panel discussion 2 The corporate market: rising to prominence n 2014, for the first time, the agenda for the KangaNews DCM Summit included a panel discussion on the Australian dollar corporate bond I market – an endorsement of the new-found relevance of this growing asset class. The beginning of 2014 has been more circumspect after two years of increased issuance and diversity, but market participants say the future is bright.

Panellists n Adrian David Senior Credit Analyst Macquarie Investment Management n Tim van Klaveren Executive Director and Head of Credit UBS Global Asset Management n Darryl Mutzelburg Chief Financial Officer Port of n Bob Sahota Head of Fixed Income Challenger n Erin Strang Group Treasurer Aurizon n Guy Wylie Treasurer Corporation

Moderator n Ron Ross Head of Capital Markets, ANZ

DOMESTIC DEVELOPMENT quite open to both overseas and Australian markets, but the Australian market caught our attention. There was a lot of Ross What have issuers achieved in terms of activity from July to September in the triple-B range. What we transactions in the domestic market over the saw was a series of triple-B issuers being able to achieve longer past 12 months? tenors at a reasonable size. We followed suit. We ended up with n Strang For context, Aurizon is Australia’s largest rail-freight a A$525 million (US$492.5 million), seven-year transaction – haulier by tonnes pulled. We are triple-B-plus rated and were the largest single tranche transaction for a triple-B range issuer. listed on the Australian Stock Exchange in late 2010. Aurizon Looking to the future, we expect to continue to diversify Network, the issuing entity, is a wholly owned subsidiary of our debt, lengthen tenor and retain flexibility for our company Aurizon Holdings. It owns, operates, manages and controls the at a reasonable cost. central coal network through 2,600 kilometres of n Mutzelburg Port of Brisbane was privatised in 2010 and track in the North of Queensland. It is a regulated asset and is the largest capital-city port in Australia, with a significant provides open access to rail operators. amount of land and diverse including bulk commodities. Last year we undertook a material review of our capital We have A$1.1 billion of debt, the majority of which came structure to make sure we had the appropriate structure going across as project finance from privatisation. We started turning forward. This also made us contemplate our long-term debt- that out into the capital markets when we placed US$550 management strategy in terms of diversification, tenor and million of debt in the US private placement (USPP) market in flexibility – all to be done at a reasonable cost. 2012 – A$100 million of which was in Australian dollars. In June 2013 we ended with debt held appropriately against In a diversity play we placed A$300 million into the our regulated asset, in line with a regulatory assumption of 55 domestic MTN market last year, which only leaves us with per cent debt to the regulated asset base. We then, alongside about A$300 million worth of bank debt on the books. We our bankers, decided to look at how to diversify. We were have a nice spread of markets and maturities now.

24|kanganews supplement may 2014 n Wylie Telstra Corporation (Telstra) is the largest issuer in the look to use our credit skills on a fundamental basis to work out AUD corporate bond market with about A$2.6 billion on issue whether we want to take the initial yield for the credit risk. To in the public markets at present. We issued a five-year, A$500 broaden out the triple-B area of issuance it is very important million bond in November 2013 which priced at 88 basis points for us to have good Australian corporates issue into the over the swap rate. At the time this was clearly the best option domestic market. for us from a price, volume and execution risk perspective. It is interesting that Australia has one of the largest sales With a long-term debt portfolio of around A$15 billion pools in terms of superannuation, with A$1.7 trillion in assets equivalent we have a lot of options in terms of the markets under management, yet we have one of the least-developed we access. We are keen to discuss how we can do more in the corporate bond markets in the world when you look at that Australian dollar market and how we can extend tenor into the savings pool. David Murray recently said the Australian market seven- to 10-year range. The Australian dollar is where Telstra should be A$400 billion in size, so we have a long way to go. has a strong focus and we see it as a strategically important and But it all bodes well for issuers and investors alike to see if we growing market moving forward. can work out deals to be issued in the Australian market.

Ross From the investor side, what did you OFFSHORE OPTIONS see evolve last year and what did you see as a positive backdrop for the Australian dollar Ross Offshore markets also remain market? competitive. With this in mind, how n David Overall, 2013 was pleasing with a broad range of important is it for Australian corporates to issuers across many different sectors, a range of listed and maintain a presence in the domestic market? unlisted issuers and corporates issuing secured and unsecured n Strang It is very important. We are an Australian dollar debt. From that perspective it gives us more optionality in being company so there is always a cost element to offshore issuance. able to reflect our views. We don’t have to participate in all the We have around A$2 billion in debt within Aurizon Network, deals when there is such a large range, but this of itself gives A$525 million of which is now funded by the Australian dollar the ability to differentiate ourselves. debt capital market and the remainder by bank debt. This Van Klaveren I agree. In terms of diversification, we saw an suggests we need to implement more diversification. But even increase in both the number and different types of issuers and as we are looking offshore we would still look to build a curve investors which actively participated in the Australian corporate in Australia. bond market during 2013. We also experienced an increase in the level of interest from offshore – with regard to both issuers Ross The USPP market has been around for and investors. some time and there are specific reasons

“We would welcome the opportunity to push the boundaries and do longer tenor – 10 years or more. It is partially up to the investors – we need to work as a team to persuade the superannuation industry to recognise the value of an increased allocation to fixed interest.”

Guy Wylie Telstra Corporation

In terms of tenor, a number of seven-year deals printed. why Australian corporates would go to that But, ultimately, the market needs to extend to 10-year term. market – for instance for extended tenor, In terms of book size, in the past there had always been because they are unrated, or because questions about the potential volume that a triple-B issuer they are natural US dollar funders. How could achieve. But we are seeing a lot more interest for primary would issuers broadly compare issuance triple-B issuers. In the recent Airport deal [for A$400 prospects in the two markets from their own million, priced in March 2014], for instance, we saw a book in experiences? excess of A$700 million. n Mutzelburg When we went to the USPP market in 2012, n Sahota Challenger is a credit investor so triple-B issuance, the domestic MTN market wasn’t there for triple-B corporates especially at 7-10 year tenor, is a positive development given we so it didn’t feature as one of our options. The major difference are writing record numbers of lifetime annuity liabilities. We between USPP and Australian domestic MTN is tenor, so it is

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Marks of the covenants An issue which has consistently bubbled under the surface in the Australian dollar market is covenants – specifically a concern on the part of local investors that some issuers were favouring other markets via stronger packages. The discussion nowadays seems to be much more open.

n Ross Covenants can be We are not concerned about bank debt facilities are with That is due to the quality frustrating for both issuers what we offer in terms of a small group, versus a bond of the rating and name. and investors – specifically our metrics – which are issue which could be with if they see inconsistencies fairly modest and to which 40 or more investors. I think Wylie We issue under a in terms of what the we have no intention of it’s appropriate, with long- standard negative pledge domestic market expects ever getting anywhere term debt arrangements in all markets. In domestic compared with the offshore near. If covenants provide with multiple investors and issues, where we look to do alternative. How do issuers investors some comfort, at strong credit equity, not to A$500 million (US$469.0 set themselves up from a that will help with pricing. have to provide covenants. million) size transactions covenants standpoint? at a time, we like to have a Strang Aurizon has a Sahota It’s a case-by-case lot of liquidity in the deals. Mutzelburg Investors different position because we thing. If issuers want to issue Covenants give protection and generally expect to get the have got a view to accessing 7-10 year debt they have low can be seen as a response same kinds of covenants overseas markets and hurdles – they must have very to lack of liquidity in a deal. as other lenders have. we don’t want to create a stable businesses, and are precedent with covenants in issuing into a market which has When we push the banks which Port of Brisbane is a highly any debt capital market. the same sorts of covenants are arranging our deals, one of diverse and stable business that are being given to the the key things we say is that the so we don’t expect to have We successfully issued [in banking group. We expect a deal has to have good turnover volatility in our returns Australia] with no covenants, minimal level of covenants to in secondary. Our investors which would threaten our and unsecured, which is come with a capital markets have to be able to come in metrics. Offering low-level representative of what you issue. It protects our stake and and out of the bonds and we covenants doesn’t restrain see in the US dollar, euro and our stakeholders’ interests, have to see good turnover. the business but we need sterling markets. We are a so it is entirely appropriate to be conscious that it is highly rated regulated business to ask for covenants. The difference between the hard to contemplate what and we talked investors Australian dollar market our business requirements through our credit profile. For a single-A borrower like compared to euro issuance will be in 10 years’ time. So Telstra Corporation (Telstra), or 144As is turnover. Telstra’s there needs to be flexibility The reality is that the debt it’s entirely appropriate recent Australian issue in the agreed covenants. covenants you have in your not to have covenants. which priced at 88 basis points over swap traded in to around 68 basis points. But “We are not concerned about what we understand it is relatively we offer in terms of our metrics – illiquid and hard to get a price. which are fairly modest and to which Covenants are but one of we have no intention of ever getting the reasons we like to issue anywhere near. If covenants provide benchmark size – to start investors some comfort, that will driving liquidity through our notes and help get a help with pricing.” better secondary curve. Darryl Mutzelbur g Port of Brisb ane This helps everyone.

encouraging to see the Australian dollar market start to go out market but reliability is an issue for domestic MTN – one along the curve. It proved itself at seven years last year but has concern last year was whether the market would respond yet to establish itself in the 10-year space. USPP can go out to appropriately at the time we issued. It did eventually behave, 15 years. Our observation is that there seems to be a pricing and has behaved since, but it would be interesting to see how advantage on Australian domestic MTNs versus USPPs. future shocks affect the market. From a legal point of view the documentation seems to be quite similar, although information memoranda are much Ross Telstra is well versed in looking at more comprehensive for USPP deals than for domestic offshore markets, typically in size. Guy Wylie, MTNs. Currency issues are more complex with the USPP how much of an impact is the cross-currency

26|kanganews supplement may 2014 “I would ask treasurers to test it out with us and see if we’re interested in the tenor and volume they are looking for. The first deal might not have the tenor corporates are after but if they keep coming back they are likely to see subsequent deals supported with much more volume.”

Bob Sahota Challenger

swap having, and how much is it becoming Australian dollar cash flows. If the company generates foreign a deterrent? I assume you have an inherent cash flows it makes sense to issue offshore. However, with the desire for more depth and longer tenor in increased costs associated with cross-currency swaps, if issuers the domestic market? are borrowing offshore and investors are investing in foreign- n Wylie We have about A$12.25 billion of debt on issue in currency bonds and swapping these bonds back into Australian international markets and we usually issue 10-year tenors in dollars, the parties which benefit the most are the banks which order to maintain an average duration of about four to five take both sides of the swap trade. years. When we do a 10-year deal we have to fully swap it back n Sahota All our liabilities are in Australian dollars so we to AUD at inception. Cross-currency swaps are expensive, would like to support the Australian corporate market. It is a absorb a lot of bank credit capacity and can also generate case of relative value, so if certain markets offshore are more volatility in P&L under IFRS [international financial reporting competitive than ours on a swapped-back basis, that’s a wider standards] accounting rules – despite being cash-flow matched. economic decision for a treasurer to make. As an example, when corporates do a cross-currency But I would ask treasurers to test it out with us and see if swap we have to do a credit-valuation adjustment on the we’re interested in the tenor and volume they are looking for. swap depending on each swap counterparty’s credit margin That is how the market develops. Initially the first deal might compared to ours. This is an additional layer of complexity and not have the tenor corporates are after but if they keep coming a potential source of volatility in our financial results. back they are likely to see subsequent deals supported with As a company with predominately Australian dollar much more volume. revenues, we would welcome the opportunity to push the boundaries and do longer tenor – 10-years or more. It is partly DEPTH AND BREADTH up to the investors – we need to work as a team to persuade the superannuation industry to recognise the value of an increased Ross What do panellists estimate to allocation to fixed interest in their members’ investment be market depth for a triple-B issuer in portfolios. Australia? We have seen the government come out and do long-dated n David Perth Airport is a useful starting point. It came back issuance and if we could get it done ourselves in size – at least to the market for the first time last year but the timing wasn’t A$500 million – with confidence it would be favourable. great – it did A$150 million and pricing was quite light. But We also hope investors are willing to come down the curve. the issuer came again this year with a A$400 million deal Some of our triple-B borrowers offer attractive pricing but the which had a book of over A$700 million and also managed to A-rated credits also need to be considered. tighten pricing. n Van Klaveren We prefer to see local corporates issue This is a useful starting point to show that while the first in Australian dollars, especially if their business generates issue might not be substantial the follow ups tend to be. The

“Offshore corporates which have come into the market are in some respects filling a niche which the market doesn’t already have. They haven’t consumed any demand which could have gone to Australian corporates.”

Adrian D avid Macquarie Investment Management

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benefit to Perth Airport is the follow-on roadshow gave the opportunity to reflect a credit view through that name. I investor community an opportunity to meet with the issuer and don’t think it has happened on purpose, but the issuers which form a view about how its capital funding plan is going. A$500 have come in have filled a niche in the market – they haven’t million should be a reasonable target for a single deal for a consumed any demand which could have gone to Australian triple-B borrower – the market is capable of digesting this. corporates.

Ross Does Australia need a deeper corporate Ross How do you see a more developed bond market? market here in 10 years? n Van Klaveren In times of stress it’s usually local investors n David The market made a big step last year, going from what which step up and fund local corporates. We witnessed this was a five-year market a few years ago to seven years. We’re during the financial crisis in Europe, when European retail on the right path for 10-year tenor but it is still quite a step to investors stepped up and bought European corporate bonds squeeze an extra three years out. when banks reduced lending and borrowing costs rose Naturally there will be more demand for a seven-year than substantially. Most companies default purely because they a 10-year so, from a corporate treasury perspective, borrowers cannot refinance rather than because they can’t pay a coupon. have to decide whether they are happy to take less volume to Having a local investor base to support you in times of stress is get more tenor. In addition to pricing ramifications, the issue very important. of market capacity needs to be considered. n Van Klaveren Within the next 12 months we will see more Ross As the Australian dollar market has 10- to 12-year issuance. Even as an investor I’m a bit baffled developed over time it has been attractive why we don’t have an established 10-year market here when for a lot of offshore borrowers, in recent other markets go out to 30 years. Treasuries are being issued years including corporate activity. Does the longer and state governments are issuing longer, so naturally emergence of offshore borrowers coming we should just have a corporate market which could go out to to Australia take away investor appetite for 10 years at least. domestic Australian dollar credit? n Sahota There are a couple of massive headwinds to n David No. There is strong investor demand for corporates. developing a longer-term market in this country. The first The market is still financially rich so there is a logical level of is asset consultants’ infatuation with equity markets – that is demand for corporates. Offshore corporates which have come not going away any time soon as Australia has the highest into the market are in some respects filling a niche which the allocation to equities in the developed world. market doesn’t already have. Australia doesn’t have any A-rated Secondly, the idea that you need liquidity from the get-go oil and gas majors such as BP, and the oil and gas companies is a hurdle. A lot of my peers in the fixed-income landscape we do have tend to go offshore because they like to match their need to borrow liquid issues, such that if a 30-90 redemption revenue base. The same applies for Holcim: this market doesn’t comes through – ie the asset consultant wants to take it from have any cement companies, or any capital goods companies fixed income and put it into equities because the market is such as ABB. looking attractive – it impedes the idea that you can go into The only mining and metals company you can buy in a 10-, 12- or 15-year bond because liquidity isn’t there. The Australian dollars is BHP Billiton and there is not much reason Australian issuers demand a premium for higher tenor

“Within the next 12 months we will see more 10- to 12- year issuance. Even as an investor I’m a bit baffled why we don’t have an established 10-year market here when other markets go out to 30 years.”

Tim van Klaveren UBS Glob al A sset Management

28|kanganews supplement may 2014 is because of the illiquidity compared with offshore markets. n Strang We had three leads, and unusually we included This is also why there has been a disconnect between what the investment banks – which reflects the fact that we are looking issuers want to issue and what investors want to buy. That’s across multiple markets. We also recognised that we needed what we all need to come up with to change the landscape and a major international player. It’s important to understand that break the obstacles. ongoing liquidity is needed in the market, which the banks have to provide. How the banks work alongside an issuer is crucial, Ross Tim van Klaveren, you recently particularly for a larger-sized transaction for which we can mentioned issuers should sometimes benefit from practical and realistic feedback. think about dual-tranches including fixed n Wylie We always juggle whether to appoint three or four lead or floating rate. Can we touch on why this managers. When we choose banks to lead the deals we also is attractive to you as an investor and the look at their capacity to take switches, given we know investors benefits you see for issuers? which come into our primary deals want the banks to have n Van Klaveren As a peripheral market we need to be more some switch capacity. innovative in offering a solution to issuers. There are not a lot The next thing that is important for Telstra is the Asian of Australian corporates, apart from Telstra, which are happy distribution capacity of the banks. We will support, on to have A$1 billion of debt mature in any one year. Triple-B allocation, definitively Australian investors but we also like to issuers could get better volume if they came to market with see the new liquidity pockets. a five- and 10-year dual tranche, or even seven-year with a Our last domestic deal saw very good sovereign wealth fund three-year floating-rate tranche. Across our portfolios there are demand coming out of Malaysia and Hong Kong. These are investors which have different maturity preferences, including the investors which will drive the multi-year market – they can some investors who just want floating-rate exposure. come in size and also go right along the curve. The ability for the banks to do switches and provide Asian access is important Ross Australian corporate deals tend to for us. have a range in terms of the number of lead managers involved. While some borrowers Ross Any time an Australian deal gets prefer to use the big four banks on each of launched a percentage – between 10 and 30 their deals, others advocate the use of just per cent – will be sold offshore, with Asian two leads given the AUD market is smaller private-bank money taking an active part. than some offshore jurisdictions. What are What are Australian domestic investors’ the panellists thoughts about this? views on Asian participation? n Sahota From an investor perspective we do not mind how n Van Klaveren It’s positive – the broader the mix and type many lead managers are involved on a deal – the more, the of investors that are in a transaction the greater diversity there merrier. What we don’t want is to buy then the next day find is, and better liquidity will prevail. If all a borrower’s bonds are out there are no limits in the intermediary universe so the held by one type of investor and they all try to exit at one point, bonds can’t be traded. Whether there are more or fewer leads there is no liquidity. Having different types of investors in a is irrelevant as long as there are limits to provide a secondary transaction can also open up relative-value opportunities for market and a bid for those bonds. other investors. •

“How the banks work alongside an issuer is crucial, particularly for a larger-sized transaction for which we can benefit from practical and realistic feedback.”

Erin Str ang A urizon

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