AusNet hybrid kicks off international Australian corporate issuance for 2021

AusNet Services Holdings printed a euro hybrid deal on 2 March which exceeded demand and pricing expectations. The borrower has a strong presence among euro investors that allowed the focus during execution to be on deal specifics rather than issuer credit – and paved the way for a jumbo book, leads say.

The €700 million (US$843.8 million) 60-year non-call 5.5-year deal had BNP Paribas, Citi, HSBC, Morgan Stanley and Westpac Institutional Bank as leads. AusNet has been active in hybrid issuance in recent months having printed a A$650 million (US$466.7 million) transaction in September last year.

The company has been focusing on hybrid issuance to support its credit rating as it embarks on a capex programme. Ampol and Scentre Group also issued hybrid capital in H2 2020 as the instrument’s relevance picked up amid high levels of borrowing and low interest rates.

There is also a refinancing element. AusNet’s euro hybrid transaction comes ahead of two hybrid call dates in Q3 2021 – for Singapore and US dollar deals executed in 2016. Alastair Watson, AusNet’s Melbourne-based treasurer, says the decision to execute now was based on market conditions. “Rates markets have been in flux in recent weeks but credit has remained strong. We wanted to use this window of opportunity,” he explains.

Market choice

Watson says AusNet considered a range of markets for its latest transaction but decided euros offered the best combination of volume and pricing. He says the swapped back level is similar to what could be achieved in Australian dollars but demand for hybrid securities is much deeper in euros.

The borrower’s name recognition in Europe, where it has a well-developed senior curve, was also a factor in market choice, according to lead managers. Ian Campbell, Sydney-based, managing director and head of debt capital markets Australia and New Zealand at Citi, says AusNet’s outstanding euro curve made for straightforward pricing comparisons with other utility companies’ senior and subordinated spreads.

Meanwhile, Joel Morton, director, DCM at Westpac in Melbourne, says the familiarity of the issuer meant investors were more focused on the specifics of the transaction, such as its relative value, rather than the credit alone.

Demand for the deal was clearly strong. Morton says early momentum was generated by investors that indicated interest ahead of intitial price thoughts immediately entering bids when the deal launched. Morton says €4.1 billion of bids were received at launch price leading to a price tightening of 37.5 basis points after which the book continued to grow to final volume of €5.5 billion.

The deal attracted a broad set of investors, including AusNet’s core euro investor base as well as a larger universe of accounts attracted by the higher yield on offer, according to Andrew Duncan, HSBC’s Sydney-based head of debt capital markets Australia and New Zealand.

Morton adds that there was also strong interest from Asia-Pacific investors, including some in Australia and New Zealand. These contributed a meaningful bid, albeit small in the context of the overall book size. Deal statistics show fund managers and continental Europe as the primary sources of demand (see charts 1 and 2).

Source: Westpac Institutional Bank 8 March 2021

Source: Westpac Institutional Bank 8 March 2021

Gearing up

The end of Q1 and beginning of Q2, after February reporting, is typically a busy period for large Australian corporates seeking to execute offshore transactions and leads say they are anticipating further deal flow following AusNet’s deal.

Market conditions mean borrowers have plenty of options. Campbell says the euro market is showing pricing levels on average 15-25 basis points wide of the Australian dollar market for some credits but says AusNet’s deal demonstrates how momentum can be generated in transactions and compress pricing outcomes while maintaining the ability to take large volume.

As always, market choice will come down to the issuer’s desired tenor and volume as well as relative pricing. Duncan says the euro and US dollar markets have opened 2021 strongly and investors are looking for opportunities in both currencies. He says the recent rates move in the US dollar market caught attention in all markets, but technical demand factors remain strong.

AusNet itself is unlikely to be back in the market during the 2021 calendar year, with this transaction and its Australian dollar hybrid sufficient for its current funding needs according to the issuer.