Execution critical for corporates offshore
Intermediaries say execution strategy will play a more important role in international funding for Australian corporate borrowers in 2022 as spreads widen, investor allocations become more selective and new sources of market volatility continue to emerge.
Kathryn Lee Staff Writer KANGANEWS
Global debt market uncertainty is increasing. Interest rates and inflation are on the rise, while geopolitical tensions and the lingering effects of the pandemic create market volatility. While the Australian dollar market recorded a solid start to the year for global high-grade issuers and local banks, Australian corporate issuers had been almost absent from the domestic and foreign-currency markets by the end of February.
This is not unusual, as corporate issuance in and from Australia typically only gets started in earnest after the February reporting season. But borrowers with international market ambitions may be in for a challenging time in 2022.
Kate Stewart, Sydney-based managing director and head of debt capital markets at BNP Paribas, tells KangaNews this is the most uncertain start-of-year environment in 10 years. Execution will be a key focus for issuers as they navigate what could be a turbulent year. “Issuers will not be able to choose their week in advance and go – they will have to pick market windows, be flexible and move quickly to get a deal done,” Stewart says.
She adds: “Investors are struggling to understand what is going on and they are also waiting for mandates to see how much money they have to allocate. Combined, this makes it difficult to predict what the market will look like in 2022.”
Indeed, some corporate issuers believe their peers will be inclined to hold back from major transaction commitments throughout the first half of the year (see box on p52).
As and when issuance does take place, the euro and US dollar bond markets will continue to be an important source of funding for Australian banks and corporates. But being flexible, nimble and patient is likely to be key to finding the right execution windows in more volatile markets, says Duncan Beattie, managing director, investment banking Australia at Barclays in Sydney. “Inflation, rates and central banks were the main focus but the Russia-Ukraine conflict has added another dimension altogether,” he notes.
Toyota Finance Australia was the only Australian corporate to issue in the public market this calendar year by the end of February, printing a dual-tranche €1.15 billion (US$1.3 billion) deal on 5 January (see p7) – an unusually early window. The issuer and its leads say it selected this timing to avoid an expected pickup in deal flow later in Q1, but it may have inadvertently benefited by getting ahead of the latest wave of volatility.
The challenge is that no single jurisdiction can be relied on to produce superior outcomes. With uncertainty growing, Beattie suggests issuers wanting to fund offshore should monitor multiple markets. “For the bigger names, having access to US dollars and euros will be important to navigate the more challenging conditions we are currently seeing,” he says.
Excluding the US private placement market, Australian corporate issuers split their flow fairly evenly between US dollars and euros in 2021 with a slight bias to the US (see table). Liquidity is the critical factor, particularly if execution becomes more difficult. This is where the US dollar market continues to score over the euro option: despite growth in euro issuance from Australia in recent years, most intermediaries say the US market will almost always be the last to close and the first to open in especially volatile conditions.
Ben Stewart, head of global capital markets at ING in Sydney, says the legal cost involved in setting up and maintaining a US dollar issuance programme can be onerous but is often worthwhile. “Especially for smaller Australian borrowers, there are more cost-effective programmes than US dollar 144A. The catch is that they forego the liquidity the US market offers.”
“Issuers will not be able to choose their week in advance and go – they will have to pick market windows, be flexible and move quickly to get a deal done. Investors are struggling to understand what is going on and they are also waiting for mandates to see how much money they have to allocate.”Button Text
Whichever market they choose to issue in, Australian borrowers venturing offshore will find it increasingly hard to execute without credible environmental, social and governance (ESG) plans.
Dealers say 2022 could see the first ESG-aligned bonds issued by an Australian company in the US 144A market. Even outside the labelled issuance arena, ESG is playing an increasingly important role in global markets including the US.
Barclays’ most recent survey of US investors shows more than 60 per cent consider ESG in their decision-making. “Europe led the way but I would not be surprised to see Australian borrowers access US dollars for ESG issuance as well in the future,” says Jake Hartmann, Sydney-based director and head of debt capital markets, Australia and New Zealand at Barclays. “There has been extraordinary growth in the sophistication of US investors toward ESG in the last three years.”
Australian corporate issuers have, unsurprisingly, favoured the euro market for their ESG-linked notes. Stockland went to Europe to print its €300 million (US$341.4 million) green bond in October 2014. Worley followed, tapping the market for a €500 million sustainability-linked bond (SLB) in June 2021. Woolworths and Wesfarmers were next, executing SLBs in September and October 2021.
If issuance does become more challenging, an ESG-themed bond stands a good chance of improving the execution outcome given the stickiness of funds seeking assets with good sustainability credentials, adds BNP Paribas’s Stewart. As the cycle turns, the value of ESG may be moving from a cost benefit that was hard to quantify but definitely small to a key to market access. “In difficult markets, the more investors an issuer can get to look at its trade the better,” Stewart adds.
It is not always about the label. Stewart notes investors also consider a company’s overall ESG credentials. “Large investors are seeking a high granularity of detail,” she explains. “They want to know about boards’ commitments and objectives, and whether they are linked to sustainability. Issuers need to have a 2030 strategy and long-term objectives that are consistent with the Paris and Glasgow Agreements.”
“Europe led the way but I would not be surprised to see Australian borrowers access US dollars for ESG issuance as well in the future. There has been extraordinary growth in the sophistication of US investors toward ESG in the last three years.”Button Text
Corporates may put offshore issuance on hold until H2
Market uncertainly could see corporate issuers hold off on offshore funding plans until the second half of 2022, according to frequent domestic and offshore issuer Ausgrid. Geopolitical concerns and rising inflation are hard to ignore.
Ausgrid is a global issuer and has active programmes in the US, European and Australian markets (see chart). It has been a frequent issuer since its privatisation in 2016 and aims for diverse sources of funding.
Its last foreign-currency print – a €525 million (US$845 million) transaction in 2021 – was a proactive issue aimed at capitalising on favourable market conditions and getting ahead of a June 2022 bank debt maturity, says Ed Waters, Sydney-based group treasurer at Ausgrid. The issuer also wanted to be active ahead of what it anticipated could prove to be a more challenging issuance environment during 2022.
Other offshore funding options could assist Australian issuers if volatility makes benchmark issuance in the largest global markets unappealing at times. Ian Campbell, Sydney-based managing director and head of debt capital markets Australia and New Zealand at Citi, says while the euro and US dollar – and sterling to a lesser extent – will inevitably provide the bulk of offshore funding for Australian corporate issuers, niche currencies could receive an uptick in popularity if market conditions remain volatile and issuance windows narrow.
Noncore currency issuance from Australian corporate names has typically been sporadic. Issuers have found private placement opportunities in Hong Kong and Singapore dollars, while smaller benchmark deals appear sporadically in Swiss francs and Canadian dollars. The Asian-focused US dollar Reg S market fires periodically for Australian issuers, typically offering deals in clusters for corporate names with regional links or parentage, but has been quiet since before the pandemic.
Campbell says currencies such as Swiss franc, yen, Hong Kong dollar and Norwegian krone become more popular during times of volatility due to solid inflows from retirement and insurance funds.
“Pension funds in noncore jurisdictions need to be well invested and our attention is drawn to these markets when it is a question of where cash needs to be put to work,” Campbell notes. “The value is continuing to find ways to reduce execution risk without needing to go to the big markets.”
“Pension funds in noncore jurisdictions need to be well invested and our attention is drawn to these markets when it is a question of where cash needs to be put to work. The value is continuing to find ways to reduce execution risk without needing to go to the big markets.”Button Text
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