Corporate Australia on the record

LEWIS It has been a very ‘boring’ year, because conditions and outcomes have broadly been so good. Transactions have been successful, and it has been one of those years in which things have worked. So not the most intellectually taxing, but very good from a borrower’s perspective.

LEWIS It would be naïve to say the gradual removal of a buyer that has taken €130 billion of corporate paper out of the market in the space of 16 months doesn’t affect things.

WILLIAMS Interestingly, a number of European investors have independently approached us to buy 15-year paper where they were previously buying 10 years. They say they are not particularly perturbed about European QT. They just  want something to invest in that is longer duration.

LEWIS You can see this in the pattern of deals over the last few weeks. For example, Klepierre printed a 15-year transaction at a very tight spread. I am not entirely on board with the logic, but it is clear investors have a very visible need to maximise short-term yields.

MOTTOLINI Feedback we received from our recent European nondeal roadshow in September 2017 is that some investors are showing more interest in maturities of up to 10 years.

LEWIS Right now, any deal in the five-year part of the curve is buried by demand because investors want to buy anything with a positive yield to preserve their cash. Even mid-swap flat gives a 70 basis points pick up over Bunds.

GIAIMO Very similar. It was another record-breaking year in corporate and financial supply with more than US$1.3 trillion of issuance digested in an orderly way. Market inflows have been positive in every week of the year and even with elevated supply levels spreads have consistently performed well.

STEWART We always show clients pricing across a range of markets but at the moment spread levels are very similar across euros, US dollars and Australian dollars. So with no cross-currency swap costs to take into account the most competitive for issuers is the Australian market. Our advice is to access the market with the best price, assuming diversification and other factors aren’t a major objective, as it is unlikely an issuer will regret locking in 10-year money at the spread levels we’re currently seeing.

LEWIS To hear the positivity around the Australian MTN market is a real change from a couple of years ago and poses an interesting conundrum for issuers to consider. This is whether they should they take advantage of markets opportunistically while they are accommodative or continue to rely on more regular and reliable funding sources. US dollar Reg S is a good example of a market which has been very good to some issuers this year but that hasn’t always been as reliable in the past.

WAKEFIELD I have always been concerned that executing a Reg S issue could cannibalise demand for our bonds in other currencies and markets.

WILLIAMS It is very important to cultivate a following in a market. There have been numerous attractively priced private placement (PP) opportunities that we have decided not to pursue because they detract from our capacity to execute larger public transactions. Our preference has been to raise funding via public transactions, to maximise our engagement with a broader range of investors.

GIAIMO Tapping the 144A market with increasing frequency helps spreads compress relative to US domestic peers.

MOTTOLINI We have always viewed Australia as a core market. This is notwithstanding that we might not be able to print in as large volumes and in as long tenors when compared with what offshore markets offer. But we don’t always chase longer maturities, so we are happy with issuing A$500 million (US$378.3 million) at five or seven years in the Australian market. For issuers that are willing to participate in the short-to-medium end of the maturity spectrum we view the Australian dollar as a solid, reliable market.

MOMDJIAN The Australian bond market remains one of our opportunistic funding markets, just like Canadian Maple, Swiss franc, sterling and USPP markets, all of which can also provide 10-year tenor demand in addition to diversification benefits. It’s certainly encouraging to see the strong momentum coming out of the Australian bond market this past year, especially the growing bid and price leadership out of Asia.

STEWART Debt capital markets have indeed become very attractive. Having said this, loan funding is also competitive because, just like bond markets, banks haven’t had a lot of assets to invest in. Additionally, there are new entrants from the likes of Japanese and Chinese banks coming into this space and
we are also seeing market players returning.

WILLIAMS Some of this is money that doesn’t necessarily need, or seek, ancillary business. But there is also money that you know is always going to come with the expectation of collateral business. There is nothing wrong with this per se, but you need to be a little judicious in determining how much additional funding you want to take and think about the implications down the track for sharing your ancillary business around the bank group.

DUNCAN This largely depends on what you mean by ‘set’. Offshore banks depend on the local banks to set documentation and terms and conditions, but domestic banks sometimes say they can’t match their offshore peers on pricing. In the short time I’ve been at Ausgrid, I’ve had at least one domestic bank tell me it couldn’t match pricing we’d been offered. In this instance an offshore bank undercut by two-thirds.

MACHLISS There always seems to be a new cohort of players coming in to replace the last group of banks that were breaking into the market.

DUNCAN Five years ago the Canadian banks struggled to compete for cross-currency swaps. Their bids were twice as high as local and other competitors, mostly because new capital rules had an impact. We provided feedback so the banks could try to match the levels, and they did try. At the end of the day this is how to build understanding, and nothing changes without two-way conversation.

MOMDJIAN The cross-currency-swap dynamic has really changed. Having multiple domestic and offshore lenders in our banking group allows us to readily observe these changing dynamics and optimise swap pricing accordingly.

STEWART There used to be a few banks that wanted to lend but were happy to sit on the sidelines when it came to ancillary business. I have started to see more banks wanting a fair share of the cross-sell.

MOTTOLINI Some Asian banks have been in Australia for a long time. But while in the past they have been very supportive with lending facilities, they are now pushing for ancillary business. They have invested heavily in teams on the ground both offshore and locally, so it is fair and competitive to offer them other business opportunities.

PRESS I expect Brambles has a a higher proportion of US and European banks in its banking group, compared with other Australian corporates, given where we operate. We put our banking group together in 2001, and it has remained broadly the same since.

MOTTOLINI We look for the long-term relationship. There is lots of competition and issuers are in a competitive position in this environment. But we don’t like to rely on hot money. In an acquisition scenario we might want a large volume of money quickly and therefore we prefer to have long-term partners that we can rely on to be there every time.

WAKEFIELD This is why investor relations is so important. It is through this kind of exercise that we discover the partners that will be there for the long term. In the bond market, the Asian investors we market to in other currencies might already own our US bonds. With regard to Asian investors in particular, the difference now is that they are playing much more strongly in the Australian dollar market. I’m not sure what others’ views are but my gut feeling is that these investors aren’t going anywhere any time soon.

LEWIS Anecdotally I have heard that if the cap on Japanese government bonds raises by as little as 10 basis points Japanese investors will stop buying nondomestic assets. This may be some cause for concern, even though it is not only Japanese investors that comprise the Asian bid.

WAKEFIELD A number of the Australian domestic investors we meet want to engage in PP-style funding, mostly driven by the covenants they are able to lock in. I can see why this could be a viable funding option
for some issuers, but equally I would be hesitant to access this form of funding unless I really needed it.

WILLIAMS I expect it would be difficult to mix institutional and bank lenders in the context of ever needing to obtain waivers or some other approval later on. Institutional lenders are likely to have a rather different
outlook from bank lenders and may complicate the process of amending documentation if this were ever to become necessary. This kind of funding activity isn’t really something we would engage in.

MOMDJIAN We have been increasingly proactive with respect to debt versus equity investor relations. We are now actively considering undertaking debt-investor nondeal roadshows across both existing and potential new markets, particularly if we are going through a quiet period for bond issuance. We tested this idea in Europe in November 2017 and investor feedback was overwhelmingly positive.

WAKEFIELD My preference has always been to treat debt investors like equity investors. I think this is even more important now we are a private company and investors’ access to information is reduced.

STEWART I haven’t strongly recommended nondeal roadshows in the past as it can annoy some investors. But there is no doubt that nondeal roadshows are favourably looked upon where an issuer has not had a physical presence in a market for more than a year or two, or has had significant credit events or management changes.

MOMDJIAN We host semiannual European debt investor update calls – often with limited attendance. However, attendance was very strong when we hosted our most recent European nondeal roadshow, even though it was one of the busiest weeks of issuance. Investors specifically extended their appreciation for face-to-face interaction.

LEWIS I think European investors support nondeal roadshows by Australian issuers because they see it as a way to meet face-to-face, particularly where opportunities for physical access are limited by distance.

WAKEFIELD Every US nondeal roadshow we host sells out and investors always tell us how much they appreciate our visit. They also really help our secondary spread levels.

PRESS Nowadays, a physical roadshow doesn’t need to precede a US deal – all the marketing takes place on the phone.

GIAIMO This is because there are so many US investors that it is simply more efficient to get the touch-point across the country rather than spending several days travelling.

WILLIAMS Actually, we have noticed that telephonic updates with US investors have tended to be less effective than face-to-face marketing. We would prefer to do more physical meetings.

MACHLISS In theory a borrower should not issue within two weeks of a nondeal roadshow. This shouldn’t be problematic, except if the roadshow response is so strong that it wants to issue.

LEWIS In Europe, the two-week regime was always broadly adhered to. Some banks seem to be suggesting greater flexibility now and issuers will probably find that different dealers give different advice. At BNP Paribas, we think the two-week mark is about the right amount of time to allow. The reason for this is that nondeal roadshows aren’t usually publicised in the same way as deal roadshows and as such issues around fair access to information might arise.

PRESS In our experience investors appear to be more focused on environmental, social and governance (ESG) indicators such as business-model sustainability or an issuer’s position in a reputable sustainability index, rather than in specific green accreditation.

MACHLISS This is absolutely correct. For socially responsible investment (SRI) analysts in Europe, their interest is far less about green-bond funds, which are a growing but form a very small overall component of the market. It is more about the SRI overlay.

LEWIS An official stamp doesn’t make a bond green. As Cathy Press points out, investors are more influenced by a company’s focus on sustainability and preservation.

MOTTOLINI We received quite a lot of questions on sustainability at our recent European investor meetings. I would say there was at least one question on sustainability at some point in the meeting in more than 60 per cent of these meetings. But I view sustainability as different from a green bond. We should all be cognisant of making our business models and propositions sustainable for the long term. This is not just a matter of being ‘green’ – it’s about being sustainable in many different ways.

LEWIS New regulation starts in just a few weeks and it’s fair to say that even this close to implementation we’re deeply uncertain about how it might affect large chunks of our business. The impact on issuers insofar as what they will need to prepare to take deals to market isn’t significant. The impact on intermediaries is frankly a nightmare.

LEWIS Exactly. But I would argue that the current system already treats fairly investors that are consistent. The worst-case future scenario is that in a €500 million deal with a €2.5 billion book we will have to scale all participants equally to 20 per cent, with no differentiation for investor type, behaviour or history. My view is that not all investors are created equal and they shouldn’t all be treated as such.

GIAIMO For the time being, we expect this regulation to affect the European market the most. The same  regulation doesn’t apply in the US, at least in year one.

LEWIS I am always concerned that an extra layer of bureaucracy will slow things down. A few issuers have
opportunistically accessed the euro market in the last few days to get their deals done pre-MiFID II. To be clear, I don’t think it’s going to negatively affect market pricing or sentiment – but
I do think no issuer wants to go first.