Euroweek Australia report: US private placements

Euroweek, August 2013 

Standfirst: The US private placement market has long shown enthusiasm for Australian borrowers, and presents them with opportunities they can’t get at home: long-dated funding without even the need for a credit rating. But will high swap costs and greater depth in the domestic Australian markets reduce their allure? By Chris Wright

You are an Australian corporate and you need long-term funding. The Australian domestic bond market won’t provide it, and you don’t have the rating or the following to do a senior deal in the US or Europe. What do you do? You follow an increasingly well-trodden path to the US private placement market.

“Australia has historically been favourably disposed towards US PPs for a number of reasons,” says Sean Henderson, head of debt capital markets for Australia for HSBC. “Documentation is much easier than public 144a issuance, being more loan-style in nature. Also this market doesn’t require large benchmark issue sizes, and offers long-dated funding that can be spread across a range of tranches, reducing refinancing risks.” And issuers don’t need to have public ratings to access it. “All of these add a relatively easy option for borrowers without public bond and ratings platforms, and it has often been the market of choice for Australian credits with more modest financing needs.”

Ron Ross, executive director of debt capital markets at ANZ, likes to champion the domestic debt markets, but recognises there are needs the home market can’t meet. “Corporates head overseas for several reasons: usually for tenor, which is where the US PP market kicks in,” he says. “Last year we did a 30-year bond there. No other market is going to go that long.” In particular, for unrated corporates, it can be the only option. “Only the US PP market is going to allow that,” he says.

So what are the arguments against? “One of the main challenges issuers face in this market is the use of maintenance covenants,” says Henderson. (Maintenance covenants are more onerous than incurrence covenants, which commonly apply in markets such as high yield and term loan B). “You’ve got to adhere to them at all times, and that doesn’t work for all businesses.”

Then there’s cost: both longer-dated funding and, for most Australians, the need for cross-currency swaps to bring funds back to Australian dollars. “The US private placement market is definitely there for project and infrastructure borrowers, particularly those who are more corporate-looking,” says John Chauvel, head of debt capital markets for Westpac. “The only problem is that most non-resource-related borrowers need the cross-currency swap. I’m always optimistic the domestic market can step up and meet that need in Australian dollars.”

But can it? Gary Blix, head of corporate origination at Westpac, says US PPs have a competitive advantage over domestic issuance for 10-years plus. “But anywhere between three and seven years, the majority of transactions, if not all, will be done domestically.” Every borrower will have a different point at which one market becomes more cost-effective than the other. In theory, though, as tenors develop in the domestic market – and they do appear to be developing, very gradually – the appeal of going to the US for a placement will dim, particularly if banks continue to rein in their swap lines and make them more expensive.

Where the US market makes a great deal of sense is for borrowers who need dollars anyway. Consequently, mainstays of this market tend to be in the resources sector where the dollar is the functional currency anyway, eliminating any need for the swap.

There’s certainly no shortage of enthusiasm from the investor side in the US. “US investors are keen on Australian corporates,” Henderson says. “They offer a good mix of good corporate governance, access to a developed economy with low sovereign debt levels, a robust legal system and diversity from their existing portfolio.” In 2011, for example, Australia and New Zealand made up 16% of the entire US$46.5 billion US private placement market, according to data from JP Morgan. Borrowers in that market in recent years have included CSL, Melbourne Airport, Envestra, Metcash and New Zealand’s Transpower.

Two typical transactions this year demonstrate what these deals normally look like: split into a range of small, long-dated tranches, with reasonably modest coupons. CSL’s US$500 million placement on March 27, for example, was split between five, seven, 10 and 12-year bullets, with coupons from 2.07% to 3.32%.

Then Orica’s US$600 million placement on August 10 was split between 10, 12, 15 and 20 year notes with Bank of America, Westpac, JP Morgan and ANZ as agents. Coupons on the tranches ranged from 4.53% to 5.9%. Orica serves explosives and blasting systems to the mining and infrastructure markets, demonstrating once again the link the market historically has to resource-related sectors.

An appealing element of the US PP market is that it offers funding that fits the development of infrastructure, likely to be a theme for many years ahead in Australia. “We expect the US private placement market to have a very solid year. There is a lot of interest coming out of that market for infrastructure-style deals,” says Steve Lambert, executive general manager, global capital markets at National Australia Bank. “As we think about refinancing infrastructure post-construction, there will be an increasingly interesting market for Australian infrastructure borrowers in US private placements. Swaps are an issue, but borrowers can normally get around that.” And if the domestic market can’t provide an alternative, these credits are going to continue to cross the Pacific to find it.