Feature

Spreading the net Issuance by Australian corporates into offshore markets has been relatively subdued in the first months of 2013. Intermediaries say this is driven by supply rather than demand factors. In fact, global markets remain receptive to Australian credit – so much so that borrowers may be able to diversify their issuance avenues when they have a need for funding.

By Samantha Hodge

ntermediaries ascribe the relatively measured first quarter based on two notable factors: larger deals, but fewer of of the year for Australian corporates in offshore markets them. USPP bankers say there is no sign of the option losing primarily to supply rather than demand factors. In fact, attractiveness for the segment of Australian corporates which has with three well-subscribed euro deals already in the books traditionally received a good response there (see box on p14). by the end of April, some bankers believe global credit markets are sufficiently robust that 2013 might continue Market strength to see additional diversification outside US dollar issuance ead managers on the public deals say all received a Iby Australian names. positive response. The transaction, for instance, By the end of April 2013 there had been four public Lattracted over 320 accounts to a €5 billion-plus book offshore corporate deals from , issued by Telstra according to data from Deutsche Bank, which led the trade Corporation (Telstra), , Amcor and alongside BNP Paribas, J.P.Morgan and Lloyds TSB. (Origin). Total public market deal volume was noticeably down Telstra’s deal was in the market at the same time as a euro on the previous year’s aggregate (see chart on facing page), issue from AT&T, and while the latter closed at €1.25 billion though the 2012 number was significantly inflated by a US$5.25 Telstra achieved the same margin for six months of extra billion transaction from BHP Billiton. duration. Grant Bush, head of capital markets and treasury In 2013 Telstra opened the door on March 6 with its 10.5- solutions (CMTS) at Deutsche Bank in Sydney, tells KangaNews year, €1 billion (US$1.31 billion) trade priced at 80 basis points Telstra’s book was actually bigger than that for AT&T. over mid-swap. Second mover, on March 14, was Wesfarmers’ Bush says the overwhelming investor support for Telstra’s five-year US$750 million 144A issued at 100 basis points over US deal demonstrates the depth of demand available in the Treasuries. This was followed on March 15 by Amcor’s 10-year European capital market – at competitive pricing. “Demand €300 million transaction, with pricing of 105 basis points over for Australian credits and defensive credits remains very robust mid-swap. Lastly, on April 17 Origin Energy (Origin) priced a 7.5- and Australia is a preferred jurisdiction for investment for both year €750 million deal at 130 basis points over mid-swap. European and US investors,” he comments. During the same period the US private placement (USPP) A similar story emerged for Origin’s euro transaction, which market actually grew year-on-year in Australian-origing volume leads say attracted over 125 accounts from both and

“While things are improving, the margin level Australian investors seem to require is higher than offshore. There is also more liquidity in Europe and the US.”

Graham Vavasseur Amcor

12|kanganews may 2013 – including 35 per cent from , 28 per cent from australian corporates’ offshore public issuance France and 11 per cent from the UK. The majority was taken by currency, jan 1 – apr 30 by fund managers, who accounted for 83 per cent. CAD CHF USD EUR Andrew Edwards-Parton, executive director at Goldman

.) 9,000 Sachs Australia in Sydney, a joint lead on the Origin deal with 268 8,000 Barclays, says the transaction followed a well-received roadshow 412 7,000 6,117 that visited the UK, Holland, France and Germany with a high v x. equi o 6,000 conversion rate among the 75 investors the borrower met. 5,000 Edwards-Parton says the Origin distribution is broadly 4,000 3,719 representative of the key jurisdictions for euro demand. A $ M appr 3,000 779 However, he adds: “The strength of demand seen from high- 2,000 2,588 ume ( quality investors in France and Germany skewed distribution 1,000 1,247

vol 759 marginally in their direction when we may typically see a greater 0 proportion of transactions placed into the UK. More broadly, 2011 2012 2013 while a reduction in participation from peripheral investors Source: KangaNews April 30 2013 might be expected, we continued to see activity from Italy, and Portugal in the deal.” In fact, some leads identify an increasing trend for cross- According to Edwards-Parton an issuer like Origin does border investment. Kate Stewart, Sydney-based managing not attract a different investor base in Europe compared with director and head of debt capital markets at BNP Paribas – also an even more familiar name like Telstra. In fact, the European a joint lead for Amcor with Deutsche Bank – says there is greater investor base is open to looking at a range of Australian credits. participation being seen in the US dollar market by European and “An increasing number of European investors are seeing Asian investors than has historically been the case. Australia as a great diversification play from Eurozone Stewart tells KangaNews: “You see more investors and a exposure, especially as the sharp reduction in US-origin more diverse investor base. Also, issuers that are able to look issuance into Europe is providing few alternatives,” comments at a range of market options – such as Telstra and Amcor Edwards-Parton. “The Origin deal attracted some of the – demonstrate to investors they will go to the market which largest and highest-quality investors in Europe and we would provides the most competitive pricing. They are not beholden expect other Australian issuers, with the appropriate level of to one market, and that makes a difference.” investment in investor relations, to achieve similar distribution.” Others are not convinced cross-border investment is more than a marginal dynamic. For instance, Brad Peel, director CMTS Cross-border participation at Deutsche Bank in Sydney, believes cross-border investment he US 144A market, while quiet so far this year, between the euro and US dollar has little consequence in terms continues to be available for Australian issuers, too. of relative pricing or liquidity. He comments: “The speed of TNatalie Vanstone, managing director debt capital execution is still high and European investors continue to be markets at J.P.Morgan in Sydney – which was also a joint lead mainly looking for euro assets. We may see some increase where on Wesfarmers’ 144A with Bank of America Merrill Lynch, they see a pricing arbitrage but is happening so quickly – books Barclays and Goldman Sachs – says the strength and breadth are only open a few hours so it is difficult to participate in an of the order book for Wesfarmers’ US dollar deal was a Australian name if it is not front-of-mind.” highlight. The company’s success was assisted by the involvement Currency diversity of accounts outside the US: its leads say 20 per cent of the ne thing intermediaries agree on is that – despite recent book came from Europe and Asia. “Wesfarmers has a good renewed uncertainty stemming from the situation in following, domestically and in Europe as well as in the US. OCyprus – a wider range of currency markets, including We saw crossover with European accounts also buying the euros, are offering consistent execution opportunities in issue in US dollars,” Vanstone confirms. 2013. Vanstone suggests that although clients should monitor

“We expect to be in different markets, driven largely by the all-up price-after-swap outcome and diversification of investors rather than by currency diversification as objectives.”

Cliff Davis Tels tra Corporation

13 Feature

USPP standing up for volume While public market offshore corporate issuance shows signs of growing currency diversity, the US private placement (USPP) option continues to offer the best combination of pricing and tenor for many Australian borrowers. While deal flow from Australia (US$205.7 million) 2017 Campbell tells KangaNews: James Waddell, director, capital to the USPP market has been maturity, which priced on “Market volumes were down markets origination at National slower so far in 2013 – with November 5 2012 at 175 basis around 30 per cent year-on-year Australia Bank (NAB) in Sydney, four deals priced to mid-April points over swap. That bond at the time, and we were able to and lead on the GPT deal, says it compared with six in the same was marked at 151 basis points launch the first Australian USPP is the extended tenor available in time period in 2012 and nine over swap on Yieldbroker of the year while others were still USPP format which continues to in 2011 – larger average deal ratesheets on the day the in preparation mode.” be the key attractor for issuers. sizes mean this year’s volume is issuer’s new USPP priced. “GPT got competitive pricing and up on that from the equivalent Although CSL’s USPP is close was able to spread its maturity period in 2012 (see chart on Oversubscription to a volume level which in the risk and achieve long-term facing page). Lead managers on 2013 past required visiting public funding, so it ticks all the boxes.” USPP deals say they were markets, large USPP deal sizes USPP pricing, even swapped well received by investors. Ian are becoming more common. This is particularly valuable for a back to Australian dollars, Campbell, capital markets Brookfield Rail also sold a subset of issuers that are yet to remains attractive. For instance, origination director at Citi in US$700 million USPP in March see the full benefits of domestic GPT Group (GPT) priced its Sydney, says the US$500 this year, for instance. market development. Waddell inaugural USPP issue on March million, four-tranche USPP adds: “The domestic market is 19, selling US$150 million of 12- transaction his bank led for However, Campbell points out a compelling option for rated year notes and US$100 million CSL in March was supported bigger deals are likely only for borrowers. But the volume of 15-year notes at a combined by strong demand, which certain names and industries. available in long tenor for triple-B margin of 170 basis points over culminated in a US$2.2 billion “It remains a market that borrowers is not great.” bank bill swap rate (BBSW) order book. He adds that the appreciates companies with once converted back to AUD, issuer’s timing was helpful, unique features – such as some With greater volume available in according to the issuer. thanks to a recent upgrade to its of Australia’s utility and energy USPP format, some borrowers NAIC rating and the relative lack companies, especially those which might in the past have GPT’s most recent domestic of competing USPP issuance at with reasonable market share,” been forced out into the public deal was a A$200 million the time. he explains. market are able to continue issuing in private format.

Sam Novellini, associate director “If U.S. Treasury rates fall and of debt securities, debt capital investors set minimum yield targets, markets at Institutional it means widening spreads. But if U.S. Bank in Sydney – a lead on the GPT deal – agrees that issuers Treasury yields rise, spreads in the U.S. are still attracted to the USPP market will become more competitive.” market by the greater deal James Waddell Na tional A ustralia Bank flexibility offered relative to the

potential volatility patches there is strong, consistent demand in Peel agrees a shift is possible, especially given the increasing both US dollars and euros. burden involved in US dollar issuance. He explains: “Over the “The European and US investor bases are very comfortable past few years the 144A market has become more expensive with Australia and corporates find good access into both to access. Also, there is a very limited window of issuance – an markets, so selection comes down to price,” she comments. Australian corporate generating a results report on a six- “The volatility we have seen recently is a reminder of how monthly basis has just four or four-and-a-half months of the investors should continue to be opportunistic when accessing year to tap the market. This reduces flexibility.” the market.” Intermediaries are certainly not suggesting a wholesale In fact, Stewart suggests euros could well take a greater share shift to Europe from the US for Australian corporate issuance. of issuance from the Australian issuer base this year – thanks to There is no doubt the US remains the deepest and most issuer desire for diversification and the availability of additional consistent market available and will continue to swallow tenor in Europe. “In the euro market you can do seven-, eight- or up at least its fair share of Australian-origin activity. As a nine-year transactions, which is much less prevalent in the US. consequence, borrowers looking for mid-tenor deals may Issuers have flexibility to plug in maturity gaps which they don’t continue to find 144A issuance the best option even if they have access to in other markets,” she tells KangaNews. explore other markets.

14|kanganews may 2013 appetite the 144A market offers and the size and quality of the stricter conventions of the 144A their historical lows. This is order book.” environment. leading to increasing investor Preda explains that comparing the US and European readiness to consider credits Campbell adds the substantial and deals offering a greater markets requires a nuanced approach individual to each volume available in USPP yield. Novellini explains: “This is borrower. “It is not quite as simple as which market is better format can allow borrowers to expected to translate into more than the other. The choice of market for an issuer is driven by a stand back from public markets activity for triple-B band credits range of variables including industry sector, credit rating, pricing, until they need more regular or – NAIC-2s – on the basis larger debt issuance volumes. that they offer a stable credit tenor, funding diversification, volume and execution certainty, exposure for investors.” desired end currency of funding, and documentation.” “There is a period where a firm Vanstone is also not predicting improved conditions to lead will evolve to public markets USPP investors have recently a flood of borrowers away from the US in a search for diversity. like 144A, when its debt towers commented on the increasing “It comes down to borrowing needs. If a borrower is swapping begin to grow and it believes challenge of finding acceptable its funding options need to headline yields. But Waddell back to Australian dollars cost will always be a key driver, be opened up a bit more,” says the fact issuance has as well as quantum of debt,” she explains. “There is some Campbell explains. “But for continued even as US Treasury diversification desire among corporates but it is not as if any CSL this is the third time to the yields crater suggests spread Australian names are ‘capped out’ of the US market in terms of USPP market and in my view improvement could be a volume or capacity – it is down to price. There are also benefits it doesn’t need to go to public medium-term prospect for markets – a US$2.2 billion borrowers. “If US Treasury to an issuer building a curve in one market first before looking book on a US$500 million rates fall and investors set to diversify into a new one.” trade proves there is quite a bit minimum yield targets, it of capacity left for the firm.” means widening spreads. Euro specifics But if US Treasury yields rise, ndeed, with a relatively small cohort of deals so far in 2013 Moving spreads spreads in the US market will Leads say coupons on USPP become more competitive,” it is easy to interpret specific reasons why each of the three transactions are near, or at, he explains. Ieuro deals were directed to that market in particular. Graeme Vavasseur, vice president and group treasurer at Amcor in australian corporates’ uspp issuance , tells KangaNews the issuer’s decision to go to the (USD tranches only), jan 1 – apr 30 euro market was driven by pricing but also by the firm’s natural euro requirement. “In terms of our profile, that was the most 3,500 price-efficient market for us,” he says. “We have a natural 3,000 3,137 requirement for funding in euros to support our European 2,500 business – we are fortunate we don’t need to swap back into 2,000 other currencies.” 1,860

ume us$ M 1,500 1,560 Amcor has been a regular USPP borrower but Vavasseur vol 1,000 explains there was no need for the issuer to re-enter the market. 500 “We have done a lot of US dollar issuance and we’re relatively 0 2011 2012 2013 happy we have a good match against our US dollar asset base.

Source: KangaNews April 23 2013 We always consider all the global markets to see where we may have opportunity to issue into, but there was no other alternative market on this occasion.” For instance, Sylvia Preda, director and head of capital debt Meanwhile, Vavasseur says potential issuance in the markets at Barclays in Sydney – joint lead on the Wesfarmers Australian dollar market is also deemed problematic for Amcor and Origin transactions – explains that the US was clearly because it is harder to get longer tenor. He adds: “While things the best option for what Wesfarmers wanted to achieve this are improving, the margin level Australian investors seem to year. She reveals: “For Wesfarmers, pricing in US dollars was require is higher than offshore. There is also more liquidity in compelling in five years, along with the depth of investor Europe and the US.”

“An increasing number of European investors are seeing Australia as a great diversification play from Eurozone exposure, especially as the sharp reduction in US-origin issuance into Europe is providing few alternatives.”

Andrew Edw ards-Parton Goldman S achs

15 Feature

“The US and European capital markets have been in great shape all year. A number of issuers will be looking, whether this half or in the second half of the year, and there will be a good pipeline for Australian corporates in 2013.”

sylvia pred a b arclays

The euro also continues to work for corporate borrowers Telstra focuses on investor base rather than currency when looking for longer-dated issuance while the US continues it looks for diversification. Davis adds: “We would see a 144A to be the preeminent option for mid-curve deals. But Preda US dollar issue as tapping a largely different investor base tells KangaNews it is impossible to generalise because market from that of a US dollar Reg S, for instance – although they selection for issuers varies by industry sector, issuer and are both in the same currency. We expect to be in different credit rating – and the US market concentrates demand for a markets, driven largely by the all-up Australian dollar price-after- narrower range of tenors. swap outcome and diversification of investors rather than by Preda comments: “Demand for 144As is specifically currency diversification as objectives.” focused on five-, 10- or 30-year tenors, with rare opportunities for seven or 12 years in exceptional market conditions. Issuance prospects Meanwhile, the euro market consistently offers a menu of owever, Telstra’s borrowing requirement is forecast intermediate tenors between five and 10 years, as well as some to be “moderate” in the foreseeable future and this longer-dated appetite.” Hmirrors a pipeline for corporate offshore issuance Edwards-Parton agrees: “One advantage in Europe is the which is expected to remain solid rather than spectacular. There market is generally more flexible with tenor. So a name such is no expected change to the constrained overall funding task as Origin can pick maturities away from the norm to help fit the Australian corporate sector has developed in recent years maturity profiles to financing requirements.” Origin was also thanks to balance sheet bolstering. helped by the fact that it has become a relatively well-known “Although overall balance sheets are generally in a good name in the euro market, having now issued three times. position – so levels have to be attractive to prompt deals – the Telstra cites volatile swap markets for its decision to revisit US and European capital markets have been in great shape all the euro market for its issue in early March. The firm has for year,” Preda comments. “A number of issuers will be looking, some time been relatively unusual among major Australian whether this half or in the second half of the year, and there corporates as a heavier user of the euro, rather than the US will be a good pipeline for Australian corporates in 2013.” dollar, capital market. Nevertheless, it completed a sizeable US Peel agrees that the supply pipeline is constructive. “There deal in October last year. Cliff Davis, corporate treasurer at are a lot of investment-grade issuers to keep a close eye on, Telstra in Melbourne, says on this occasion the swap outcome that either feel constrained in the Australian market or have from the euro market gave a better landed cost of funds. needs exceeding what the Australian market can price for Looking ahead, Telstra has diversification very much on them. I expect to see a number of issuers to the euro or its funding agenda. Davis mentions the Swiss franc market as sterling market within the next two to six months,” he tells well as Japan, , Hong Kong, Singapore, and potentially KangaNews. the RMB market as a potential target for shorter maturities. And that issuance is likely to be spread between a number Swap developments are also adding to the growing appeal of destinations. Stewart explains: “Those corporates that have of domestic issuance. “Given we need Australian dollars and actively put in place a diversified funding strategy can pick and the cost of FX hedging is increasing in the post-financial choose their markets at the moment to ensure an optimal mix crisis environment we could expect the domestic market to between banks and capital markets. I think this year they will be feature,” Davis tells KangaNews. able to achieve those targets.” •

“There is some diversification desire among corporates but it is not as if any Australian names are ‘capped out’ of the US market in terms of volume or capacity. There are also benefits to an issuer building a curve in one market first before looking to diversify into a new market.”

Natalie Vanst one J.P.Morgan

16|kanganews may 2013