Australian corporate credit is set to become a coveted category for European investors, who are seeking investments with better returns compared with European names that have been sidelined by investors because of the region’s debt crisis.
Wesfarmers, one of Australia’s largest retail chains, priced a €650 million 10-year deal with a 2.75% coupon rate on July 24 to take advantage of the narrowed swap rates to access cheaper funding sources. The proceeds were entirely swapped back to Australian dollars at a fixed coupon of around 5.8%, according to statement from the company’s website.
“We’ve seen a volatile market in Europe, and investors are looking for diversification in a solid credit issuer where you can get a new name, a new sector and new exposure,” said a London-based banker with knowledge of the deal. “Wesfarmers was a good example of that. Also the fact that they got a 10-year maturity shows that these investors were very comfortable with it. Usually we see issuances in the three to five years, so investors were aggressive in getting this credit.”
Orders exceeded the initial guidance of €500 million 10 minutes into the investor call, which eventually expanded to €4 billion in an hour. The deal closed 15 basis points (bp) tighter than planned to 110bp above the 10-year mid swap rate. That compares with its dollar-denominated bonds due 2016, which are trading at 135bp above euro swaps. Wesfarmers’ bonds tightened 10 basis points (bp) in initial trading, according to a debt capital markets banker with knowledge of the matter.
The solid orders may help open the gates for more Australian issuers to sell bonds in European currencies as a way to access funding at cheaper costs or diversify assets. Wesfarmers is rated ‘A-’ by Standard & Poor’s and ‘Baa1’ by Moody’s. RBS, Société Genérale, BNP Paribas and Deutsche Bank were bookrunners on the deal.
“The Australian market has certainly offered high quality issuers access to high quality transactions, which in 2012, have been primarily targeted at retail investors,” said Andrew MacGonigal, Nomura’s head of debt origination for Australia, in a reply to an email sent by Asiamoney PLUS. “We expect Australian borrowers to continue to tap this market, however those with a significant enough borrowing requirement will still consider offshore markets such as USD, euro, yen and sterling. I would expect that issuers will look at opportunities if the pricing is attractive compared to other markets.”
Measures to stimulate growth in Europe, including bond-buyback programmes and liquidity injections into the region’s banks, have given European investors more liquidity to mobilise, and Australia is becoming viewed more favourably than European names, said another debt capital markets banker based in Hong Kong.
“European investors have more liquidity because of the QE-style measures, which have also given banks access to money. They need a place to invest, and credit that is solid and has a high grade is something they love.”
“Australia is being seen more and more as a resilient economy to invest in right now, so I’m sure there are more names that could tap the market if they desired,” added Chris Walter, a Sydney-based credit strategist at Westpac. “We don’t have the same issues in Australia as we are seeing in Europe. That said, we continue to field investor questions about the perceived housing bubble.”
Australian issuance in the euro market comes as companies have faced difficulty in accessing funding of a similar scale back at home.
“Capacity constraints in terms of size and tenor experienced in the Australian corporate bond market has resulted in them looking for alternatives in terms of the deeper offshore capital markets including US 144a and the euro bond market,” said Vicky Melbourne, a Sydney-based credit analyst at Fitch Ratings. “A lot of Australian corporates had relied on bank funding. However since the global financial crisis, when credit was tight, they have actively sought to diversify their funding sources to a variety of public and private markets. This is a credit positive.”
Australian corporations have also been deleveraging significantly, said Melbourne, adding that they have been tapping the equity markets more to pay down debt.
Only two Australian companies have tapped the European currency bond market so far this year. Telstra Corp issued a €1 billion, 10-year bond at 115 bp over mid swaps in March. BHP Billiton sold €2 billion in a two-tranche deal, with €1.25 billion due 2018 at 65bp more above the swap rate, and €750 million due 2024 and pricing 100bps over swaps in May. Telstra is rated ‘A’ at Standard & Poor’s and ‘A2’ at Moody’s. BHP has an ‘A+’ from Standard & Poor’s, while Moody’s has given the miner a ‘A1’ credit rating.
“The May issue was undertaken because the euro bond market offers us diversification from the US debt capital markets where, incidentally, we have stated our intention not to return until calendar year 2013,” said Antonios Papaspiropoulos, a Sydney-based media relations manager at BHP Billiton to Asiamoney PLUS. “The group does not finance itself from the banking market and the diversification strategy entails us to build a maturity curve over time with liquid benchmarks.”
Westpac's Walter believes that companies that are highly-rated and well-known in Europe have the best shot at garnering high interest from European investors.
“Companies like Woolworths, Amcor and Rio Tinto are well-known to European investors and they continue to generate very solid cash flows,” said Walter. Australian banks may also visit the euro-currency market too, said Nomura’s MacGonigal.