10-year demand shifts the dial for Dexus’s domestic appetite

The domestic bond market has supported a steady flow of 10-year corporate deals in recent months. Dexus Finance (Dexus) is the latest corporate to have issued at this tenor domestically and the issuer says the ability consistently to price deals at the long end shifts its appetite for domestic-market deals significantly.

The A$200 million (US$135.7 million) 10-year deal priced on 10 October and was led by SMBC Nikko (SMBC) and Westpac Institutional Bank (Westpac). It follows recent 10-year Australian market deals from Pacific National, United Energy Distribution, Spark Finance and AusNet Services.

The Reserve Bank of Australia has cut the official cash rate three times in 2019, sending yields plunging and leading investors to look at the longer end of the curve. Reflecting this, the six lowest-ever coupon 10-year corporate deals in the Australian dollar market have all been priced in 2019 (see table).

Australian dollar corporate market lowest-ever coupons for 10-year deals

Pricing dateIssuerRating (S/M)Volume (A$m)Maturity dateCoupon (per cent)
17 Sep 19 United Energy Distribution A-/NR 100 25 Sep 29 2.37
10 Oct 19 Dexus Finance A-/NR 200 17 Oct 29 2.5
29 May 19 Deutsche Bahn AA-/Aa1 115 7 Jun 29 2.518
24 Jul 19 AusNet Services A-/A3 350 31 Jul 29 2.6
11 Sep 19 Spark Finance A-/NR 125 18 Mar 30 2.6
4 Apr 19 Edith Cowan University NR/Aa2 120 11 Apr 29 3

Source: KangaNews 16 October 2019

Dexus’s Sydney-based head of treasury, David White, tells KangaNews the issuer takes a flexible approach to markets and timing of transactions so it can seize opportunities as they arise, as is currently the case with corporate 10-year demand in Australian dollars.

According to KangaNews, the deal is the first Australian dollar 10-year transaction from a REIT since Aroundtown’s A$250 million Kangaroo deal in May 2018. Dexus’s peers that have come to market since have done so at shorter tenors. White says Dexus was cognisant of this but confident in the view of its intermediaries that there was latent appetite for a 10-year transaction.

Peter Block, head of corporate and nonfrequent borrower origination, DCM, at Westpac in Sydney, says the Australian dollar market has been constructive across the curve in recent months. He adds that conversations with Dexus had been ongoing about the possibility to extend its Australian dollar curve and with demand apparent, the issuer was able to take advantage of prevailing market conditions.

According to White, the ability to price 10-year transactions in the Australian dollar market shifts the dial significantly for Dexus’s appetite. “We have always been supportive of the domestic market as it is beneficial for us to be able to fund without having to take on the derivative volatility of foreign-currency issuance. To be able to do this and extend the tenor of our debt profile, which sits at around seven years, is a great advantage.”

Deal execution

The deal turned out to be fortuitously timed. It was mandated on 8 October, launched late in the Sydney afternoon on 9 October and priced less than 24 hours later. SMBC’s Sydney-based executive director, Luke Spitty, says Australian dollar swap spreads moved significantly on the day after pricing amid reports of improvements in the US-China trade war talks and Brexit negotiations.

According to a Commonwealth Bank of Australia research note published on 11 October, Australian dollar 10-year bond yields were 12.5 basis points higher on the day. Spitty says with the current market backdrop it is beneficial for issuers to be able to get in and out of the market quickly.

Marshall Denning, Sydney-based assistant treasurer at Dexus, says upon mandating the deal on 8 October, it was expected the execution process would likely take until 11 October. However, investor comfort meant the launch could be expedited and the transaction window shortened.

With no recent 10-year REIT transactions, Block says the deal was marketed with price guidance of 165-170 basis points over semi-quarterly swap based primarily on a curve interpolated from Dexus’s outstanding 2025 and 2027 lines as well as other appropriate credit data points.

The deal was launched into the Asian afternoon to capture demand in the region and create momentum going into the Australian morning, according to Block. He adds that this was achieved with the deal receiving around A$140 million of interest by the close of the day on 9 October. According to Block, price guidance was maintained into 10 October and was then able to be revised with significant demand coming from Australian real-money accounts.

The final book reached around A$430 million, says Block, allowing for a price revision to 162 basis points over semi-quarterly swap. Domestic fund managers were the primary participants, though a sizeable chunk was allocated to investors in Asia (see charts 1 & 2).

Source: Westpac Institutional Bank 16 October 2019

Source: Westpac Institutional Bank 16 October 2019

Spitty says the tight execution turnaround did limit participation for some accounts in Asia, but demand from south-east Asia and Japan was notably strong. Furthermore, he says Dexus received some new Asia-based investors in its book.

This was particularly appealing for the issuer, according to Denning. “Diversification of markets is important and so is investor diversification within markets. It was pleasing to attract new investors in the deal as well as to extend Dexus’s debt profile,” he comments.