARE LIMITED. - Capital/Financing Update 2016

==> picture [119 x 24] intentionally omitted <==

Computershare Limited

MARKET ANNOUNCEMENT

ABN 71 005 485 825 Yarra Falls, 452 Johnston Street Abbotsford Victoria 3067 Australia PO Box 103 Abbotsford Victoria 3067 Australia Telephone 61 3 9415 5000 Facsimile 61 3 9473 2500 www.computershare.com

Date:	4 February 2016
To:	Australian Securities Exchange
Subject:	Acquisition of Capital Markets Cooperative, LLC.

Computershare Limited (ASX: CPU) today announces that it has agreed to acquire Capital Markets Cooperative, LLC. (CMC), based in Florida, USA. The acquisition is subject to US regulatory approvals which are expected to be obtained within three months.

CMC enables a U.S.-wide network of mortgage originators to leverage their collective power to receive better product, service, pricing and liquidity solutions during the processing, sale and servicing of mortgages. CMC has more than 200 originator clients with combined annual loan origination of more than $100 billion.

The total acquisition price is USD 71.2 million. The price comprises USD 44.0 million for the CMC business plus USD 27.2 million for its current mortgage servicing rights (MSR) portfolio of approximately USD 5.4 billion in unpaid principal balances. The MSR purchase price of USD 27.2 million is net of the sale of an associated excess servicing strip (see further details in the accompanying presentation).

The initial consideration is USD 57.2 million payable on closing along with a maximum of USD 14.0 million in deferred consideration payable over three years.

Computershare’s CEO, Stuart Irving, said “We are excited by the acquisition of Capital Markets Cooperative which provides a strong strategic fit with CPU’s existing US mortgage servicing footprint. We expect that the combination of CMC with our current operation will help us become a significantly larger, more profitable, higher returning mortgage services business.”

More details about this transaction are contained in the attached presentation.

Computershare management will be holding a conference call TODAY to provide an overview of the CMC business.

A recording of the call will be available on the Investor Relations page of our website.

Call details

Date: Thursday 4 February 2016 Time: 9.30am (Melbourne time). Lines are open from 9.15am. Participant code: 9289542653# Telephone conference details: Melbourne: +61 3 8648 8889 Sydney +61 2 8088 0900

For further information contact:

Computershare Mr Darren Murphy Head of Treasury and Investor Relations Ph +61 3 9415 5102 [email protected]

About Computershare Limited

Computershare (ASX: CPU) is a global market leader in transfer agency and share registration, employee equity plans, proxy solicitation and stakeholder communications. We also specialise in corporate trust, mortgage, bankruptcy, class action and utility administration, and a range of other diversified financial and governance services.

Founded in 1978, Computershare is renowned for its expertise in high integrity data management, high volume transaction processing and reconciliations, payments and stakeholder engagement. Many of the world’s leading organisations use us to streamline and maximise the value of relationships with their investors, employees, creditors and customers.

Computershare is represented in all major financial markets and has over 15,000 employees worldwide. For more information, visit www.computershare.com

About Capital Markets Cooperative, LLC.

Founded in 2003 by and based in Jacksonville, Florida, Capital Markets Cooperative, LLC., (CMC) leverages the collective power of a nationwide network of mortgage bankers to negotiate better products, services, pricing and liquidity solutions during the processing, sale and servicing of mortgages. CMC has 200+ Patrons with combined annual production of more than USD 100 billion.

==> picture [387 x 205] intentionally omitted <==

----- Start of picture text -----

ACQUISITION OF
CAPITAL MARKETS
COOPERATIVE LLC
(CMC)
----- End of picture text -----

Stuart Irving Chief Executive Officer and President

Mark Davis

Chief Financial Officer

February 2016

==> picture [721 x 76] intentionally omitted <==

==> picture [20 x 541] intentionally omitted <==

Transaction summary

Strong strategic fit and financially compelling acquisition

Overview of CMC

Acquisition rationale

› Secures regular flow of new origination MSR for CPU at below auction prices
› Leading service provider to mortgage originator clients (known as Patrons) with substantial Mortgage Servicing Rights (MSR) co-issue program (refer to appendix II and glossary for definition)
› ROIC enhanced through ability to buy at below auction prices and sell excess strip (refer to appendix I and glossary for definition) to financial investors to improve returns and reduce capital intensity
› MSR co-issue program provides access to MSR from a growing base of 220 small mortgage originator clients (Patrons) at discounts to auction prices
› Provides scale enabling CPU to build a growing and sustainable mortgage services business with sub-servicing and ancillary revenue streams
› Clear value proposition to Patrons – service, scale and purchasing power enables Patrons to achieve better economic outcomes than they would on their own
› Creates competitive advantage and efficiencies through creation of a single loan boarding channel:
› Strong relationships with those investors who buy mortgage loans and require sub-servicing
For Patrons, they can sell or sub-service loans to single provider through same channel

› Track record of growth and profitability

 - CPU has access to service more loans from one source

› Transaction EV $71.2m:
- › $44.0m for CMC business
- › $27.2m (post sale of excess strip) for an MSR portfolio with circa $5.4b Unpaid Principal Balances (UPB)
› Expected monthly MSR purchases of $500m in UPB with potential to expand to $1b per month over the next 3 years
Transaction Overview › Projected year 1 revenues of $27.2m and Return on Invested Capital ~15%
› Projected year 1 revenues of $27.2m and Return on Invested Capital ~15%
› Immediately EPS accretive
› Funded from existing cash and available debt facilities. Post transaction net debt/EBITDA ratio expected to remain within CPU’s neutral zone of 1.75 to 2.25x
› Subject to approval of / notification to several federal agencies and states

==> picture [90 x 19] intentionally omitted <==

2 All figures are presented in USD

==> picture [20 x 541] intentionally omitted <==

Acquisition rationale

CMC’s co-issue program will be the upstream provider of a substantial and consistent flow of MSRs for CPU at discounts to auction prices

Leading co-issue program and service provider to originators CMC clients represent approx. 8% share of all US mortgage originations Highly regarded and experienced management team, aligned and incentivised to deliver growth and returns Well respected within industry. Strong IT systems, compliance culture and disciplined risk process Growing client base of 220 Patrons with no one contributing more than 10% of revenue Established in 2003. 60 staff based in Jacksonville, FL. Purchase includes MSR portfolio of circa $5.4b in UPB with monthly purchase opportunity of $500m+ Strong network of preferred investors who buy loans from Patrons and offer sub-servicing potential       	Mortgage servicing leverages CPU core strengths
	› Mortgage servicing leverages CPU core skills of effectively managing large volumes of complex financial data, communications and assets in a timely, accurate and trusted way › Market that CPU understands well and already has deep experience following acquisition of SLS in 2011 › Strong management team with an established track record of growth and good returns on capital › Capacity, systems, processes and capital to support substantial growth › Fragmented market structure where CPU can build scale to drive operating leverage and deliver sustainable profitable growth with strong returns › Opportunity to deploy capital on an ongoing basis to secure large volumes of MSR and generate enhanced ROIC

Leading co-issue program and service provider to originators
CMC clients represent approx. 8% share of all US
mortgage originations
Highly regarded and experienced management team,
aligned and incentivised to deliver growth and returns
Well respected within industry. Strong IT systems,
compliance culture and disciplined risk process
Growing client base of 220 Patrons with no one
contributing more than 10% of revenue
Established in 2003. 60 staff based in Jacksonville, FL.
Purchase includes MSR portfolio of circa $5.4b in UPB
with monthly purchase opportunity of $500m+
Strong network of preferred investors who buy loans
from Patrons and offer sub-servicing potential








Mortgage servicing leverages CPU core strengths

›
Mortgage servicing leverages CPU core skills of effectively
managing large volumes of complex financial data,
communications and assets in a timely, accurate and trusted
way
›
Market that CPU understands well and already has deep
experience following acquisition of SLS in 2011
›
Strong management team with an established track record of
growth and good returns on capital
›
Capacity, systems, processes and capital to support substantial
growth
›
Fragmented market structure where CPU can build scale to
drive operating leverage and deliver sustainable profitable
growth with strong returns
›
Opportunity to deploy capital on an ongoing basis to secure
large volumes of MSR and generate enhanced ROIC

==> picture [90 x 19] intentionally omitted <==

==> picture [20 x 541] intentionally omitted <==

US mortgage servicing landscape

› Since SLS ownership (FY2012 – FY2015), its revenue has more than doubled and continued growth is expected in FY2016.
› Over recent years, returns have been impacted by several factors including new regulations but they have consistently exceeded CPU’s cost of capital.

==> picture [55 x 69] intentionally omitted <==

==> picture [117 x 104] intentionally omitted <==

----- Start of picture text -----

billion +
----- End of picture text -----

==> picture [90 x 19] intentionally omitted <==

==> picture [20 x 541] intentionally omitted <==

CMC’s position in the value chain

Building long-term competitive advantage in the US mortgage servicing market

SLS to benefit from

==> picture [584 x 220] intentionally omitted <==

----- Start of picture text -----

Servicing revenue on ~$5.4b
MSR book
> Sub-servicing opportunities
from CMC Clients & Investors
> Ongoing MSR flow
INVESTORS
CMC CLIENTS (PATRONS)
Investors who regularly
Originate approx. $100b in CORE SERVICES
acquire mortgage loans from
new loans per year Loan sales
CMC Patrons
Sub-servicing opportunities MSR co-issue acquisition
Sub-servicing opportunities
Vendor services
----- End of picture text -----

==> picture [90 x 19] intentionally omitted <==

==> picture [20 x 541] intentionally omitted <==

Strategically attractive and financially compelling Buying CMC is a superior strategic choice

› Strong strategic fit with CPU’s existing US mortgage servicing business. CPU knows CMC well – two MSR acquisitions already completed.
› CMC has access to large and consistent newly originated MSR flow at below auction prices.
› Scope for substantial growth – opportunity for MSR purchases to grow from $500m to $1b per month. Transfer of existing MSR portfolio and material opportunity to win new sub-servicing work.
› Combined CMC and SLS can build scale and become a significantly larger, more profitable, higher ROIC generating mortgage services business operating across the whole mortgage lifecycle.
› Management continuity – combined group has experienced and well regarded management team and personnel.

==> picture [90 x 19] intentionally omitted <==

==> picture [20 x 541] intentionally omitted <==

Financial overview

Strong returns and EPS accretion

› Forecast revenue includes existing MSR portfolio, new MSR additions, CMC core services and contributions from sub-servicing. Year 1 revenue expected to be $27.2m projected to rise in line with anticipated MSR additions.
P&L › CMC revenue model a mix of servicing revenue attributable to the MSRs being serviced and fee for service activities.
› Operating costs assume migration of servicing to SLS shortly after completion and amortization of MSRs acquired.
› Expected day 1 capital deployment of $57.2m, net of proceeds from sale of excess strip (assumes UPB of MSR portfolio at closing of circa $5.4b).
› Deferred consideration of $14m for rep & warranty holdbacks and management earn out payable over 3 years, to give total consideration of $71.2m.

Balance Sheet

› Additional year 1 net MSR (post sale of excess strip) purchases projected to be $23.0m.
› Funded from existing cash and available debt facilities.
› Projected Year 1 net operating cash after tax of $10.7m, forecast to increase annually as MSR portfolio grows.
› Projected Year 1 ROIC of ~15% - materially above cost of capital. ROIC anticipated to rise further as business case delivered.

Returns

› EPS accretive in year 1.

==> picture [90 x 19] intentionally omitted <==

==> picture [20 x 541] intentionally omitted <==

Enhancing returns

CPU provides CMC with capital and capability to service an increasing MSR purchasing program at enhanced ROIC

	FY17	FY18	FY19	FY20
Indicativemonthly MSR purchase volume (UPB)	$500m	$750m	$1,000m	$1,000m
Indicativemonthly average incremental net capital employed (pre amortization)	$1.8m	$2.7m	$3.6m	$3.6m
ROIC	circa 15%			circa 25%

› ROIC benefits from anticipated additional capital light sub-servicing and scale benefits as UPB under management grows.
› Assumes CMC able to continue purchasing MSR at similar prices to historic average.
› Net operating cash after tax will not equal free cash flow available for distribution given the need to fund ongoing MSR purchases.
› We expect growth rate (%) in net operating cash after tax to broadly align with NPAT growth rate (%).

==> picture [90 x 19] intentionally omitted <==

==> picture [20 x 541] intentionally omitted <==

Risks and sensitivities

A range of risks and sensitivities have been considered

› MSR volumes drive financial outcomes. Strong visibility of buying opportunity.

Higher prepayment rates could impact financial outcome. Increasing interest rates mitigate risk.

› Prepayment rates › Sustainability of MSR pricing

Mortgage Strong visibility of buying opportunity. origination and MSR volumes › Increasing rates could have potential impact on origination levels, however Interest rates rise in rates overall a net positive. › ROIC dependent on ability to sell Excess strip excess strip at regular intervals. Track sales record of delivery and strong investor appetite.

Discount to auction pricing assumed to be maintained in line with history of business.

Subject to our ability to execute sales and marketing plan successfully. Subservicing is ROIC enhancing.

› Sub-Servicing volumes

› Synergies assumed to be delivered within 12 months. All identified.

CPU already invests considerably in regulatory compliance and we assume no material changes will be required.

Delivery of synergies

Regulatory environment

==> picture [90 x 19] intentionally omitted <==

==> picture [20 x 541] intentionally omitted <==

Conclusions

A strategically and financially compelling acquisition

› CPU has a small share of a large market and this transaction significantly enhances capacity to build a scalable, growing mortgage services business with access to sustainable sub-servicing and ancillary revenue streams.
› The transaction is expected to deliver strong growth in ROIC enhanced by ability to buy at below auction prices and sell excess strip to investors.
› CMC brings a diverse and growing client base.
› Creates competitive advantage by delivery of a combined purchasing and servicing offering through one distribution channel.
› Leverages CPU core competencies.
› Scope for considerable efficiencies through creation of single loan boarding channel.
› Immediately earnings accretive with scope for substantial growth.

==> picture [90 x 19] intentionally omitted <==

==> picture [20 x 541] intentionally omitted <==

Glossary

Key terms defined

› - CMC’s MSR co-issue program A program that enables CMC Clients (known as Patrons) to sell newly originated loans to the Government Agencies on a loan by loan basis. Patrons sell loans to obtain immediate liquidity (the Government Agencies settle daily). In such a program, a separate MSR is created (the Government Agencies such as Fannie Mae and Freddie Mac don’t buy MSRs) and CMC gets the first opportunity to acquire the MSR when sold by the originator.
› Excess strip sale - The sale of a stream of cash flows associated with the servicing fee on an MSR. The seller of the servicing strip has the ability to service the mortgage.
› - Mortgage servicing rights A contractual agreement where the right to service an existing mortgage is sold by one party to another who, in return for receiving mortgage servicing fees, provides the various administrative and compliance functions required to service mortgages.
› ROIC - The net operating cash flow after tax divided by average annual capital employed.
› - Capital The aggregate of the business purchase price, MSRs acquired net of amortization and excess strip disposals and incremental capital expenditure net of depreciation. Average capital employed is the opening and closing balances for the year divided by two.
› Net operating cash flow after tax - The net profit after tax plus amortization.
› UPB - The Unpaid Principal Balance on mortgage debt.

==> picture [90 x 19] intentionally omitted <==

==> picture [20 x 541] intentionally omitted <==

Appendix I : Excess strip structure overview

› The excess strip is the revenue over and above a normalized servicing fee. Selling a portion of the excess strip enables CPU to operate in a sub-servicing capacity whilst retaining an interest in the overall MSR economics.

==> picture [173 x 233] intentionally omitted <==

----- Start of picture text -----

Capital Revenue
Allocation Allocation
100% 80%
0% 20%
----- End of picture text -----

MSR Segments Excess Strip

Enhances ROIC

Approx. 60% of MSR usually sold to investor thus reducing CPU capital requirement

Sub-servicing role requires no capital and therefore adds to overall return

Assumes all prepayment risk and amortization expense > Shared between CPU and investor on pro-rata basis

Confidence in Execution

Financial institutions invest in excess strip transactions as part of overall asset allocation strategy

Servicing Strip

Strong investor appetite to participate in such transactions

Assumes all operational cost and risk > Receives sub-servicing fee (bps) on UPB

Attractive risk/reward profile
CPU executed a range of similar size transactions over the last 18 months

==> picture [90 x 19] intentionally omitted <==

==> picture [20 x 541] intentionally omitted <==

Appendix II : Co-issue program overview

› Under a co-issue program, loans are originated and then split into the underlying asset and an MSR. The underlying loan is sold in the secondary market to the government agencies (GSE’s). A separate MSR is created which CMC has first chance to purchase. Settlement back to the originator occurs daily at an individual loan level.

==> picture [549 x 368] intentionally omitted <==

----- Start of picture text -----

Loan Asset GSE
Loan
purchaser
Originator CMC
Facilitates loan
sale but does
MSR created
not purchase
loan
MSR CMC
MSR
purchaser
DAILY SETTLEMENT TO ORIGINATOR
----- End of picture text -----

==> picture [20 x 541] intentionally omitted <==

Important notice

Forward-looking statements

› This announcement may include 'forward-looking statements'. Such statements can generally be identified by the use of words such as 'may', 'will', 'expect', 'intend', 'plan', 'estimate', 'anticipate', 'believe', 'continue', 'objectives', 'outlook', 'guidance' and similar expressions. Indications of plans, strategies, management objectives, sales and financial performance are also forward-looking statements.
› Such statements are not guarantees of future performance, and involve known and unknown risks, uncertainties and other factors, many of which are outside the control of Computershare. Actual results, performance or achievements may vary materially from any forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which are current only as at the date of this announcement.

==> picture [90 x 19] intentionally omitted <==

AI assistant

COMPUTERSHARE LIMITED. Capital/Financing Update 2016

64696_rns_2016-02-03_e5d52f3d-38a0-4bdd-84b5-7ed1ab07d5c9.pdf