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MoneyGram International, Inc. (NASDAQ:MGI)

Bank of America Merrill Lynch Leveraged Finance Conference

December 5, 2012, 10:10 AM ET

Executives

Larry Angelilli – Treasurer

Eric Dutcher - Director of Investor Relations

Analysts

Operator

Investor presentation, with us we have Larry Angelilli, Treasurer and also Eric Dutcher, Director of Investor Relations. We’ll do a brief presentation either followed by Q&A or please feel free to ask Q&A as we go along especially if your schedules don’t permit, so please feel free.

Larry Angelilli

Thanks for joining us on the meeting on the last day. Just a little history, one of the things that I wanted to do today is since we are a relatively new name, we have some bonds that are in the term of remarket that are traded privately. So, we’ve got a little history here and a little bit about the company and then as Sam said we can keep this pretty informal, if you have questions as I am going along let’s do it that way. We are headquartered in Dallas. We had revenue of $1.25 billion last year. One of the things about the company is that the money transfer is now 83% of our revenue that is a change from our past where we had a significant part of our revenue as part of the investment income and also we are a big player in the cashier’s check and money order business, but now the strategy of the company really is to be a global player in the money transfer market.

We are 29% public and we are 70% owned by two private equity funds Thomas H. Lee Partners and Goldman Sachs. Last year was a very or this year I guess has been a very significant year for the company. As many of you may know, we settled with the U.S. Department of Justice recently on a fraud and scam claim that was made for a activity that was done between 2002 and the end of 2008, that was the legacy company prior to our current management and also our current strategy, but the investigation related to that era and we settled with the government for a $100 million payable over the next 3 months.

We also announced that we have an agreement with Walmart, we extended our agreement with Walmart under basically the same terms. Walmart is our largest customer and we have extended it through March 2016 and it has annual renewal options in it as well. Bank of America is one of the largest check cashing and it is actually up on and small loan business. We expanded our relationship and renewed it with them. We announced our agreement with PayPal where we will be initiating service with PayPal where you can use cash to increase your PayPal account and then ultimately where you can withdraw from PayPal using the MoneyGram network and receive cash which is a technology that they currently do not have today.

We entered into agreement with Gemalto, this is entering the mobile space where we can receive transfers on to your mobile wallet through the MoneyGram network and then we established an agreement with Payment Center which was a major entry for us into the emerging and growing Russian market. From an interim quarterly perspective, where our revenues for the year-to-date third quarter $986.8 million up 7% from last year. Our EBITDA was influenced by the settlement that we made with the government, if you factor that out and what we call adjusted EBITDA we had $207 million in EBITDA or adjusted EBITDA year-to-date of 5% from last year, free cash flow $91.5 million year-to-date.

This is one of the most important aspects of the company is the growth of the agent network. There is really two people in the space that provides the same service, Western Union and MoneyGram provide what is known as a [ph] will call service where you can send money and receive money anywhere in the world within 10 minutes in any location within that country, that is unique to this industry and so the importance of your agent network is paramount because convenience is one of the most important factors when you are doing a transfer that is done within this short of time period. We got up to 293,000 agent locations in the world in the third quarter, up 15% from last year, that is the basis for which growth will be predicated. The ability to send money and receive money on a global basis on a convenient basis is where our growth is common, it is really the engine for revenue and cash flow in the future. You can also see that it is paying dividends where our transaction volume is also up 13%, this is in global recession we are attaining double digit growth in our transaction. You can also see that sends originated outside the United States which is the fastest growing and most important growth area for the company was 18%.

When you think about this market, Western Union has been a global player since almost the created this business where MoneyGram until several years ago was really primarily a domestic player that sent money around the world from the United States. Today, almost two thirds of our transactions don’t touch the U.S. dollar or either sent from the United States to a foreign country or never even touch the United States and as you can see sends originated outside the United States was 18% growth rate, so far this year, year-over-year growth and that has translated into revenue growth of 8% and actually our money transfer and other constant currency growth were negatively impacted by the decline in the Euro when we look at things from a nonconstant currency basis, if you take in the constant currency basis, we had a 11% growth.

From a free cash flow perspective year-to-date $91.5 million that is tracking favorable over the last year. You can also see the trend has been consistently positive throughout the recession as we have been rebuilding this [ph]franchise.

One of the things that I’ll also touch on is that the composition of cash flow has changed and this is related to our credit history, this is an important factor. The company was investment grade, but had no debt outstanding and it was really had grown up from being a traveler’s check business and official check business we do tremendous volumes in money orders and we also provide banks and outsourcing service for their cashier’s check.

Prior to the financial crisis, the company had about $6 billion in cash and investments that related to float the team from that business. It was a U.S. business and they really had a strategy where they are going to maximize the arbitrage on that flow and it bought significant portfolios of CDO’s and structured finance products, and a lot of subprime mortgages. (inaudible) that portfolio, almost [ph]bankrupt company in 2008 and that’s why the company was recapitalized. It also was the reason that the company as the so called ‘fallen angel’ where it got downgraded and it was really totally related to the mark-to-market and the losses on an investment portfolio was not related to the operations of the company or in the money transfer business in which we are today.

The other factor that goes with this is that our operating losses, I mean our operating results and our EBITDA are negatively impacted because what we’ve done is, we’ve de-risked this investment portfolio. That portfolio today is about half what it was with the peak, and as you can imagine in a 0 interest environment, when we de-risk that portfolio, we really don’t have meaningful investment income in the company anymore, and so the loss of that investment income had a theoretically a negative impact on our cash flow because we just stopped that activity. We will continue to de-risk that portfolio and so we don’t look for investment income to be an income driver for the future.

I mentioned that the portfolio was reduced and it seems to have stabilized today at around $3 billion. And today we exceed the EBITDA that we reached at the peak of the market with essentially minimal investment income and so the growth of the company now, we’re a fifer service business and our growth will come from transaction volume and the continual expansion of our agent network.

This gives you a flavor for our revenue and EBITDA on a historical basis and the grey bars also show the impact of investment income, as I was just discussing. So, you can see that for 2009 and actually 2009 is after the financial crisis, and after the barge investment portfolio was liquidated. You can see that even as this portfolio matures and we de-risk it further and rates continue to decline, then investment income is now down to $10 million. So, far this year it was $32 million as recently as 2009. So, you can see that the red buyers that were outstripping the growth and we’re offsetting the impact to the loss of the investment income and we’ve repositioned the company to have its cost structure and revenue structure totally around a fifer service business.

The other credit implication to this is that the factors that cause the downgrade of the company and the factors that cause the near death of the company actually are now gone, and so it really is impossible for history to repeat itself when it comes to our investment portfolio. This just drives back home a little clear where it shows that the yield our investments you can see that it went from 6.3 or 630 basis point yield on our portfolio in 2008, and it’s now down to 40 basis points. We project that at some point the U.S. will return to some sort of normalized interest rate environment. We would benefit from that and we show kind of that what our thoughts are in terms of our return to. But right now we’re focused mainly on bank deposits and as competition starts return for bank deposits, we could see some increase in our yield because that’s where the majority of our higher yielding asset loss. You can also see that 5% of our portfolio is really cash and cash equivalents and the remainder is, I think that’s reverse. The red the should be the trading investment. No I’m sorry that’s correct. You can see where we’re 73% trading investments and now it’s reversed right.

From our credit metrics perspective, the company has consistently delivered partially due to the recapitalization of the sun in 2010. Right now, this gives you both our covenant and our actual numbers though are leverage covenant is a 4.75 times, we are currently at 2.9 and our EBITDA to interest covenant is 2 times and we are currently 4.2. This is delivered and the company has been focusing on improving its credit profile and it hence had a deleveraging strategy consistent with restoring credit integrity.

Moody’s and SMP have just published on us, this as November 23, which was the last year when they renewed our ratings. I don’t think everything is published yet, so we haven’t updated the date but right now, we want corporate rating by Moody’s with a stable outlook. Standard & Poors of the (inaudible) with a stable outlook, those ratings were both affirmed and I think the rating is just in the process right now of publishing their update. I have seen drafts but I don’t know that I have seen the finals. So it even could be today.

This kind of gives you a little bit of a history on our capital structure. In May of 2011 was the major recapitalization, it was a complicated deal. It was really attempted to simplify our capital structure and remove the preferred overhang that was created by the invested by the private equity funds. There is a lot of confusion around preferred stock, the third bullet there is the conversion of preferred comment provided a significant reduction in total leverage. That was crucial to both reestablishing ourselves in certain markets that are credit sensitive and also outlining and delineating the roll that the private equity players we’re going to have in our new structure and also eliminating payment and kind accruals.

In November of 2011, a year ago, we did a secondary offering. This was primarily driven by Goldman Sachs, who became a bank holding company during with financial crisis because of the Bank Holding Company Act, it was not permissible for them to own controlled stock and MoneyGram above 20%. So, they slowed down their position to 19.5%, and then at the same time, we were able to claw back a third of our mezzanine debt that’s held by Goldman Sachs, which (inaudible) in the quarter. Those two transactions were done a year ago. So, they were not only beneficial from a shareholder perspective, but they were also beneficial from a credit perspective because that significantly reduced our interest expense on a $175 million worth of debt.

This is our current ownership. So, we are public shareholders, own close to 21% of the company. You can see Goldman Sachs at 19.1% and THL at close to 52%.

Just a strategy summary. We continue to be in a growth market. In spite of the global recession, this market continues to grow, and the number of people in the world, who don’t use banks, is significant and a growing population. We continue to outgrow that market and really have led the major industry player significantly in growth over the last several years.

Not insignificant is the second point here, and that’s the powerful global brand. There used to be somewhat of a monopoly in this business and what’s changing in this business is the MoneyGram brand has strengthened substantially. We have gotten away from our legacy problems and also have consistently grown in markets where we really didn’t even use the play. And so, from a global brand perspective, there’s decreasing and in many cases and an insignificant difference between the Western Union brand and the MoneyGram brand. And so, it’s really the first in this industry where we have the truly global competitor to the industry leader. And we continue to focus on that brand and actually part of the margin compression that we saw this year was a concerted effort on our marketing plan to increase our advertising, increase our brand awareness, because we are getting traction, significant traction from building this brand in the market.

We are also adding new channels, I think the PayPal is a new channel. We continue to focus on new electronic technologies. These technologies, while they create a lot of buzz, are still in their infancy. We want to be in a position where our back office, essentially our global network can support these technologies rather than compete with these technologies, and that’s where we are accelerating our ability to kind of bolt on to new technologies that emerged, that require global network that can handle cash payments.

Ironically, during the same time, when we were settling with the government on compliance-related issues, we established ourselves as an industry leader in this arena. One of the barriers to entry to this business and an increasingly expensive part of this business is compliance. On a global basis, just about every government in the world is increasingly focused on any money laundering and fraud, and in reaction to that and actually recognizing that this is a fact that life in this business, MoneyGram has invested in technology, we represent really an industry-leading position in fraud detection, in anti-money laundering and continue to have that as a major corporate priority, so that we not only can comply with these laws, but actually leave the industry towards cooperating with government and preventing fraud and money laundering.

And then, through all this, we continue to have industry-leading growth, and we continue to improve our balance sheet. We continue to increase our cash flow, and deliver strong performance. That was our prepared remarks. There is my contact information, and then Eric Dutcher, our VP of Investor Relations is here with me, and I think we can throw it open any questions you have, regarding this or anything else you would like to ask.

Question-and-Answer Session

Unidentified Analyst

You know, Wal-Mart contracts are very dangerous for every single borrower that I looked at. So, if you can give us a little more color on what does it mean if it’s reviewed until 2016? Can they exit the contract? And my understanding is the contract is only that they are giving the location there, their stores just to do the business correctly.

Larry Angelilli

Eric, is our Wal-Mart expert. I will let –

Eric Dutcher

So, the contract that we referred to on Wal-Mart is the contract that relates to the primary in-store business in the U.S. We have separate contract with Wal-Mart and India and Mexico, but the primary contract was renewed and it goes into effect into April of 2013. It’s a three-year contract. It’s where they felt comfortable and where we felt comfortable under the terms of the agreement of setting that link of time. I think as, on the equity side, obviously people would like to see a lot longer. On the debt side, I think your focus will be a little bit even more on it. The one thing that we can say is that we have had a really long and really strong relationship with Wal-Mart. We were the ones that came alongside them to initially pilot doing money transfers in the locations and we have renewed this contract now several times with them.

So, there were really good relationships with them. We look forward to continuing that in the future. We are culturally aligned, they are a value player in their industry and we are the value player in our industry. So, we were very happy to have that renewed, and we will continue to work and help that relationship over the next several years. It does have a provision where at the end of the three years, that the notice isn’t given 180 days [ph] in advance that the contract will roll for a year under the same conditions and we will continue to do so until that notice is given. So, were very happy to continue that relationship.

So, the revenue portion, Wal-Mart represented 29% of our revenue in Q3. You know, the way they share the revenue is more of from commissions, but if you are – there is a provision that – beyond the revenue share from a commissions standpoint –

Larry Angelilli

The only thing, maybe what you are seeing, they have a participation agreement with Thomas H. Lee where if Thomas H. Lee sells their stock positions for a gain, Wal-Mart has a piece of that and receives some portion of that gain, and it was something that was negotiated during the crisis when Wal-Mart stayed with the company and participated in the restructuring of the company during the crisis, but that’s the only, what I would call, sharing otherwise they have what we deal within all of our agents, which is the commissions structure and they get paid a commission based on the transaction that they are doing.

Unidentified Analyst

Can you talk a little bit about the demographic, the average transfer size?

Larry Angelilli

Sure. Our demographic tends to be the unbanked of the world. Generally, people who send money across the border tend to be immigrant labor, returning money to the families for their retirement. We see it through patterns throughout the world where you can see where certain countries export labor and certain countries import labor, and you can divide the world really in the send and receive type countries. And that’s the way we look at our business. And the United States, Canada, Europe, Australia, New Zealand, Saudi Arabia tend to be ‘sent’, and the rest of the world is ‘receive’. It’s really unusual in the United States. The United States were the few countries in the world that actually is ‘send and receive’. People use the money in the United States like if you are kids in college and they need money, you could send us at MoneyGram, and so, we see a lot of that in the United States, but you don’t see it in other parts of the world. It tends to be, a lot of immigrant labor returning money home and it tends to be unbanked, or people where – the other thing about the sending an international wire transfer is a very expensive proposition, even if you have a bank account. And also, it’s a time-consuming proposition. When you offer a 10-minute service, so we are really offering a convenient and really an essential service to people around the world at a very cost-effective basis, even if they have bank accounts. But our customers tend to be more of the unbank to the world.

Eric Dutcher

And there are, you know, a lot of our consumers, they have the bank accounts, but they don’t want to touch on, because every time they touch it, they cause some sort of fee. But really if you have ever done a wire transfer at a bank, it’s a complicated process. You have the routing numbers, and you know, it’s for the benefit of us, and there’s usually two tiers of banks that you are going through. Ours is a very simple system, who are you sending it to and you get a number that you give to that individual and they can go and pick it up at whatever location, it’s very convenient for them.

So, the World Bank estimates that around a little bit over $500 billion move every year cross borders, and so, it’s a huge market. We have about 5% of the market share and Western Union has about 17%. And so, between even the two largest players, we don’t even have a quarter of the market. So, it’s a large, it’s a growing market, it grows about 7% a year. And the consumers are usually people that are migrating for work or need to send money on an emergency basis. So, it’s a very emotional service that we provide that’s very key to their life, whether it’s their savings for retirement, whether they are sending family money back home or they got to get money to somebody quickly in need.

Larry Angelilli

Even in the United States, it’s interesting. Lot of banks that exited the money order business, they don’t even sell them. Some banks, I just, personal experience, my daughter needed a money order last week for a security deposit on rent. The bank want to charge $15 for money order. You can go to a Wal-Mart and buy it for $0.68. Safeway sold it for $0.83. So, I think what happens here is you have a situation, not only in the United States but in the world where the new rounds of regulation and capital rules for banks have made banking more expensive for everybody.

So, you kind of have a situation where bank fees don’t even make any sense for a lot of other kind of regular everyday consumers. And so, these types of services become increasingly important just because the banks don’t even want to provide these services or can’t on the same timeframe. So, it’s both a demographic and then just like a cross-benefit that’s driving this business today.

Unidentified Analyst

Is it a flat fee that you are charging or is it percentage?

Larry Angelilli

It’s like a graduated fee. So, our lowest is we have our product called 5 for 50. If you want to send $50 or less, we will charge $5. And then it goes up by like major increments. So, it’s not like basis points, it’s like $5 for $50, and then it goes to like $9.

Eric Dutcher

Yes, it will depend on each market and generally, what there is, is there is a band of how much you are sending and within that band, you either pay a fixed fee. And usually on the lower end, it’s going to be a fixed fee. And when you get into the higher bands of sending over $1,000 or sending over $2,000, then it becomes a percentage of that phase. But generally it’s a fixed fee.

Larry Angelilli

Yes, and it will vary greatly depending on the region of the world that you want to send the money. So, we are in 197 countries, which means we are in – subs here in Africa, we are in sections of Asia that are difficult to do business in or have established banking. And so, some of those countries, the fees might be higher. And then, sending money within the United States or U.S. to Canada might be less expensive. So, really, it’s a function of two things. The amount that you are sending within bands and then what we call the corridor, in which you are sending to, and then there is really almost an infinite number of pricing combinations that you might have depending on where you are sending to.

Unidentified Analyst

And just the average transaction size?

Eric Dutcher

On a global basis, it’s a little over $300, on a typical money transfer.

Larry Angelilli

Yes, and I think that kind of goes through demographic question to our average transfer, between $300 to $350.

Unidentified Analyst

(inaudible)

Larry Angelilli

What is the difference?

Unidentified Analyst

(inaudible)

Larry Angelilli

Yeah the primary factor in for example on Q3, $1 per share, this is more on a EPS level but the 100, basically we took the 70 million of the 100 million payment that we did for the MDPA, so that’s the large difference is here we took to 30 million provision earlier in the year, so a 100 million is impacting this year. And that’s really the large difference.

Eric Dutcher

But there has been a lot of factors, you know one of the issues that we, I think we’re hopefully getting closer to the end of but we keep, we’ve had a lot of transactions that we’ve recapitalized the company. And so, you know there is a distinction between whether the core operating cash flows of the company and then what are these, one offer non-recurring type items and so that’s where that distinction lies, so the settlement with the Justice Department was 70 million in the quarter, which for debt purposes was a reduction of EBITDA and that’s where the biggest change is for this quarter. But in the past, if you look at a historically we’ve also adjusted EBITDA to reflect transaction costs associated with recapitalization or with some of these major transactions that we’ve done.

Larry Angelilli

It looks like we’re out of time.

Eric Dutcher

We have 2 minutes left, if anybody has one other question.

Larry Angelilli

Thank you very much for joining us.

Eric Dutcher

Thank you very much again.

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