Euroweek Australia report: International debt capital markets

Euroweek, August 2013

Standfirst:  Australian issuers find receptive markets when they venture overseas, from 144a and jumbo euro deals to smaller opportunities in Swiss francs and sterling, and specialist markets like US private placements and term loan B. The big question: should they still need to go there if Australia’s own markets develop?

Australian issuers engage with a wide range of currencies and investor bases, from dollar and euro benchmarks to the US private placement and term loan B markets. But they are driven, ultimately, by what they can’t do at home.

As other articles in this report explain, capacity and tenor are improving in Australia. So what can’t be done in the domestic markets? “Despite developments, it’s still volume and tenor,” says Luke Gersbach, director, debt securities at Westpac. “That remains the domain of offshore markets. If you have an extremely large funding requirement the euro or US dollar market can provide tenors out to 10 years, with a favoured sweet spot for investors at 500 million in each currency. In the Aussie market at that tenor, you would need to be the right credit, and even then volume would be limited in comparison.”

The big banks, discussed in a separate chapter, are seasoned veterans of these issues, in dollars, euros, sterling and further afield, whether in mainstream senior debt or in covered bonds. Bigger corporate names are familiar internationally too: Telstra, for example, raised Eu1 billion in 10.5 year funding in March, building on long-standing relationships in that currency and tenor. Wesfarmers is another frequent issuer here, and more recently, SP Ausnet raised Eu500 million in a seven-year transaction in July, paying mid-swaps plus 95bps: “roughly in line with what its costs would have been in Australian dollars,” Gersbach says.

This year, many Australian borrowers have sought out Swiss franc funding, finding some familiarity in Swiss investor behaviour. “The theme in the Australian market of investors moving down the curve is evident in other markets as well, particularly Swiss francs,” says Paul Neumann, associate director at UBS. “Swiss investors are moving down the curve to pick up yield, but are still looking for issuers from jurisdictions that they understand, have stable political regimes and have good growth prospects. Australia is one of those places.” Boral, SP Ausnet and Amcor have all raised funds in Swiss francs recently, with UBS involved in each of them, Neumann says; Gersbach says Swiss francs make sense for deals up to Sfr 300 million in tenor up to seven years. Sterling, he says, supports deals up to £250 million, usually in 10 to 12 year duration.

“We are still seeing extremely strong support for Australian credits,” says Grant Bush, head of capital markets and treasury solutions at Deutsche Bank. “It is still very much a preferred jurisdiction. In Europe and the UK the strength of Australia’s economic performance is often the key driver, and diversification away from local exposures; in the US, it’s more a market that differentiates between domestic and offshore, and when they look at offshore jurisdictions Australia is still strongly preferred because of its fundamentals.”

Elsewhere in the world, National Australia Bank made its dim sum debut on May 31 with an RMB400 million two-year deal. The amount of money – equivalent to US$65.6 million – was not significant for a bank like NAB, but nevertheless it allowed the bank to make a strategic statement, showing the importance it places on the currency. NAB became the second Australian major to try the dim sum route after ANZ, which issued back in 2010. “We’re seeing more dialogue around NAB,” says Sean Henderson, head of debt capital markets for Australia at HSBC, a joint lead on the NAB deal alongside NAB’s own syndication team, “and as deregulation continues and global trade re-denominates, we expect interest in funding in the currency to grow further.”

While the banks tend to do the biggest outbound deals from Australia, in many respects the most vibrant part of the market for new international issuance is corporate. “One big change in the last two years has been the way corporates view their options for financing: which markets, what mix of currencies, should they do EMTNs, should they do private placements,” says Henderson. “This year you’ve seen SP Ausnet going to euros, you’ve seen yen and Hong Kong dollar placements for names like GPT, private placement issuance is becoming more relevant, and more corporates are looking at the US high yield and term loan B markets.”

Each of those markets helps to serve the parts of Australia that the homegrown market won’t reach: the unrated, or the sub-investment grade. There is no high yield market in Australia, so rated issuers in that area have to trek across the Pacific if they want an alternative to domestic lending. “The high yield market is strong, with a robust pipeline of transactions following a period what saw some cash outflows from high yield funds,” says Steve Black in debt capital markets at Credit Suisse. “That has now stabilised and even reversed. The asset class has benefited from central bank policies designed to force investors into riskier assets.” Mining names dominate Australian issuance in US high yield, because they work in dollars and therefore don’t need to swap proceeds back again: Fortescue Metals, for example, has been a prolific issuer in US high yield.

Australia also has its share of successes in US private placements, such as CSL and Orica, and in the term loan B market, such as Pact Group Industries, discussed in more detail in other chapters.

At home, Australian bankers tend to hope that their home market will evolve sufficiently to provide what borrowers need without leaving the country or the currency; doing so would save them from cross-currency swap costs, among other things. But progress is never as fast there as one would hope. At least, in the meantime, when Australians do have to go overseas, they find a willing audience to buy their paper.