USPP market appeal
US private placements (USPPs) have been a key source of debt for corporate Australia for many years, with the REIT sector providing more than its share of supply. The market was less active in 2020 but issuers say they expect it to remain on the funding menu.
CHEUNG There has not been much Australian REIT issuance in the USPP market over the course of 2020. We did one in 2019 but since the start of 2020 the domestic market has been very strong at long tenor so we have favoured it.
I still see a place for the USPP market in future, though, and yields have been coming back in. It is also still important for diversification of investors.
It is good to see the Australian dollar market extend to 12 years and it would be even better to see it go toward 15 years – for which we traditionally had to go to USPP. Having multiple options for long tenor would be good.
WHITE USPP remains a relevant funding source for Dexus and it provides diversification. Smaller issuers may be able to get away with only issuing in Australian dollars, but larger REITs will always need to have offshore markets too.
The domestic bond market has performed well in 2020 but it has a history of coming and going. Hopefully this is not the case going forward and it is the first market we look to – but it is certainly not the only one.
It is more about diversification than tenor for us. It is great that the Australian dollar market has been able to go beyond 10 years, and Dexus has also been able to access tenors out to 20 years. In fact, in 2020 we had an enquiry for a 30-year deal. The demand for tenor in the Australian market is there at times, it is just not always at the volume available in the USPP market.
SCHRETZMEYER Bills-LIBOR has been compressing and US Treasuries have been increasing so a couple of market forces are positive for USPP issuance outside of where the bulk of deals are pricing. Some of these market dynamics could make USPP more attractive for Australian issuers in 2021.
CHEUNG It has been fairly similar to the domestic market. They are interested in understanding how the code of conduct works and what the impact on performance and outlook will be. We have had queries around the structure of leases and how these may change.
Despite what we see in the press, lease structures mostly remain as they were, with fixed rent and annual increases. Our investor base values this certainty of cash flow and we do not believe transfer of risk from retailers to landlords is appropriate.
PARKER The USPP investors I speak to are pretty switched on and know a lot about the Australian marketplace. For instance, investors looking at Scentre Group’s 144A hybrid deal were keen to understand how the issuer could lock out tenants. This action is unlikely to occur in the US. They were very comforted to know that Australian landlords have legal backing to ensure tenants honour lease agreements.