Australian dollars a good fit for MHCUK’s growth ambitions

MHCUK’s London-based group treasurer, Jeremy Johnson, spoke to KangaNews about the issuer’s decision to come the Australian dollar market, the nature of its credit, the execution process and its funding plans.

MHCUK currently has an investor base of private placement MTNs – many of which are sold into Asia – and euro-denominated public bonds in Europe. We are keen to broaden out from this base. Australian dollar public bonds will form part of the mix of medium-term debt issuance in addition to the use of bilateral term bank borrowing, euro CP and securitisation in the UK.

Adding Australian dollar public debt issuance fits with the wider MHC Inc group’s global strategy, which is to raise more out outside its home market of Japan. This is because the business has already become, and will further become, more international.

The Australian dollar market is attractive to MHCUK because the minimum size for a public bond is around half that of a euro transaction, which enables us to deploy proceeds more efficiently and lowers concentration of rollovers in any single month.

We have been looking at the Australian dollar market for some time and, after seeing the strong market earlier in 2023, decided to take the first step by adding a Kangaroo wrapper to our MTN programme at the annual update in September.

Yes, after the success of our debut issue we anticipate returning to the Australian dollar market, potentially once or twice a year, to firmly establish our credit and access more domestic investor portfolios over time. This is provided, of course, that market rates and swaps co-operate.

The consumer and equipment finance businesses were readily understood by investors in Australia as similar companies are active in Australia.

What was important for Asian and Australian investors was the stability of the credit. In fact, this was critical. Notably, our strong capitalisation and low credit losses, alongside the strong ownership and credit ratings. We also set out MHCUK’s strategy and differentiating factors in our markets, which help us protect our business flows and margins.

As noted, the deal size in Australian dollars is attractive to us as it is smaller than other public markets. MHCUK adds around £150-200 million ($US189.5-252.7 million) of assets per month, hence we can deploy this amount of proceeds easily within a month. We anticipate similar sized deals in the future, or slightly larger if our asset growth accelerates.

MHCUK swapped the proceeds into sterling, given our predominantly sterling asset base. The cost of funds was broadly in line with other public bond markets such as euro, or possibly slightly lower. It was more expensive than MTN private placement issuance bank loans and, interestingly, securitisation – which is not usual.

MHCUK was advised by its joint bookrunners that a physical roadshow was strongly recommended for a debut issue, to meet key investors in person and demonstrate commitment to the Australian dollar market.

We believe the roadshow achieved these objectives and led to a stronger focus on the transaction by investors – particularly domestic investors, in the context of a very busy Australian dollar new issue market in late November.

We viewed the physical roadshow as an investment to launch our Australian dollar fund raising and establish a base from which, next time, we hope to do more virtually. This would be more in line with our ESG [environmental, social and governance] credentials.

We received good feedback from investors and the conversion rate was around 50 per cent of the investors we met in person, in Australia and Asia. We heard that some investors either did not have credit lines for MHC Group or preferred to wait to see how the first issue performs and then participate in secondary or subsequent issuance. This is helpful information in light of our strategy to build a presence in the Australian dollar market over time.

Indeed 60 per cent of the bonds were allocated to Asian investors and 40 per cent into Australia. This was due to strong support from a single, large Asian investor that knows us well. Without this investor it would have probably been predominantly domestic Australian investors. We do indeed look to build domestic participation over time.

The rates rally worked in both ways. On one hand, it provided a positive backdrop for fixed income. On the other, it reduced the attractiveness for some yield-focused investors.

MHCUK was indifferent to the yield level, since we swapped the proceeds into sterling. We were satisfied with pricing, which is broadly in line with our public bond levels in other currencies albeit wide to our MTN issuance levels.

The three-year tenor is appropriate for MHCUK as it is close to the average life of our assets. For future issuance, we would likely issue in a similar tenor or slightly longer – after factoring in investor preferences and pricing dynamics.

This is not a near-term objective. MHC Group’s business in Australia uses private securitisation at the moment, but this is a joint venture. Securitisation is not always efficient from a cost and time perspective, and it needs scale to work efficiently. MHC Group’s Australian dollar asset base is probably not large enough yet for a public ABS deal, and MHCUK itself does not have Australian dollar-denominated assets. It would be more likely that we would add the Australian business to the MTN programme, to access capital markets that way.