It has been a buoyant year for Australian issuers. MTN issuance out of Australia is up from 361 trades in 2000 to 568 deals so far in 2001. And volume is up by over a third on last year's levels. The key to this growth lies in Australia's traditionally strongest investor base - Asia. Australian issuers have historically enjoyed name recognition with Asian investors and have boasted a large lending and capital markets presence. They have also had the advantage of the overlap in time zone. And there is now an added ingredient to this Asian success for Australian issuers. It is no longer just yen that is driving business forward - the growth of Hong Kong dollar has spurred the Australian sector to greater issuance in 2001. Almost $1 billion more has been done in Hong Kong dollar by Australian issuers this year compared to last. And Australia is now the third largest issuer of Hong Kong dollar paper, in terms of volume, behind the UK and France. The MTN market has been a key source of funding for Westpac Banking Corp (Westpac) since 1996 and Anna D'Ercole, who works on funding at Westpac, has noticed the greater number of trades and the increase in the variety of structures over the past year. She says: "In the last 12 months we have printed a record number of trades. The growth of the Hong Kong dollar sector has been one of the major contributors to this." Hong Kong dollar now contributes nearly 15% of all Westpac's volume and with 37 trades done so far in 2001, it is its most frequently tapped currency. Chris Jones, head of the Euro-MTN desk at Deutsche Bank, believes that a change in the traditional thinking of Asian investors has been one of the key developments for the Australian sector. He says: "There seems to have been a realization amongst this investor base that there is no longer any need to wait until Europe opens for execution. There are a large number of quality financial institutions in the Asian time zone who are able to price and close deals at short notice." Also, the credit worthiness of many Australian issuers continues to place them high in the queue for these investors in comparison with other Asian credits. The big Australian banks are rated double-A, while the smaller regional banks have a single-A rating. The sovereign issuers all have foreign currency ratings of AA+. David Bailey advises borrowers on MTN opportunities in Salomon Smith Barney's (SSB) Australian office, and believes that these high ratings are advantageous in the Asian market. He says: "Demand for double-A and single-A credits in non-yen Asian currencies has increased in the last 12 months. The relative credit strengths of frequent Australian issuers provides an advantage both as a group as well as individually in comparison with many Asian credits." And while demand for yen paper from Australian banks has dipped in the second-half of 2001, issuance has been taken up not only in euro and US dollar, but also in Hong Kong and Singapore dollar. And the potential for non-yen Asian currencies to continue flourishing is there, with room for further diversification in credit, tenors and structures. D'Ercole, at Westpac, says: "Not only have our number of Hong Kong dollar trades risen, but we have also seen this market develop into structured trades. We are optimistic that this market will continue to grow." But while the levels of issuance in non-yen Asian currencies continue to grow, for the more frequent Australian issuers - the banks - the US dollar and euro Euromarket are the most cost effective sources of capital. Paul Umbrazunas, head of debt capital markets for Australia and New Zealand at Deutsche Bank, says that issuance in Asian currencies has been mostly opportunistic this year and cannot be relied on as a main source of funding. He says: "If you ask any major borrower, they will tell you that for certainty and core funding, they look to Europe. If there is a bid from Asia that is all well and good, but this will not drive a substantial new issue. The Hong Kong dollar tenders have typically been for shorter maturities and not for the kind of volumes that borrowers will seek as part of a core funding exercise." And there is another flip side to the success in Asia as Jones, at Deutsche Bank, highlights. He says: "On the private side in Europe, the Aussies have not been too successful. While they get the advantages of the time-zone factor in Asia, they get the disadvantages in Europe. Firm pricing for the more structured deals, where they are more likely to print deals at their levels, frequently requires referral to the parent for approval prior to execution." Many Australian issuers now have round-the-clock coverage. One of these is Commonwealth Bank of Australia (CBA), the leading Australian issuer by volume this year. Philip Christie, senior manager of group funding at CBA, says: "We are contactable 24 hours a day, either directly or via our London desk. The London desk has certain delegations that can be exercised during their day. If a proposal is outside their delegation, they will wake me to authorize a mandate." It is a policy that is also employed at Macquarie Bank, where Craig Shapiro works as division director of the treasury. Shapiro believes that the opening up of the Euromarket to Australian credits has been central to their success in the past 12 months. He says: "The increased issuance reflects the maturity of the Australian debt markets and the increasing exposure Australian issuers have in the Euromarket. The growth in the funding requirement of banks in Australia has outpaced the growth in the local debt markets. This has increased the requirement of the use of offshore funding markets." But many smaller banks and particularly corporates often find themselves losing out as they lack the resources of the bigger and more frequent issuers. And the necessity for them to enter the Euromarket is not there at present. "Generally Australian corporate issuers have smaller funding requirements, which can be met in the Aussie dollar market," says Bailey, at SSB. "Corporate issuers that have requirements in euros will look to the Euromarket to meet their needs. However, there are very few of these. As such the Euromarket remains an alternative for a small number of corporates that have specific funding requirements in euros or on an arbitrage basis." But the future may hold increased exposure to the Euromarket for corporates. Umbrazunas, at Deutsche Bank, has already noticed this trend. He says: "With the advent of the euro more corporates are looking to Europe as a potential source of funds. We have seen a definite increase in both awareness of what is available in Europe for corporates but more importantly, cost competitiveness. Given the dynamics of the euro corporate sector, the types of deals being done suit the Australian corporate balance sheets quite well. Europe will definitely represent a more important element of Australian corporate core funding going forward. You will also see more Australian corporates establishing Euro-MTN shelves without a doubt." And Jones, at Deutsche Bank, believes that those with an MTN facility already in place will be best set to capitalize on any opportunities for access to the Euromarket. He says: "The use of the Euro-MTN market will be important for many Aussie borrowers in the future. For many years there has been a distinct arbitrage of domestic funding opportunities versus the Euromarket. If this diminishes, issuers with facilities already in place will be best positioned to take advantage of any change more quickly than those without."
December 14, 2001
