Thursday, 18 July 2019

Bouncing higher

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  • Circus Oz performers dressed as red kangaroos pose for pictures at Darling Harbour in Sydney.

A repeat of Apple’s 2015 blockbuster may be unlikely, but the Australian credit market can accommodate many more international issuers at more modest sizes.

The corporate Kangaroo market is expected to maintain its recent steady progress in 2016, although no one foresees any repeat of last August’s stunning Apple debut.

Apple raised Australia’s global profile and cheered local DCM desks with a A$2.25bn (US$1.58bn) triple-tranche print, which, besides being the largest bond sale from any overseas issuer, smashed BHP Billiton’s local corporate bond record of A$1bn.

The deal raised hopes that Australia’s underutilised bond market would be viewed as a key second-tier destination for overseas credits alongside the sterling, Swiss franc and Canadian dollar markets.

The Coca-Cola Company (Aa3/AA/A+) looks set to provide the first real test of the year for the corporate Kangaroo market, having mandated Deutsche Bank to arrange investor meetings from March 7 for a potential debut trade.

Australia has many things going for it, including the highest absolute yields among Triple A rated nations, as well as the world’s fourth-largest pension pool with total assets of almost US$1.7trn in 2014, according to the Towers Watson Global Pension Assets Study.

Unfortunately, as far as the bond market is concerned, only 15% of these assets were allocated to bonds in 2014, less than half the global average of 31% and well below, for example, Japan’s 51% – as domestic retail investors maintain a clear, tax-break related, preference for equity funds and term deposits.

Brad Scott, head of corporate bond origination at National Australia Bank, said offshore issuers had driven growth in the Australian corporate market in recent years, representing around one-third of total corporate supply in 2015, up from 10% to 20% between 2012 and 2014.

“While domestic firms are notably price sensitive and tend to retreat back to the bank market when spreads widen, foreign companies are not arbitrage (basis swap) driven. They are happy to come Down Under if they are able to print flat to their US curves or even pay modest new issue concessions,” Scott said.

He anticipates significant corporate Kangaroo issuance this year as Australia takes a slice of America’s US$250bn 2016 M&A pipeline and jumbo issuers look to diversify their investor bases.

Addressing the buyside, Scott said: “The market has not grown as much as we would like with investors becoming more cautious after facing a few headwinds in 2015 and early 2016. Nevertheless, Asian interest is deepening and we expect them to take a bigger chunk of these deals as long as the spreads on offer and credit stories are attractive.”

The Apple trade succeeded for a variety of reasons, including the-then favourable global market backdrop, the company’s stellar balance sheet, the lack of alternative technology companies in Australian portfolios and compelling pricing levels.

Australian asset managers were keen to add Apple to their rather narrow portfolios (a useful marketing tool to help attract clients), while attractive pricing persuaded them to bulk up their typical ticket order sizes.

Pricing on the fixed-rate bonds of four and seven years and the four-year floater was keen in comparison with Australia’s four lower-rated major banks and also in relative value currency terms, with a premium offered over Apple’s euro curve. This was an essential carrot for Asian investors and the Australian funds that could otherwise buy cheaper Apple bonds overseas.

Apple’s success followed other well-received corporate transactions, including SABMiller’s A$700m five-year print on July 31 2015.

Although the world’s second-largest brewer in revenue terms issued the bond through FBG Treasury (Aust), which, technically, makes it a domestic corporate offering, investors treated it as a Kangaroo because its global parent was the guarantor.

Similarly, Anglo-Swiss mining giant Glencore received a warm reception for a A$500m five-year trade in September 2014 that, like SABMiller, was issued through a local subsidiary.

There are no guarantees size expectations will be met, however, with BP raising just A$300m from its second five-year offering in November 2013, 12 months before French energy company Total also underwhelmed with a A$350m five-year sale.

Intel, which followed Apple with much fanfare last November, provided a dose of reality, despite raising A$800m from its inaugural dual-tranche issue – the second largest sale in the corporate Kangaroo segment.

Hopes for a A$1bn plus trade proved wide off the mark as Intel underlined the lack of relative depth in Australia because the world’s largest chipmaker had tapped the US dollar market for US$8bn through a four-piece trade earlier in the year.

Scott sees Apple’s A$2.25bn raising as a once-in-a-lifetime event, but notes that deal sizes have been getting bigger with eight A$500m plus corporate trades (Kangaroos and domestic) last year, which pushed the average size up to A$350m from A$250m in 2014.

He expects A$500m corporate Kangaroos to become commonplace, but much larger deals may be more problematic, depending on the market backdrop.

One question to consider is whether or not A$500m is now sufficient to tempt offshore blue chips Down Under as the Aussie dollar’s role as a proxy for China risk puts additional upward size pressure on Kangaroos.

Having traded near parity between October 2010 and October 2014, the Australian dollar has declined to around 70 US cents. This means an Aussie dollar bond must now exceed A$700m to reach the minimum US dollar equivalent benchmark size of US$500m.

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