Corporate borrowers' intentions survey: corporate capital-markets creep
The latest installment of the KangaNews-Moody’s Investors Service (Moody’s) Corporate Borrowers’ Intentions Survey – published annually since 2014 – maintains a longstanding trend of only gradual shifts in corporate debt policy. At the margin, Australasian corporates appear to expect more capital-markets activity but there is no sign of a rush to credit-funded investment.
By Helen Craig and Laurence Davison
The survey received responses from more than 50 corporate borrowers across Australia and New Zealand, all of them capital-markets relevant and from decision makers in corporate treasury. A third of respondents report their company as being at double- or single-A rating level and more than half are from triple-B names. The majority of the remainder say their companies are unrated but with investment-grade credit metrics.
Matching the profile of corporate Australasia in capital markets, more than 40 per cent of survey responses come from companies with operations in the infrastructure sector. The other highly represented specialist sectors are energy, at 20 per cent, and real estate and construction, at 16 per cent.
Survey trends paint a picture of a corporate sector that had grown very conservative around the mid-part of the current decade and is only starting to contemplate more growth-focused behaviour at the margins. While more than half of survey respondents expect their companies’ call on capital markets to increase over the next two years, less than 10 per cent expect significant growth (see chart 1).
The trend for increased capital-markets usage is so slight as to be almost imperceptible. In the 2014 survey, 46 per cent of respondents expected to issue more debt in the next two years – growing to 48 per cent in 2015, 51 per cent in 2016 and 52 per cent in the latest iteration of the survey.
It is also possible that corporates are not borrowing more in aggregate but instead reweighting their debt books away from bank loans and in favour of capital markets. In the 2017 survey, nearly 70 per cent of corporates say their debt book is predominantly or majority capital-markets funded, up from a low of barely half in 2015 (see chart 2).
This reweighting effect should continue, as more than 40 per cent of survey respondents indicate companies anticipating an increased proportional use of capital-markets funding – compared with just 7 per cent predicting a swing to bank debt (see chart 3).
So far, most Australasian corporates appear to have remained within established gearing ranges – in fact, slightly more report reduced gearing over the past 12 months than increased (see chart 4). The forward-looking position is broadly similar although in this case the trend at the margin is reversed, as the proportion of corporates forecasting increased gearing in the year ahead is slightly greater than that projecting a reduction (see chart 5). Most expect gearing to remain roughly where it is now, though.
Moody’s believes corporate investment is likely to pick up in the period ahead, though one of the sectors it expects to drive this trend is under-represented in the KangaNews-Moody’s poll. Arnon Musiker, Sydney-based senior vice president, project and infrastructure finance group at Moody’s, confirms: “We expect several companies to increase capital spending, particularly in the infrastructure and mining sectors.”
Musiker agrees that the pickup is likely to be within conservative parameters. “This trend may raise financial leverage for some companies, but not to the extent that it will affect their ratings – especially given infrastructure companies’ generally solid operating performance and the strong cash generation apparent in the mining sector,” he explains. “Infrastructure issuers in particular have generally increased their financial buffers at their rating levels during the recent past, which will in turn expand their capacity to fund capex.”
To the extent that Australasian corporates want to take on additional debt funding, their treasury teams appear to be extremely comfortable about the state of market access. Corporate borrowers have a net-positive view on every market-access factor included in the KangaNews-Moody’s survey, with “investors’ appetite for Australasian credit” rated a conducive factor in almost 100 per cent of survey responses (see chart 6).
The only factor corporate borrowers are less content with when it comes to capital-markets access is “derivatives related to debt issuance”. But even here there is a net-positive score – that is, the proportion of borrowers rating the factor conducive less those rating it challenging – of around 30 per cent. This is up from a nearly flat net score a year ago.
The lack of urgency to access capital markets comes despite a consensus that pricing conditions may be set to deteriorate – though only at the margin. More than 40 per cent of corporates expect outright yields to increase in the year ahead while barely 10 per cent expect them to fall further (see chart 7). A third of borrowers predict wider spreads in the next 12 months, again with barely 10 per cent forecasting further tightening (see chart 8).
When it comes to market selection, the domestic option has rebounded in the eyes of Australian issuers as more than 60 per cent now consider domestic Australian dollars to be among the most conducive bond-issuance options (see chart 9). This is up by nearly 10 per cent on the 2016 results, when the domestic option was nearly eclipsed by US private placements (USPPs) as a preferred funding route for the largest number of Australian corporates.
Corporates on the other side of the Tasman Sea have historically tended to report a somewhat narrower mix of funding options with which they are engaged, and the 2017 KangaNews-Moody’s survey results suggest the situation here has not changed. Again, the domestic market has rebounded – though in this case it never fell far below a 70 per cent preference rate – while USPPs have also regained popularity after an unusually soft response in 2016 (see chart 10). The big mover is the Australian dollar market, which is now on the radar for half the New Zealand corporates responding to the survey.
Taken together, Australasian corporates appear comfortable with their funding mix – and increasingly reluctant to pay up to broaden it. Just 12 per cent of survey responses indicate willingness to pay more than 10 basis points to access a new funding market, and more than 40 per cent would not pay even as much as 5 basis points to do so (see chart 11).
Matthew Moore, vice president and senior credit officer in the Moody’s corporate-finance group in Sydney, suggests corporate borrowers in Australasia may now have reached a level of diversity with which they are comfortable, having reshaped their debt books in recent times.
He comments: “We have seen a reduction in the reliance on shorter-term bank funding, while increased exposure to cross-border issuance and the availability of longer tenors in the domestic market have contributed to better diversity and improved maturity profiles. For the most part, issuers have improved funding diversity to their targeted levels.”
This is not to say corporates in Australia and New Zealand are uninterested in new approaches to funding
– although where these exist they generally take the form of evolution rather than revolution. For instance, the KangaNews-Moody’s survey indicates growing borrower willingness to explore different formats even for issuance in established markets.
One is the use of global documentation for domesticcurrency bond issuance. While two-thirds of survey responses state a preference for domestic documentation, the balance is open to or actually favours the use of global or EMTN programmes (see chart 12).
There has also been a noticeable jump in engagement with the green-bond asset class. In the 2015 and 2016 iterations of the survey, no more than 4 per cent of corporates said they hoped to issue green bonds – a proportion that leaps to more than 20 per cent in the new survey (see chart 13). The proportion of survey respondents effectively ruling out green bonds has also fallen, by nearly half.