Hastings Income Trust

Overview

The Hastings Income Trust (HIT) provides an investment vehicle for retail investors to access the Hastings Yield Fund, a wholesale entity. The Hastings Yield Fund (HYF) provides exposure to investments in high yield securities such as loans and hybrid equities. These loans and hybrid equities investments are predominantly derived from infrastructure privatisation and general industrial assets, representing Hastings' expertise in these types of assets.

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Assets

Portfolio update - Hastings Yield Fund (HYF)

The year ended 30 June 2011 saw a number of updates to the Hastings Yield Fund’s portfolio, including:

• In July 2010, HYF received full repayment of its $20 million face value investment in the first tranche of Manildra Group’s Reset Secured Notes (RSN1) ahead of the first reset date of 15 August 2010. The holding period realised return was 11.47 percent per annum. As part of the Reset Secured Notes refinancing, HYF benefited from consent fees and increasing the interest rate to 12.50 percent per annum on its remaining $12.0 million face value investment in the second tranche of Reset Secured Notes (RSN2) with a first reset date of 21 December 2012;

• In September 2010, HYF completed the on-market divestment of its holding in Prime Infrastructure stapled securities. The divestment was consistent with HYF’s stated strategy to sell down its holding of the equity position in an orderly manner before the end of the 2010 calendar year, and occurred after the announcement of a merger with Brookfield Infrastructure Partners L.P. The divestment was achieved at an approximate 30 percent premium to the pre-announcement traded price. HYF continues to retain an option over the net proceeds of Prime Infrastructure’s Australian Energy Transmission & Distribution (AET&D) assets which have been sold. Any sale proceeds for the AET&D assets in excess of the senior debt will be for the benefit of the former exchangeable preference share holders, including HYF – it holds this option at zero value;

• In September 2010 HYF invested $40 million face value in the subordinated debt facility, the Secured Hunter Infrastructure Notes (SHINs), issued by Newcastle Coal Infrastructure Group (NCIG). NCIG is a coal export terminal located at the Port of Newcastle in New South Wales, established in 2004 by coal miners with significant operations in the Hunter Valley Coal Corridor to address coal export infrastructure constraints. HYF funded the investment in part from new fund commitments of $18 million and the balance out of cash reserves;

• In November 2010 HYF received repayment in full on its holding in Prime Infrastructure’s SPARCS. Following the SPARCS repayment HYF has divested all Prime Infrastructure exposure. HYF’s combined exposure to Prime Infrastructure across both instruments has generated a positive return, albeit below HYF’s benchmark of 3.00 percent per annum above the Index.

• In October 2010, HYF’s investment in Hyne Timber’s High Yield Non-cumulative exchangeable Securities (HYNES) reached their reset date and Hastings lodged an exchange notice requesting repayment. In response, the Board of Hyne Timber elected to convert the majority of the $60 million HYNES issue to ordinary equity as allowed under the terms of the HYNES on 21 December 2010. HYF now holds an ownership stake of 7.4 percent of the total ordinary issued capital of Hyne Timber;

• In January 2011 a capital restructure of Yellow Pages Group was completed. This resulted in HYF being allocated 3.92 percent of the three tiered capital structure comprising a NZ$500 million Senior Term loan, NZ$250 million of Optional Convertible Notes and Ordinary Equity. The recovery rate under the restructure was equivalent to 54.6 percent of original principal, with all accrued interest being fully paid up to the restructuring date. The recovery achieved was largely in line with the impairment provision applied in December 2010 prior to the recapitalisation. The Hastings Alternative Debt team continues to actively monitor the investment in the best interests of unitholders;

• In March 2011, Perth Airport repaid all outstanding convertible notes. The repayment proceeds received from Perth Airport included a 1.75 percent repayment premium, equivalent to $588,000, which was negotiated upon the refinancing of the notes in September 2009. Since initial investment in March 2003, HYF’s investment in Perth Airport generated an annualised return of 10.98 percent, equivalent to a margin of 5.51 percent above the average three month Australian bank bill swap rate;

• In April 2011, HYF’s £20 million face value investment in the Thames Water Junior Floating Rate Loan was repaid in full, ahead of its scheduled maturity date in December 2013. HYF’s investment in Thames Water generated an annualised return of 10.28 percent, equivalent to a margin of 4.81 percent above the average six month Australian bank bill swap rate since investment in February 2007; and

• In late May 2011 Hastings, along with other subordinated lenders executed an agreement in relation to the outcome for Junior Lenders in the event of a financial restructure of DCA Group. The agreement provides for a recovery of approximately 10 percent of the value of HYF’s original investment, paid in the form of senior debt, warrants and equity in the restructured entity. Final terms of the restructure are currently under negotiation. The realised loss on HYF’s investment in DCA Group is equivalent to $33.5 million.

The Trust’s sole investment is units in the Hastings Yield Fund. As at 30 June 2011, the Hastings Yield Fund comprised the following securities: