“Public markets are going through a period of volatility the like of which we have not seen for several years,” says Kate Stewart, Sydney-based managing director and head of debt capital markets at BNP Paribas. “Previously in periods of volatility markets were able to recover and stabilise, but the recovery has not happened this year. In fact, spreads continue to widen – and this has given USPP a point of difference.”

Stewart expects pricing and liquidity will recalibrate in general after the northern hemisphere summer. But as long as public market spreads and conditions remain volatile, she says issuers will likely continue gravitating to USPP.

Gary Blix, head of corporate origination at Westpac Institutional Bank in Sydney, contrasts the USPP market with public options – especially the need to step back during periods of turmoil. “For Australasian issuers, the private market is considered the most stable and accessible capital market during periods of heightened volatility,” he tells KangaNews.

Annual volume of USPP issuance topped US$100 billion last year, up from US$88 billion in 2020 and US$95 billion in 2019, according to data from Mizuho Securities. The USPP market has experienced almost constant year-on-year volume growth for more than a decade and it appears to be maintaining this pattern in 2022. Issuance for the year to May 31 is US$41 billion, up from US$34 billion for the equivalent period in 2021.

USPP issuance achieved this steady growth despite a fall in supply from Australasian corporates – which historically trail only their North American and European peers in volume – in 2020 and 2021. Before the pandemic, Australasian companies typically issued around US$10 billion of USPP volume annually through about 25 deals, about 10-15 per cent of total volume.

In 2020, by contrast, Australasian private placement market volume was just US$4.9 billion from 13 USPP deals, according to BofA Securities data. Market participants say highly conducive domestic funding conditions, supported by Reserve Bank of Australia (RBA) fiscal intervention, laid the foundations for the best-ever value proposition for corporate issuers in Australian dollars. Norms may now be re-establishing themselves, however.

“For much of the past 18 months, notwithstanding the initial COVID-19 impact, a global economy awash with cheap liquidity has underpinned credit markets,” says Matt Carr, head of debt capital markets, Australia and New Zealand at MUFG Securities in Sydney. “Issuers enjoyed a beautiful combination of all-time low benchmark rates and credit spreads delivering historically low overall bond pricing. But the situation has reversed.”

Corporate borrowers seeking to raise funds today do not have the luxury of stable markets, Carr says. Execution risk is to the fore. This is when the natural advantages of the USPP market shine through, because the availability of the USPP pool of capital has not suffered even as the price of credit has changed markedly in the past 6-9 months.

Brian Gottlieb, Chicago-based director, debt private placements at BofA Securities, acknowledges the cost of debt in
the private placement market has increased, based on a higher-yielding US Treasury benchmark overlaid with wider credit spreads.

While higher outright cost of funds is unavoidable, though, he emphasises that the relative value available to USPP issuers actually improved over the first half of the year as the market showed less volatility than public issuance options.

Corporate treasurers typically value certainty of liquidity above all else in their funding approach, and the degree of reliability USPP offers is highly attractive in a volatile global market. “USPP investors are buy-and-hold and do not have a trading mentality so they are not as affected by short-term volatility,” Gottlieb confirms.

The USPP market is also known for offering flexibility and a level of bespoke tailoring unavailable elsewhere. Simon Ward, managing director, debt capital markets at Mizuho in Sydney, says this sophistication supports growth in USPP volume even as other markets freeze up. “Issuers appreciate being able to sound with investors and put a deal together without the pressure of being on screens,” he says. “USPP is more accessible than some of the larger public markets for this reason.”

The availability of longer tenor, alternative currencies and funding deferrals in USPP gives issuers more room to navigate volatility. “With the rhetoric pointing toward continued rate increases, the ability to secure competitive funding at an attractive rate is especially advantageous to issuers that need to fund in advance, allowing them to lock in rates without worrying about negative cost of carry,” says Gwen Greenberg, Sydney-based executive director, debt capital markets at ANZ.

Unlike global public markets, USPP investors are willing to accommodate the natural Australian dollar funding requirement of most Australian corporate issuers. Greenberg tells KangaNews the number of US investors that can provide Australian dollars at a competitive level has increased significantly and that removing the need for issuers to rely on bank balance sheets for cross currency swaps is a further tick for USPP issuance.

While near-term factors like volatility in public markets are driving the relative attractiveness of the USPP option, lead managers argue that – like the hiking rates cycle – the situation should be regarded as a return to the normal course of business rather than an outlier. Australian companies typically issued in greater volume in the USPP market than they did at home prior to the pandemic, and in this sense it is 2020 and 2021 that represent the deviation from the norm.

On the other hand, not all the conditions of the pandemic era have unwound in the corporate lending space. “The banks in Australia are still lending at attractive rates, though the general view is that this could change over the course of the year,” says Adam Terranova, New York-based head of US private placements at BNP Paribas. “At some point, there will be an inflection where private placement pricing should look attractive compared with alternative funding sources. Unless the Australian and euro markets show a marked improvement from recent months, USPP will be a very attractive option for those issuers.”

For the 12 months since May last year, financial institutions have accounted for 22 per cent of new USPP issuance, real estate investment trusts (REITs) for 18 per cent, project finance 17 per cent and utilities 10 per cent, according data from Mizuho.

Of the USPP transactions completed by Australasian issuers so far in 2022, agents point to debut issuer Ichthys LNG’s jumbo US$1.3 billion deal from May as a clear demonstration of the market’s capacity and the growing role of project finance issuance. Water control systems company Reliance Worldwide Corporation also executed a debut deal, issuing US$250 million in April, and testing services provider ALS printed a US$200 million-equivalent deal across three currencies in March, including a A$30 million (US$20.5 million) green-bond tranche.

Putting aside market selection considerations, lead managers also point out there has been a relatively limited supply environment for Australian corporate credit overall. The domestic market has been slow, euro issuance almost nonexistent and only a handful of trades – often from Australian borrowers with US dollar funding needs – have printed in US 144A format.

There are some expectations of a pickup in issuance requirements in the second half of the year. Inter-market dynamics suggest borrowers may find a more appealing opportunity in USPP relative to other options when it comes time to execute a deal.

Ultimately, lead managers believe USPP will continue to be a mainstay of Australian corporate funding because
it reliably offers features many borrowers cannot reliably get elsewhere. For corporate credits without the scale of requirement to be relevant to the public US dollar or euro markets, USPP is likely the only option that will consistently offer extended tenor, for instance. With most investor groups shortening up their duration preferences in response to rates uncertainty, the appeal of USPP only grows.

“It is difficult to imagine a scenario in which the Australian domestic market could be consistently competitive beyond 10 years,” Blix tells KangaNews. “There would need to be structural changes before Australia can offer a viable alternative to the private market for extended maturities.”

The increasing ability of USPP investors to offer multiple foreign-currency funding options makes the market even more accessible to Australasian issuers, most of which need or at least prefer funding in their home currency.

“Part of the assessment in market selection involves the landed cost of funding in the home currency,” Blix says. “The cross-currency swap has an element to play in the decision-making process, so the availability of direct Australian or New Zealand dollars is very important when considering long-dated maturities in particular.”

While the euro market generally offers longer tenor options than Australian and New Zealand domestic funding options, volatility has many would-be issuers in euros looking to USPP as a safer haven for their funding needs. Carr points out that the conditions that saw euros become the optimal issuance option for most Australian corporate borrowers that could meet minimum size requirements are shifting once more.

“The dearth of issuance domestically and in the euro market this year points to the relative attractiveness of USPP and the US public market, although USPP has not been immune from price widening,” Carr adds. “Although the absolute pricing level has moved from where it was nine months ago, we are now seeing USPP feature more prominently from a relative attractiveness perspective.”

Terranova says any weakness in the public euro market likely means a greater percentage of the USPP investment pie will come from Europe compared with previous years. In turn, he expects more USPP supply to come from Australia as other funding options get more expensive.

Stewart confirms that European issuers are switching to USPP and achieving better levels by doing so. However, she notes that some of this is sector-specific based on supply dynamics. “About 20 per cent of issuance in the public euro market this year has been from REITs – that sector has been oversupplied and is looking at alternatives,” she reveals.

Brooks confirms asset management and financial institution issuers have driven USPP volume over the past few years. “REITs and utilities, which are constant users of capital, continue to use this market,” he says. “They do not always need to do index-eligible transactions and they appreciate the other flexible features of the private placement market.”

USPP investors are also not averse to newer structures and asset classes – or, as Terranova puts it, “transactions that do not fit easily into the box of getting a rating from multiple rating agencies and then being shipped off to the public market.”

Terranova also cites a high prevalence of green use-of-proceeds private placements and says the percentage of environmental, social and governance (ESG)-linked deals is growing. “USPP investors are getting very comfortable purchasing ESG-labelled transactions, and issuers are getting more innovative with how they can address the ESG topic,” he says.

Ward sees the flexibility USPP offers as a draw for investors as well as issuers. “We continue to see growth in the investor pool – the insurance market globally continues to grow and the funding going into those investors seems to be never-ending,” he says. “We see a lot of upside for the next couple of years.”

Buy-side growth has seen asset managers and private equity firms joining the traditional investor base. “A lot of new investors – including big accounts – are coming into USPP,” Stewart says. “The issuers coming to this market are attracting a more global investor base – it is not just US insurance companies anymore.”

The growth is reaching Australasia in new ways, with traditional and more novel USPP investors beginning to set up presences closer to Australasian issuers. “There has always been a large pool of insurers in the US with deep pockets, across the states,” Ward says. “We also see accounts coming from further afield and representatives of some of these USSP investors are starting to rebase into Australia to be close to the deal flow and the action.”

Moreover, according to Greenberg, the number of alliances in the Australian market has dwindled as the major banks focus on their own origination and distribution teams. ANZ recently undertook this initiative, going solo after being part of a joint venture with J.P. Morgan in the USPP space for many years. “This shows the potential of this market and its growing importance for Australian issuers, especially during periods of increased market volatility,” Greenberg tells KangaNews.

Carr, who notes that the long-term, buy-and-hold nature of the investor base makes the investor-borrower relationship especially important in USPP, says “unprecedented growth” in the investor base over the past 12-18 months has added market capacity. He tells KangaNews: “There are more dollars chasing a similar volume of transactions, so market dynamics are positive over the medium and long term.”