Deeper roots support corporate issuance in Australia

Uncertainty typically leads to lower Australian dollar corporate issuance as borrowers either avoid the market completely – often reverting to bank loans for refinancing – or print offshore. For instance, no deals were recorded in Q1 2008, the height of the financial crisis, while the January 2016 sell-off of Chinese equity markets also correlated with low Q1 Australian dollar corporate credit volume. However, a slow start is not necessarily a precursor of low full-year volume: the turmoil of early 2020, for instance, was followed by a surprisingly active corporate issuance environment over the course of the year.

Participants from all sides of the market say the steady flow of deals in 2022, while smaller than usual, is an encouraging sign of the growing resilience of the Australian dollar funding option. As is often the case in the local market, limited corporate issuance appears to be driven at least as much by supply factors as any jitters on the buy side.

Michael Larkin, group treasurer at Lendlease in Sydney, says the Australian market is a different proposition than it was even five years ago. “The market has continued to develop and grow – it is deeper and broader,” he comments. “I am not concerned if we have slower periods because, taking a step back and looking at the trajectory of the market overall, it has developed significantly and in a positive way.”

Corporate issuers priced about A$20 billion (US$15.6 billion) in the Australian dollar market in 2021, the highest volume year since 2017 and the second largest of all time. Stability and lack of competition certainly helped, as the Australian economy reopened while banks spent much of the year well supplied with wholesale funding from the Reserve Bank of Australia.

Indeed, part of the reason flow has been limited so far in 2022 could be issuers moving to take advantage of the positive environment last year. Lendlease, for example, finalised more than A$3 billion of green or sustainability-linked bonds (SLBs) and sustainability-linked bank facilities over the last 18 months, adding more than A$1 billion in SLBs and sustainability-linked loans for Lendlease managed funds over the same period.

“Market conditions were conducive last year and we felt there was a reasonable likelihood that rates were going to rise, so we wanted to get to market while conditions were amenable,” Larkin notes. “It is possible other issuers are ahead of their funding requirements, too – so they can now sit and wait to see how volatility plays out.”

For Phil Schretzmeyer, Sydney-based head of treasury and group planning at Charter Hall Group, the funding task is never complete so the company will consider issuance throughout market cycles. Nonetheless, Charter Hall was active in the positive environment of 2021. It printed three Australian dollar transactions last year, totalling A$950 million.

“We want to grow our Australian dollar MTN presence – our focus is the domestic market,” Schretzmeyer says. “We are not finished as an issuer, but it is about timing.”

He agrees the Australian corporate bond market has become more resilient, though with the caveat that more issuance is needed to demonstrate this resilience through the cycle and across market conditions.

Issuers do not judge the supportiveness of the local market just on deal activity. There is also greater confidence nowadays that extended duration can be available in Australian dollars. This can be critical for some issuers.

Michael Momdjian, general manager, treasury, tax and insurance at Sydney Airport, says 10-year triple-B supply in Australia was rare prior to 2020. He tells KangaNews: “Over the last few years, I can no longer count 10-year triple-B issuance in the local market on just one hand. The market has definetly started to support longer-dated issuance.”

Triple-B rated corporate borrowers issued A$4.2 billion of 10-year bonds last year, in 10 deals (see table 2). This volume built on the momentum from the A$3.7 billion that came to market across nine deals in 2020.

Momdjian says Sydney Airport wants to diversify its funding sources through local bond issuance, but he highlights the importance of staying relevent in the world’s deepest and most liquid bond markets. “Our first ever 10-year US dollar bond matured earlier this year, with another due to mature in less than 12 months’ time,” he says. “Diversification is only one of many funding objectives we strive to achieve. We also need to remain relevant in our core funding markets.”

Sydney Airport has tapped the equity market for its funding requirements over the last two years. However, a consortium led by New York-based Global Infrastructure Partners and IFM Investors bought the company in 2022 and subsequently took it private, which changes the company’s funding plans independent of market behaviour.

Momdjian adds: “Some corporates have issued equity and some have tapped loan markets, while the pandemic has affected some such that they may be waiting to tell a better story. Others may not have any near-term funding needs. Many factors have contributed to the slow start in bond issuance this year aside from market volatility.”

Of the eight corporate credit deals priced by 11 April 2022, four were direct refinancing of facilities maturing this year.

While corporate issuance has been limited, the Australian dollar credit market overall has shown a good degree of resilience and openness to new issuance. Financial institution transactions were key to kick starting the Australian dollar corporate credit market in 2022. As more deals printed, investors and issuers alike gained greater clarity on pricing and market appetite.

Richard Garland, senior portfolio manager at QIC in Brisbane, says the three-year deal Westpac Banking Corporation priced on 10 March confirmed a new, wider level for local spreads that had been prefigured by a Commonwealth Bank of Australia (CBA) US dollar deal a week earlier.

The Westpac transaction offered a significant pricing concession to major bank secondary marks and earlier new issuance. It printed at 69 basis points over swap, 22 basis points wider than National Australia Bank (NAB)’s three-year tranche issued in February.

“We see this often in Australia: persistent volatility offshore leads to secondary trading falling away,” Garland adds. “Spreads are stagnant, which gives a false sense of resilience and we need new supply to reprice the curve. New senior major bank issuance is particularly helpful because sell-side traders use it as an input for where they price other parts of the market.”

Since the Westpac deal there have been further encouraging signs of robust underlying demand for credit. Suncorp and CBA have both tested the waters for subordinated issuance while AusNet Services and NBN Co printed 2022’s first true corporate deals of A$500 million or more. Such outcomes can establish confidence for other corporate names. “From an issuer’s perspective, we are watching what happens in this period of instability,” Schretzmeyer says. “When a large corporate transaction takes place it really sets the market.”

Barry Sharkey, Sydney-based partner at Barrenjoey, says the AusNet deal recorded strong investor interest with an orderbook topping A$1.1 billion at peak. The Barclays-Barrenjoey joint venture was joint lead manager on the deal with ANZ and NAB.

“In volatile conditions, primary transactions can play an important role in resetting secondary trading levels. This is particularly the case in the Australian dollar market, where secondary can be less active than in larger, more liquid jurisdictions. A new primary issue can sometimes reprice an issuer’s secondary curve, rather than the opposite,” Sharkey says.

He adds that more primary issuance is always welcome and a boost to confidence. “I’m not sure whether AusNet has broken the dam, but I expect to see other issuers of all types now look at the market,” he tells KangaNews.