Source: KangaNews 1 March 2024

Source: KangaNews 1 March 2024

The volume of demand for the Telstra deal is perhaps even more eye-catching than its print volume. Indeed, at more than A$4.85 billion the Telstra book dwarfed some of the largest Australian dollar corporate transactions of all time. The largest of all – Apple’s A$2.25 billion dollar print from August 2015 – had a book of A$2.9 billion, for instance.

Gary Blix, head of corporate origination at Westpac in Sydney, argues that the Telstra outcome speaks to a new level of scale and maturity in the Australian dollar corporate market. He suggests investors have been able to keep their powder dry for an anticipated pipeline of corporate issuance despite the record supply of bank bonds in recent weeks, noting the relative rarity value of the true corporate asset class.

Sian Nagle, director, debt capital markets at ANZ in Sydney, suggests Telstra’s pricing – at 108 basis points over swap for the long seven-year and 133 basis points over swap for the 10-year tranche – was tighter than the nominal major-bank senior curve were it to extend to 10 years. The last time a corporate name achieved such an outcome was the same issuer’s five-year deal almost exactly a year previously.

The scale of bid was not a surprise to leads, given strong technicals and the strength of the issuer’s name. Nagle adds: “Telstra is always particularly well received, as a high-quality credit issuer. Meanwhile, its focus on euro issuance in recent years has increased its scarcity value in the domestic market.”

However, intermediaries say the demand Telstra encountered is increasingly available to a wider range of corporate borrowers in Australian dollars. A year ago, successful domestic prints from Telstra and AusNet Services came accompanied by warnings not to extrapolate the positive reception to corporate issuers in general. In 2024, by contrast, deal books for multiple corporate issuers are bursting at the seams.

Perth Airport priced A$300 million of seven-year bonds on 22 February, with a more than seven-times oversubscription that allowed the issuer to tighten pricing by 17 basis points during the execution process. The final margin, 147 basis points over swap, represents a negative 2 basis point new-issue concession according to data from Westpac Institutional Bank – which led alongside ANZ and SMBC Nikko.

Of Perth Airport, Nagle tells KangaNews: “It is a good triple-B infrastructure credit and its latest deal was a reintroduction to the market after a 10-year absence. It received an incredibly strong result, partly because investors appreciated the diversification.”

Brisbane Airport appears to be receiving a similar response to its 10-year transaction, which has Mizuho Securities, National Australia Bank and Westpac on the top line. The second update for this deal showed an orderbook of more than A$2.1 billion despite a revised margin 5-10 basis points inside the indicative level at 175-180 basis points over swap.

The bid for Australian dollar credit includes substantial domestic demand, but the scale of Asian interest may be the biggest game-changer. Blix reveals: “There is some variability in the Japanese bid specifically based on rating and name – the bids are typically bigger for single-A, blue-chip names – but this has been the case for some time. The newer story is what is happening in wider Asia, where capacity has grown significantly and is available to a wider range of credits.”

This is a broad-based bid, leads insist. Andrew Duncan, managing director, debt capital markets at HSBC in Sydney, reveals: “The Asian market is back and firing on all cylinders. All parts of the ecosystem are active including banks, central banks, asset managers, insurance investors and private banks. Altogether, this generates additional volume, which we witnessed in this transaction.”

Asian investors filled roughly one-third of Telstra’s overall book with a skew to the slightly shorter, seven-and-a-half year notes. The regional bid was slightly less prominent in the Perth Airport orderbook but still accounted for 15 per cent of distribution (see chart 1). By type, asset managers and insurers dominated both books though Telstra in particular found significant support from bank investors (see chart 2).

Source: HSBC, Westpac Institutional Bank February 2024

Source: HSBC, Westpac Institutional Bank February 2024

The reasons for enhanced Asian demand for Australian dollar corporate supply are the same as those identified in recent financial institution deals: intermediaries point to index inclusion, the Australian rates environment and point in the cycle, and lack of competing regional supply. Blix says the scale of the Asian bid could ebb and flow – in particular, he suggests, a rebound in US dollar Reg S supply could have an impact on capacity – but he is confident in a baseline level of ongoing demand.

Increasing its exposure to Asian investors was a component of Telstra’s strategy and the issuer points to regional participation as a highlight of the transaction. Alice van der Geest, the issuer’s recently appointed, Melbourne-based treasurer, reveals: “We invested in doing an Asian roadshow and additional time with these investors after the mandate. A focus of the funding execution plan was to grow our funding franchise in the region. We were very pleased to find active engagement throughout the entire process.”

Telstra roadshowed across Singapore, Hong Kong and Tokyo, a process that included at well over 30 one-one-one and small group investor meetings. Luke Spitty, managing director at SMBC Nikko Capital Markets in Sydney, says the issuer focused on developing its demand out of Asia early in the execution process. “The roadshow was very well received,” he reveals. “It generated more than A$800 million of unsolicited indications of interest, which gave additional conviction to the process.”

The way Asian investors interact with the deal process is particularly supportive of good execution outcomes. As with recent financial institution deals, Blix notes that many Asian accounts are willing to react quickly after mandate announcements, providing price leadership and giving books momentum by indications of interest stage. Issuers and dealers are seeking to incentivise this behaviour by adding language about favouring pricing and liquidity leadership in allocations to deal updates.

Investors from all jurisdictions are keen not to miss out. “Asia was quick to the [Telstra} book but domestic fund managers followed step,” Duncan comments.

This increase in scale and depth may be raising the Australian dollar market to a new level of competitiveness and relevance for corporate issuers. While Blix notes that there will always be reasons for issuers with large debt books to draw on multiple global markets – he highlights NBN Co, which began marketing a euro-denominated green-bond transaction on 29 February, as a good example – he says the role of Australian dollar issuance is likely to grow.

The story of Australian dollar capacity is “very much getting through” to local corporate borrowers, Blix says. It will only be helped by like-for-like comparisons such as the Melbourne Airport euro print on 29 February and Brisbane Airport’s 1 March deal. Book updates for Brisbane Airport suggest the issuer will get a “very competitive outcome against alternative markets”, Blix concludes.

“There is a significant uptick in interest in domestic issuance, particularly from names that typically consider multiple markets,” he continues.

Telstra considered multiple markets for its latest deal, but Van der Geest adds: “A further focus was to increase our level of funding domestically, especially with longer duration. Favorable conditions gave us confidence to go ahead. We are very pleased with the volume of demand and the duration we have been able to secure through this process – it’s a positive sign of the strength of our domestic capital market.”

Availability – or lack thereof – of longer duration has often been a sticking point for corporate borrowers considering Australian dollar issuance. However, Telstra’s deal reveals possibilities of longer duration at home, increasing its relevance even for issuers that access offshore markets. The final book for the Telstra transaction had A$2 billion of bids in the seven-and-a-half year tranche and A$2.85 billion for the 10 year notes.

“Many credits have access to 10-year tenor at the moment,” Nagle reveals. “It is interesting that Telstra’s 10-year tranche was mostly supported by domestic accounts as it demonstrates that this is not just a story of Asian liquidity. Many big accounts domestically participated in the 10-year tranche – and in very good size.”

Duncan argues that the Telstra deal is “a helpful signal that duration is on offer in Australia”. He acknowledges that how deep demand would be for issuers of other ratings and sectors is not yet clear – but suggests the Telstra outcome is “certainly encouraging” for all potential issuers.