Domestic market evolution

Australia’s corporate bond market took years to recover after the financial crisis in 2008-9. The rebound after COVID-19 came in a few months – and market conditions are arguably better than ever for issuers.

BLOCK The strong development of the domestic market has been evident since early May. Are issuers considering the Australian dollar market in a new light relative to other options?

MCKAY The performance of the domestic bond market has been exceptional. The two highlights for me have been the size and depth of order books, with transactions being well oversubscribed, and the ability to execute intraday. This is a big positive.

We are used to seeing these conditions in global capital markets, but to see this growth in the Australian market is a really strong development. Our recent experience with the Westlink M7 AMTN issuance was testament to these positive developments.

TRIGGELL Given our relative size, we have only been active in the domestic, USPP [US private placement] and bank markets.

Our confidence in the domestic market was reinforced through our 2020 deal process as our transaction was heavily oversubscribed with a very good pricing outcome, particularly in the 10.5-year tranche.

The trend over the last few years has been for longer tenor. We are focused on diversifying our debt sources so being able to achieve longer tenor in the domestic market is a great development. Traditionally, 10 years and beyond would be USPP territory.

BRIGGS We were very pleased with our domestic bond-issuance result, too. Pricing at the time was obviously materially wider than what we’d been looking at six months earlier. But through the whole process, from March to June, our messaging to the investor base was that we understood what was going on and that we are at the front line of the crisis. We were willing to be pragmatic on pricing.

It was no secret that there was focus from rating agencies on Brisbane Airport’s liquidity position at the time. For us, transaction execution certainty was vital and domestic investor support was fantastic. The deal went a long way toward de-risking the business and having a liquidity buffer more in line with Sydney Airport and Melbourne Airport. This got the rating agencies more confident with our position, too.

VAGG It was pleasing for us to print a 10-year deal domestically. When COVID-19 hit the big question was whether the domestic bond market would remain supportive of long-tenor corporate deals.

When we did our update in August ahead of our transaction there was no pushback on tenor, which was very pleasing. It is good to see investors embrace this duration because it is precisely what we were looking for.

The process went well. We did not have the massive book that some other deals have seen but it was still a solid result and came together quickly. Pricing was not materially wider than pre-COVID-19 levels, either. We valued certainty over price anyway, and we had the extra liquidity of our bank debt so there were no time pressures.

BLOCK How important is it that the market now allows issuers to look at tenors such as 10.5 or even 12 years?

BRIGGS It is a great development to have this flexibility. Our maturity profile was suited to 10.5 years and we did not look to test 12-year tenor given the backdrop at the time we issued. When COVID-19 kicked off the discussion was around whether we could even get five years, though – so we were very happy with what we achieved in our transaction.

BLOCK Sydney Airport has not been active in the Australian dollar bond market for a while. Has the dial shifted on how attractive the market is compared with offshore options?

MOMDJIAN We have the flexibility to issue bonds locally and offshore. We are focused on long – at times ultra-long – tenors, having issued 20-, 25- and 30-year tranches in the USPP market.

Developing a presence in the Australian dollar market remains on our radar. We always keep an eye on the local market and in the past we have been concerned about execution risk at tenor of 10 years and longer.

However, we have since seen significant issuance at 10-year tenor from triple-B corporates, even throughout COVID-19. Execution risk is no longer a deal-breaker for us in the local market. We are now confident that we would be able to raise the volume we need with low execution risk.

We collect indicative local and offshore bond-market pricing from 15 or so banks every month. Surprisingly, there has been a reversal under which pricing in the domestic market is currently much wider than it is offshore – even after incorporating swap costs. We have not seen this for many years, so the ability to secure competitive pricing presents a new hurdle.

LUCAS It was actually easier to sell 10-year paper in the secondary market than 3-4 year paper in the crisis, particularly for the most affected names. Is it the case that investors knew issuers were money-good so they might as well own them for 10 years rather than just through a rough short-term period?

DAVID Definitely. Aviation is potentially going to be a five-year recovery story and the first two years will probably be volatile. We want to enjoy as much upside as possible. If the worst happens it does not matter if we are short or long duration, so we might as well take the long duration.

LEWIS We have been looking for long-term positions for a while, which includes offering tenor of 10 years and beyond. In this situation tenor is definitely preferable – from a pricing perspective but also, as Adrian David says, to try to capture some upside in the long term.