USPP support stands up despite quieter Australasian year

The US private placement (USPP) market has long been a happy home for Australasian issuers. The annual USPP roundtable hosted by KangaNews and MUFG found that lower issuance in 2020 had nothing to do with lack of support from the investor base and that hopes remain high for future primary supply. USPP investors also share perspectives on the rapid growth in significance of environmental, social and governance (ESG) analysis in their market.

  • Peter Brooks Director, Private Placements MUFG
  • Matthew Carr Managing Director and Head of DCM, Australia and New Zealand MUFG
  • Diane Crossley Treasurer VICTORIA POWER NETWORKS
  • Michael Jones Senior Vice President PRICOA PRIVATE CAPITAL
  • Violeta Kelly Director, DCM and ESG Finance MUFG
  • Karl Spaeth Vice President, Delaware Investments MACQUARIE INVESTMENT MANAGEMENT
  • Patrick Manseau Managing Director, Global Infrastructure Debt BARINGS
  • Michael Momdjian General Manager, Treasury, Tax and Insurance SYDNEY AIRPORT CORPORATION
  • Yeou-Herng Shaw Assistant Treasurer TRANSURBAN
  • Laurence Davison Head of Content KANGANEWS

Davison We will start with a review of the key themes in the USPP market during 2020.

BROOKS The USPP market showed great resilience in 2020, considering the majority of market participants spent most of the year working from home. Volume for the year was roughly flat, at around US$100 billion. But a look under the hood shows a number of unexpected themes amid the COVID-19 backdrop.

Credit spreads started the year in the low-100s basis points over US Treasuries for the triple-B index. In March and April, they reached as high as 300-400 basis points over Treasuries with elevated new-issue concessions. Since that period of volatility, we saw consistent spread compression throughout the remainder of the year and the triple-B index ended 2020 close to where it opened in January.

It is worth noting that the USPP market never closed, although at these high spread levels there was a short-term pull back from issuers.

Last year saw less foreign-borrower issuance, at around 35 per cent of total volume compared with the average of around 45 per cent. This was driven by various factors but certainly in part was due to local public capital markets in the UK and Australia performing well compared with the US.

The lack of volume from foreign borrowers was made up for by a pick-up in some domestic industries. The energy sector was particularly active for corporate and project finance in renewables, and oil and gas. The REIT sector was also busy.

JONES We observed a significant decline in Australian and New Zealand issuers going to the USPP market – issuance volume was down by 40-50 per cent. Many US issuers went to the market for liquidity but this simply was not the case for a lot of Australian market participants.

BROOKS This is exactly right. Australian issuers have historically made up anywhere from 10-13 per cent of total USPP volume. Last year, it was 4-5 per cent with total volume of US$4-5 billion. A lot of the difference was made up by issuance into the Australian and New Zealand domestic markets.

“When there is a sharp move lower in US Treasury yield, the USPP market typically sees a slight pullback in demand from investors or a short-term increase in new-issue concessions. These elevated new-issue concessions are usually short-lived as investors quickly become underinvested in the asset class.”

CARR For Australasian corporate issuers, you can quite neatly divide 2020 into halves – and then the first half in half again.

In the first quarter of last year, as demonstrated by the Sydney Airport and Vector USPP transactions, we saw a continuation of what had been happening in the back end of 2019. For Australasian borrowers, particularly in the infrastructure sector, the USPP market was delivering globally competitive outcomes.

With the onset of COVID-19, there was a backup in spreads and – certainly from this part of the world – a pause on new USPP issuance. The local market was on hold as well, which lasted through the second quarter.

We did see corporates securing liquidity, particularly larger borrowers. When there was a lot of market uncertainty these companies went to the big public offshore markets for liquidity. They knew it would be there, albeit at wide spreads.

The conversation in Q2 as far as Australasian borrowers were concerned was really about securing liquidity when needed rather than the price of credit. A number of issuers in certain sectors were also looking at waivers and amendments.

In the second half of the year, the dominant theme was very much on the home front. Once the Australian dollar capital market had shown signs of repair, we saw Australian corporates favouring the domestic market on the basis of the pricing and tenor outcomes it was delivering.

This is borne out by the statistics. We track Australasian corporate global issuance on a US dollar equivalent basis and we saw around US$3.9 billion of USPP volume in 2020 compared with US$7.9 billion in 2019.

I do not want to oversimplify the message, but issuance in the Australian dollar market in 2020 was US$10.5 billion equivalent versus US$6.5 billion equivalent in 2019. I am not trying to suggest there is a one-for-one substitution, but the numbers bear out that issuers that may typically have used the USPP market pivoted and pointed in the direction of the home market.

Davison How do investors view USPP market performance? In Australia, we tend to regard USPP as a market that never closes, but obviously there were some challenging times in Q2 2020. How did it play out?

SPAETH Overall volume was shaky in the first half of the year but the second half was very robust. According to some sources, 2020 volume exceeded 2019 volume by a little in the USPP market.

The idea that the USPP market is always open largely held intact. We did a lot of deals during March, April, and May. Obviously, this was on a selective basis. But a lot of issuers were looking for liquidity, short-term or otherwise, to shore up their positions, or the perception of their positions, as we entered the COVID-19 lockdown and all the uncertainty that went with it.

One of the sectors I cover is utilities. There was a tremendous sell off in public credit and equities so a lot of names were doing deals not necessarily because they needed the money but just to shore things up.

It was not always a question of pricing although the markedly wider spread levels of this period were mostly offset by extremely low US Treasury yield. As a result, lots of deals we saw had attractive spreads but the all-in coupon was not much more than what issuers had been paying over the preceding three years. The market absolutely was open, nonetheless.

One noteworthy trend is that we saw several issuers in the USPP market that broadened the reach of investors. Some issuers that had only done smaller deals went wider and in this way we gained access to some new names.

Another trend is that we saw smaller companies that had not issued in the USPP market before deciding this would be a good time to widen their group of creditors. These were coming from within the US, in our experience.

“The USPP market is never shut – it was just a pricing call for us. Traditionally it has been a very competitive market and last year was the first time that the Australian dollar and euro markets were both well inside USPP.”

JONES There was a big divergence in volume between the US and other international USPP markets. I believe it was one of the better years for domestic USPP issuance. There did not seem to be the same amount of urgency to secure liquidity from Australian and New Zealand companies.

I think this can be partially attributed to the government and Reserve Bank of Australia stepping in to ensure banks had good access to liquidity, which they then offered to their institutional borrowers. There seemed to be a general trend of borrowers getting shorter-term revolving facilities to tide them over. In the US, there was more of a tendency to issue into the USPP market opportunistically given the experience borrowers had during the global financial crisis.

MANSEAU One thing I think is worth noting is that we were about flat, year-on-year, in commitment volume but our credit quality went up about one rating notch. We went toward A- from BBB+ credit on average as a portfolio – and it takes a lot of credit-quality improvement to move the needle when we are investing multiple billions each year. I think that is a result of it being easier for higher-quality credits to access the market in 2020.

Davison The USPP market traditionally offers duration out to 20-30 years. Did the motivation for issuance during 2020 – the focus on liquidity – have any impact on tenor?

JONES A lot of issuers were looking for shorter term, of 5-7 years, simply because of where pricing was. We would have liked to have gone longer but there was a tendency for shorter tenor given where spreads were at the time.

Davison The other big volatility event of 2020 was the US election. What impact did this have on the USPP market?

MANSEAU The US election was more of a headline risk in 2020. I focus on infrastructure and every four years I’m asked to opine on the results of the election on infrastructure-investment opportunities. In this election cycle there was a lot of focus on the potential effect of the “green new deal”.

However, at the end of the day, federal policy in the US is very limited in its near-term effect on capital decisions and investment opportunities in infrastructure. Renewable-energy investing occurred under the Trump administration and will continue under the Biden administration – even without a green new deal.

The more relevant policy driver this year is an incredible focus from our clients, as well as borrowers, on ESG [environmental, social and governance] issues. It was talked about as a focus in the past, but there was a real shift in client interest, demand and investment decision-making beginning on 1 January this year. This is more of a policy phenomenon – it is somewhat political but it is not tied to the US election.

Amendments and consent in 2020

The events of 2020 hammered revenue in a clutch of corporate sectors. The US private placement (USPP) market, with its traditionally strong covenant structure, saw significant flow of requests for amendments as a result. Market users say the market was able to respond quickly and sympathetically with its typically long-term eye.

DAVISON Last year was a very busy one for issuers renegotiating debt facilities, especially with bank lenders, to secure liquidity in the face of economic shutdowns. USPP is the most ‘bank-like’ debt capital market – so how significant was the flow of covenant waiver requests especially from March into the second quarter? How receptive to renegotiation requests was the USPP investor base?

BROOKS MUFG represented several of its Australasia-based clients during this period, helping them through the USPP amendment process. These processes generally went smoothly, with investors acting in good faith and understanding that COVID-19-related credit implications were out of issuers’ control.

Looking back through April, May and June, we saw a significant number of amendment and waiver processes come through the market. This corresponded with a slowdown of issuance as investors worked through their credit-committee processes. While the process was time-consuming for investors, it was comparable to what was happening in the bank market.


Issuers come to our market because we are long-term relationship-oriented investors and we have an understanding of their businesses. As a group, we recognise that these are the types of opportunities for which we have to step up and demonstrate our support.


Davison We have heard that economics last year favoured the Australian domestic market, which has not always been the case. Is this a structural change or will relative pricing between markets continue to fluctuate?

MOMDJIAN Relative pricing between the USPP and domestic market has fluctuated and always will do so over time depending on outright spreads, the basis swap, swap costs and – more generally – differences in investors’ understanding of credit, particularly in the current environment.

As a large and frequent corporate borrower, execution risk in the domestic market is no longer an area of concern for us. We are now able to issue sizeable bonds at attractive tenor of 10 years or perhaps even longer. However, better pricing and access to ultra-long tenor has actually seen us further expand our presence in the USPP market.

We receive indicative pricing feedback from more than 15 banks on a monthly basis and this has shown elevated domestic pricing relative to offshore markets throughout 2020 and into 2021. It is worth noting that this pricing dynamic may vary by sector, particularly as we have seen a number of other corporates choosing to issue in the domestic market.

CROSSLEY We started January 2020 with a very different strategy for what we thought we would do in individual markets. For Wellington Electricity, we were poised to do a USPP transaction and then the world blew up – all of a sudden we went from one swapped-back level to another that was nearly 100 basis points wider.

We needed to pivot so we turned to the bank debt market – putting in short-term funding as a bridge. We were hoping it would be a temporary blip but obviously it lasted a lot longer.

Unfortunately, we could not come back to the USPP market last year for Wellington Electricity, which ended up being termed out in short-tenor bank debt. We are probably only now getting back toward USPP levels that we would have liked last year. But we had to put other funding in place, so that door has closed for the moment.

However, as has been mentioned, the USPP market is never shut – it was just a pricing call for us. We still love the USPP market and its potential terms, such as delayed settlement, and we also appreciate the investors. Traditionally it has been a very competitive market and last year was the first time that the Australian dollar and euro markets were both well inside USPP.

We were pretty light on funding requirements for VPN [Victoria Power Networks] and UED [United Energy Distribution]. For VPN it was a similar story to Wellington Electricity: we did some bridge financing just to stop the gap and increase liquidity.

At the back end of the year, private placements in Australian dollars were very attractive, assisted by demand from Asia. Pricing was probably 50 basis points inside the swapped back level USPP was showing at the time. The update I am getting now suggest spreads in the USPP market have started to tighten and catch up.

SHAW My experience of pricing during 2020 was similar. The Australian market has become a lot more attractive in recent months. But we will need to see whether this shift is temporary or structural.

This is a good dynamic for issuers as it provides the benefit of an additional market to consider. This is not to say the USPP market has gone away – I think each market has its own sweet spot. The Australian dollar market is perhaps inside USPP in pricing at the slightly shorter end of the curve. But the USPP market will always offer tenor, which is a unique proposition.

“Maybe we have called it something else in the past, but we are very much a bottom-up shop – and concepts of ESG and social responsibility have always been there. This said, we are now honing how we talk about it and it is becoming more important to the investment process.”

Davison On pricing, all things being equal the Australian major banks being absent from US funding markets should make the cross-currency basis swap more favourable for Australian dollar funders going to the USPP market. But this does not seem to have been a game changer in 2020. What factors counterbalanced a favourable basis?

CARR You are absolutely right that, on paper, a narrower basis swap should be positive for the prospects of USPP issuance by Australasian issuers. This was borne out through the second half of 2020, when the basis was at a 2-3 year low, by the pricing relativities of the euro and US dollar public markets.

The overarching factor for the USPP market, though, was the low-yield environment and the impact this had on minimum yield. It meant outright pricing made the USPP market less attractive notwithstanding a narrow basis swap.

BROOKS When there is a sharp move lower in US Treasury yields, the USPP market typically sees a slight pullback in demand from investors or a short-term increase in new-issue concessions. Minimum coupons were also a big part of the discussion in May and June last year, especially given US Treasury yield stayed at an all-time low even when spreads declined significantly from the peak. These elevated new-issue concessions are usually short-lived as investors quickly become underinvested in the asset class and the competitive efficiency of the market returns.

This is what we saw throughout the second half of 2020 and certainly in the first two months of 2021. New-issue concessions were slightly elevated in the second half of 2020 but have now compressed to a more normal level of 10-20 basis points over US dollar public comparables.

SPAETH There were definitely conversations about minimum coupons in late February and early March 2020. At that point US Treasury spreads had tightened but there had not yet been much market dislocation. This abated rapidly as several large public corporate issuers came to the market with very substantial new-issue concessions.

There have been conversations around coupons in periods of temporary disruption but I agree that generally, in my experience, they have not lasted long.


Davison Patrick Manseau mentioned earlier that he has noticed a profound change in engagement with ESG in the USPP market. Has there been a big uptick in the USPP market’s engagement with green, social and sustainability bonds or is it more about ESG themes more generally?

KELLY COVID-19 has had a transformational impact on ESG factors across the board. For example, the ESG ETF index is outperforming the S&P 500 index by 6 per cent. To be sure, ESG factors will play a critical role in rebuilding the post-COVID global economy.

The way in which the fixed-income community has responded varies around the world. We all know ESG-labelling on debt products has been driven by the European market and has been influencing other markets around the world. It is now garnering a lot of focus in Australia.

It will be very interesting to see how the USPP market responds. As Patrick Manseau says, the ESG agenda was there pre-COVID-19 but the pandemic has brought it to the fore. There is ESG-labelled product in fixed income but the general ESG theme is gaining momentum too. It is not just about labelled bonds and loans, in other words. It is about what a company is doing with respect to sustainability, its environmental impact and social perspectives.

These themes are playing out in all fixed-income markets. For example, we were involved in an oil-sands transaction in the US 144A market that was not labelled but had a lot of investor pushback because of ESG concerns.

“Each market has its own sweet spot. Perhaps at the slightly shorter end of the curve, the Australian dollar market is inside the USPP in pricing. But the USPP market will always offer tenor, which is a unique proposition.”

Davison We saw some commentary last year about the ability of Australian coal-adjacent borrowers to get funded in the USPP market after looking at but not finding what they needed in the domestic market. This seems to have created a perception that the USPP market will fund assets that are becoming more difficult to fund elsewhere. Is this correct?

KELLY US investors tend to look through cycles. This means they can potentially understand a transition story more clearly than domestic investors – they are actually taking a view on transition over its full time horizon.

CARR The USPP market has shown an ability to be very innovative over the last couple of decades, for instance with the development of foreign-currency availability and delayed draw. This innovation was on show through Sydney Airport’s transaction last year. This was the first-ever two-way sustainability-linked bond (SLB) and highlights the ability of the market to be receptive to ESG products and innovative as well.

Davison What convinced Sydney Airport to undertake its SLB deal in the USPP market?

MOMDJIAN Investors in the USPP market are open to bespoke and novel deal structures. Our 2020 deal had a combination of delayed draw, three currencies, ultra-long tenors and a sustainability-linked tranche with two-way pricing. It is my understanding that there is yet to be a sustainability-linked deal with two-way pricing in any public bond market.

It is worth noting that in speaking with public bond market investors on the topic, most if not all find it challenging to digest the potential of rewarding issuers with a pricing discount but are very much on board with incorporating the potential for a pricing premium. While this may be more structural than opportunistic, it presents a commercial challenge as it effectively removes the incentive for borrowers to drive improvements in sustainability.

It was therefore an easy choice for us to at least test the waters in issuing sustainability-linked product in the USPP market. Interestingly, from receiving few questions on ESG from USPP investors in the past, we had a large number of investors join the briefing call on which we introduced the SLB concept. Interest is very much there.


Davison Can we hear more from the investors on ESG in their portfolios – and specifically the extent to which its role is growing?

MANSEAU I am not an ESG expert but it is apparent to me that it is a growing force and will continue to be important in the market. In 2020, particularly in the US, many factors pushed ESG concerns to the forefront in corporate boardrooms.

We had a social-justice awakening in the US. The wildfires in California heightened the environmental focus, for instance. These events served as a catalyst for capital-markets actors and corporations wanting to signal to their customers, investors and shareholders that they are aware of what is happening.

Boardrooms set goals, and they want to measure and hit the metrics associated with them. As a result of this, we are seeing innovations like the two-way pricing mechanism on Sydney Airport’s deal and some flexibility around pricing.

Previously there was a view that issuers could label a green bond but investors were not willing to change what they pay for it. Some are now willing to entertain a pricing concession to show to their chief investment officers that they have delivered on something promised to the board of directors.

Fundamentally, ESG is part of credit underwriting anyway – from a sustainability of business standpoint. The biggest area where we are seeing this in the US, and which we are coming to terms with in the USPP market, is in hydrocarbon-based assets. We have seen US insurers pull out of the coal sector and financing of coal has been scaled back over a number of years.

I suspect companies are trying to figure out their own policies. The investment opportunity set and ESG goals need to overlap. A big thing we are all talking about is energy-transition strategy. Meanwhile, companies and investors are making net-zero carbon pledges. Reporting and metrics are important here. We want to know issuers’ strategies for reducing their impact on the environment.

The feedback I give to issuers is that there is usually appetite for investment if they are a good, cash-flowing business and in a sector that is not going away any time soon. However, issuers need to be able to explain their transition strategy and ESG stories. This is being included in investor decks a lot more often.

It is not just talk anymore. Investors want to see real action rather than just greenwashing with a label. There is some signalling but I think there is also real movement and substance.

“US investors tend to look through cycles. This means they can potentially understand a transition story more clearly than domestic investors – they are actually taking a view on transition over its full time horizon.”

SPAETH I am glad to hear it said that ESG has always been part of the credit underwriting process. Maybe we have called it something else in the past, but we are very much a bottom-up shop – and concepts of ESG and social responsibility have always been there. This said, we are now honing how we talk about it and it is becoming more important to the investment process.

We have invested in several green bonds where there was no price concession. It was still a bottom-up process and we were happy to do those deals.

We also invest across the entire Australian utility space. We are well aware that a number of the big gentailers are very heavy on coal. We look at this as a structural facet of the current state of affairs in Australian power markets. Assuming the gentailers return to the USPP market, our focus will continue to be on the specifics of how they are managing these assets. We appreciate that these companies cannot just take all that power offline in a very short period. But we will be asking a lot of questions about the future.

JONES We have a similar theme – ESG has always been a core part of our underwriting. The big difference over the last 12-18 months has been disclosures and reporting on various ESG risks.

As an investor group, the USPP market aims to be supportive of energy-transition strategies. A lot of issuers know USPP investors can help guide and support an issuer through its transition. ESG has certainly changed a lot. There is more appetite to support green bonds and other structures.

BROOKS The flexible traits the USPP market is known for can also be applied to ESG-related borrowing. The market provides two primary avenues for companies looking at green finance: standard green bonds, which are asset-backed or linked to a specific green use of proceeds, and ESG-linked bonds, where pricing is tied to certain ESG factors. The ESG criteria can be rated or unrated.

Sydney Airport’s ESG-linked transaction, for example, was rated by Sustainalytics. However, we are preparing to launch a USPP transaction where the ESG component is purely KPI-driven. These notes do not have an external rating, just KPI-based pricing – which is more in line with what can be done in the bank market.

Davison Another differentiator for the USPP market has always been its ability to assess credit without formal ratings. Is it the same with ESG – that investors are less reliant on third-party ESG scoring?

BROOKS I think the USPP market follows banks in ESG. We can replicate bank documentation and sustainability-linked-loan (SLL) terms and conditions and then put these into our purchase agreement with different pricing mechanisms.

I think we will continue to follow the bank market on this. If banks are willing to accept KPI-driven price changes, we have seen this reflected in USPP documentation – so an external rating may not be needed.

KELLY Looking at the USPP market in the context of global markets, it is deeply invested and now it is reorganising to assess ESG-labelled products. Each capital market will have its own requirements and certain asset classes will make more sense to USPP investors.

It is true that USPP investors do a lot of work to understand credit through the cycle. The analysis is deeper than in some public markets and, as a result, USPP can be more flexible with structural features like the two-way coupon step employed by Sydney Airport, for example. These investors are motivated and thinking about credit from a different perspective.

MANSEAU I don’t necessarily want or need to do all my own ESG analysis without support from third-party services. In fact it would be nice if there were agreed-upon standards. The issue right now is that we are still working out the commonly agreed standards – I compare it to the days of VHS versus Betamax during the videocassette era.

Different clients of ours are asking for different metrics and there is no unified view of what they should be. Some that we consistently see are tonnes of carbon displaced and gigawatts of one type of energy versus another – for instance gas-fired power plants versus solar generation.

But how do we measure the ESG metrics for the type of assets Transurban, with its toll roads, has? If it is installing electric-vehicle charging stations this may be more qualitative than quantitative at this stage. Everyone wants to count statistics so there is demand for quantitative analysis, but we cannot do it unless there is agreement on a set of metrics for each type of asset.

Everyone wants to be able to say how much carbon they have eliminated and the number of people they have served. If ESG rating agencies could standardise metrics it would make it a lot easier for all of us to row in the same direction.

“Execution risk in the domestic market is no longer an area of concern for us. We are now able to issue sizeable bonds at attractive tenor of 10 years or perhaps even longer. However, better pricing and access to ultra-long tenor has actually seen us further expand our presence in the USPP market.”


Crossley How would the USPP price have changed for Sydney Airport had it not included the sustainability tranche?

MOMDJIAN Similar to our SLL, we made sure to progress the SLB concept once we were sure vanilla tranche pricing was as tight as it could possibly be. There is no point for bank and bond investors to bake in any sustainability-related pricing concessions on offer as doing so would remove the incentive for borrowers to drive improvements in sustainability.

In fact, we made sure explicitly to highlight the possibility of a pricing discount or premium by establishing the 20-year sustainability-linked tranche alongside a 20-year vanilla tranche – the base coupon being the same across both tranches.

Davison I think it bears asking how big an incentive pricing is when an issuer is thinking about sustainability-linked or otherwise labelled debt. Does the sustainability-linked format answer this question because it bakes the price change into the initial terms?

CROSSLEY If we issued two different formats we would end up with two different curves. Maybe they are the same, maybe they are different. But as soon as we go down the route of saying one option is greener, does it mean our older lines are not green anymore and thus become less sought after?

I would like to think that all our debt is green, but obviously USPP investors make up their own minds as to how green we are. We have lots of very good stories internally and for this reason alone we would like to keep these metrics and not just say that they are to be baked into documentation.

I read a report from Bloomberg based on an analysis between green bonds and non-green bonds in Europe. It said there was a 5 basis points differential between the two. Clearly, European investors have buckets into which they are only allowed to place green bonds. But is this something that is going to be widely found in the US going forward – to the extent that demand for anything green is only going to increase?

BROOKS Currently, classifying a new transaction as ESG-linked may have the benefit of garnering additional demand from the market. However, besides a few select deals like Sydney Airport I do not think we have seen ESG-linked or green bonds specifically getting significantly better pricing.

Attracting additional demand into a transaction will ultimately lead to better pricing down the road. But right now, given the way the market currently sits, it is hard to define that difference.

KELLY If we take the comment from earlier – that USPP investors often take their lead from the bank market – it is noteworthy that we have seen the emergence of SLLs in the loan market. It is really interesting to see the delta differential of margin discounts and premia across the globe.

Not surprisingly, in Europe the delta now is around 10-20 basis points. In Asia this is sitting around 5 basis points. Australia is around this level too – although we anticipate this to be flexed over time – and in the US it is lower, around 2-4 basis points.

I guess the question for all of us is whether the US will match Europe. My personal view is maybe not. I think European investors are running toward a different agenda. This said, when we were talking about this four or five years ago there was no delta or premium for ESG-labelled products – they priced flat. But corporates like Sydney Airport demonstrate that development is happening in this space.

As liquidity comes to the fore, I think we are going to see more and more USPP investors starting to allocate capital in this format and, potentially, we will see larger price breaks. To me, this is what is most exciting and interesting – how the US market develops given it is pretty much untapped when it comes to ESG finance.

How trillions of dollars of capital is reallocated in this format will be the next conversation we have. We know what is happening in the European market, we know what has happened in Australia, and Asia is trying to catch up. I think the big shift is yet to come in the US.

“ESG was talked about as a focus in the past, but there was a real shift in client interest, demand and investment decision-making beginning on 1 January this year. This is more of a policy phenomenon – it is somewhat political but it is not tied to the US election.”


Davison In the last couple of weeks we have seen markets taking the view that economic improvement is coming quicker than might have been expected and as a result effectively taking on central banks. This has not had a major impact on credit so far, but what are investors’ outlooks on US and Australian rates and the economic trajectory, and how does this feed into a view on the USPP market as we move through 2021?

JONES There has certainly been a dramatic movement since the start of the year. The 10-year US Treasury started 2021 at around 0.9 per cent and is now sitting at 1.5-1.6 per cent. Last year was pretty volatile, too, so I am not going to make a prediction – because inevitably I will get it wrong!

I think these dynamics are challenging some views on the longer-term outcome, whether it will be lower for longer or, perhaps, recognition that we are seeing a reversal to a more normal level of rates. It is going to take some time to play out but there continues to be a lot of fiscal-policy support, which should continue to drive growth in the US and may lead to higher rates.

It has been a very positive story across Australia. Listening to management teams discuss their recent half-year results and outlooks certainly makes it seem that there is a pretty positive outlook. Our hope is that this will create opportunities for more companies to come to our market to issue debt for growth purposes now the worst is hopefully behind us.

Brooks Is the rates environment having any impact on how investors are looking at the asset class?

MANSEAU I do not think so. Our clients use the spreads we bring them for asset-liability duration matching. They use other products to hedge against inflation – specifically with investments in real assets.

The issue underlying everyone’s concern is watching the switch from the COVID-19 discussion back to the pre-COVID-19 discussion. Are we at the top of the market? Is there going to be an economic correction? I do not know the answer.

The primary things we are focused on in a rates context is refinancing risk and issuers’ exposure to it through increased cost of debt. This is a piece of underwriting credit that we always do, though, so I do not think it is changing how we act very much.

SPAETH The rate of change in Treasury markets over the last few years has been dramatic, but we are largely rates agnostic when it comes to how to invest. Our clients also asset-liability match so what we do ties into their business. We need rates that work for them. The USPP market is seen as an asset-diversifying place to invest. I do not anticipate our flows being interest-rate driven this year.

JONES The rates environment certainly has not changed our view. We continue to have a lot of appetite for private credit and USPPs, and seek to invest US$10-12 billion annually in the asset class. Treasury rates increasing and spreads coming in have hopefully made the market more competitive so a few more opportunities will materialise in the near term. We are positive and hopeful that more Australian issuers will come back to our market this year.

Buy-side perspectives and credit constructiveness

Australasian issuers tended to find domestic capital-market conditions appealing relative to global offerings in the second half of 2020. But the experience is not universal – and the long-term value proposition of US private placement (USPP) issuance is not going away.

DAVISON It is interesting that we have heard slightly different perspectives on relative economics between markets from various borrowers. Is this reflective of a wider dynamic – that relativity is more movable nowadays?

CARR The domestic market has been demonstrably the most efficient in volume and pricing for many corporates through the past 6-9 months. However, relativities will ebb and flow according to a number of moving pieces, including the basis swap and outright spreads offshore.

A lot of issuers will have observed a period of relative strength over the past 6-9 months, in which the domestic market has performed well. They will now be looking to see, whenever there is a wobble in offshore markets, if the domestic option remains resilient and open. This can only be substantiated by the test of time, but certainly the experience over the last nine months suggests the domestic option is more consistent nowadays.

One specific that I think is worth noting – and it is quite curious to me – is that the offshore view of the Australian airport sector seems to be more constructive than the domestic investor view, as expressed by pricing relativity.


A lot of issuers will have observed a period of relative strength over the past 6-9 months, in which the domestic market has performed well. They will now be looking to see, whenever there is a wobble in offshore markets, if the domestic option remains resilient and open.