Pacific National deal shows encouraging signs for domestic market

Pacific National printed Australia’s largest 10-year corporate bond so far this year and the issuer’s largest in the domestic market on 18 September. Deal sources say the transaction makes clear once again that domestic support for 10-year corporate paper is available for issuers willing to test it.

The A$450 million (US$304.6million) deal – led by ANZ, Commonwealth Bank of Australia, MUFG Securities (MUFG) and National Australia Bank (NAB) – is one of just three 10-year deals in the Australian corporate market so far in the second half. Spark Finance printed A$125 million on 11 September and AusNet Services issued A$350 million on 25 July (see chart 1).

Both the earlier issuers are single-A rated. Pacific National is the first BBB- corporate borrower to issue 10-year paper in the Australian market this year.

Market selection

A mandate announcement on 27 August revealed that Pacific National was considering a benchmark transaction denominated in Australian dollars, sterling or US dollars. The deal ultimately began taking indications of interest for Australian dollars on 17 September.

“We wanted to launch a transaction off the back of a global roadshow that leveraged our solid financial results. Conditions seemed favourable and multiple markets appeared to work for us to execute the deal”, says Ben Nolan, head of treasury and financial control at Pacific National in Sydney.

Source: KangaNews 23 September 2019

The issuer has a funding task north of A$1 billion over the next 12 months, which includes a A$643 million equivalent US dollar 144A maturity. Nolan says Pacific National wanted to get a head start on its funding need.

“We assessed each market on its merit and felt this was the right trade from a value perspective for Pacific National. We were confident from investor feedback that we would be received well in the Australian market for a 10-year transaction,” he adds.

Investor support saw price guidance trace in to a final price of 250 basis points over swap from 265 basis points area during the indications of interest (IOI) process.

Gwen Greenberg, Sydney-based executive director, debt capital markets at ANZ, tells KangaNews: “The strength and size of the IOIs pricing guidance was revised to 260 basis points area at launch. The transaction continued to garner strong investor demand and the orderbook exceeded A$1.25 billion by noon – at which time pricing was revised again to 250-255 basis points area.”

“We assessed each market on its merit and felt this was the right trade from a value perspective for Pacific National. We were confident from investor feedback that we would be received well in the Australian market for a 10-year transaction."

Matthew Carr, managing director, head of DCM, Australia and New Zealand at MUFG in Sydney, says Asian demand sparked the momentum for significant price tightening. “During the IOI stage, bids from Asian and Australian investors were split approximately 50-50. Asian accounts provided strong price and volume leadership early in the process which helped build momentum into the transaction.”

As execution unfolded, however, domestic accounts came to dominate the deal book (see charts 2 and 3). “Ultimately, Asian accounts represented a smaller amount of the final book. This can be attributed to the large price revision through the process, which caused some volume scaling, and the fact that underlying swap yields declined meaningfully through the day of execution, which had an impact on the more outright-yield-focused buyer base”, Carr says.

Source: ANZ 20 September 2019

Source: ANZ 20 September 2019

10-year corporate demand

Leads say many factors have led to the dearth of 10-year corporate issuance in Australia. But it appears things may be turning around. For one thing, the pricing benefit on offer in the US private placement (USPP) market appears to have eroded.

Tabitha Chang, director, debt capital markets origination at NAB in Sydney, ascribes significant Australian-origin issuance volume in the USPP market in the first half in part to heightened volatility that left USPP spreads running 20-30 points tighter than other markets, on an Australian dollar equivalent basis.

“As the year has progressed,” Chang continues, “pricing has relatively realigned across markets. As a result, issuers have more optionality and are now being more strategic in their funding decisions.”

Yield-hungry investors led to a surplus of demand that resulted in a final order book of circa A$1.35 billion for Pacific National. “With the rate environment as it stands now, and with Australia falling into line with a lot of rates markets globally, investors are looking further out the curve and also down the credit spectrum for a higher credit spread. A 15 basis points area price progression is not something we see regularly in the Australian market”, says Desmond Fennell, Singapore-based director and head of fixed income syndicate Asia at CBA.

“Over the course of this year there has been a large volume of redemptions in the credit space, including financials, that has been helpful in driving the technical bid for credit”, he adds.

The price tightening and level of investor support should encourage corporates to issue in the domestic market. “Corporates have been reticent to issue in the domestic market due to execution uncertainty in the 10-year part of the curve. This should well and truly have dispelled any fears of the ability of investors to support 10-year issuance”, Chang says.

Greenberg tells KangaNews the Pacific National deal is “further evidence that the market can support corporate issuers requiring 10-year paper even if they are not in the single-A rating band.”