Australian corporate deal outcomes suggest investors are prioritising yield

A margin pickup of 100 basis points or more clearly helped in an environment in which investors are happy to add exposure to good quality names with additional yield – including in subordinated format.

Scentre last issued a domestic benchmark deal in August 2014, according to KangaNews data. But the issuer was well received on its return, eventually printing A$900 million (US$605.4 million) of subordinated notes from a more than three-times oversubscribed orderbook.

Until now, Scentre has used offshore markets for its subordinated transactions, pricing US$3 billion in a two-tranche deal in 2020. With the first of these approaching call date in 2026, Scentre considered the domestic market for part refinancing. The issuer will use the proceeds of the new deal to buy back some of the outstanding US dollar notes.

“Fortunately, the local market seems to have developed – in fact, it has transformed over the last 12 months, not just in senior but we felt also in subordinated, based on the consistent feedback we were getting,” Richard Williams, group treasurer at Scentre in Sydney, tells KangaNews. “The pricing that seemed to be available in the local market, combined with greater volume achievable, is what prompted us to start on refinancing the 2026 call date.

Since Scentre has issued domestically for many years, Williams explains that the issuer launched a comprehensive marketing process prior to the deal. It spent two days in Sydney and one in Melbourne, followed by single days in Singapore and Hong Kong. In total it met with around 80 investors – a process that it believes contributed, in conjunction with the high-quality credit of the offering, to the considerably more than 100 line items in the final orderbook.

Peter Block, executive director, DCM and syndicate at Westpac Institutional Bank, tells KangaNews the Scentre outcome lays down a marker for corporate subordinated debt issuance domestically. “The market has been telling us that it would support something like this for a while but the result is still extremely pleasing for issuers considering a product like this,” he comments. “A lot of investors’ interest exists for high-quality companies offering higher beta product in the form of subordinated debt.”

The bank tier-two market has been notably strong in recent months and there may be an opportunity for corporate borrowers to take advantage of ongoing demand.

“In a market that has supported strong supply of subordinated bank and insurance product, there is a scarcity value when a corporate entity issues a subordinated instrument,” notes Tabitha Chang, director, capital markets origination at National Australia Bank in Sydney.

With so much demand, Williams says Scentre was able to achieve a very robust price outcome. If this dynamic in the Australian dollar market is maintained, and in particular for longer tenors, Williams adds that Scentre would be encouraged to become a regular issuer.

Two days before Scentre priced its subordinated notes, Telstra printed a A$450 million six-year bond, hard on the heels of its return to the euro market, where it printed €700 million (US$775.9 million) of 12-year paper on 28 August. The company also priced a A$1.2 billion dual-tranche bond in February this year.

Alice Van Der Geest, group treasurer at Telstra in Melbourne, tells KangaNews the euro option made sense for multiple reasons. “To extend our debt maturity profile, we chose Europe due to strong investor support and greater execution certainty – particularly for long duration transactions. We were pleased to achieve our objectives and extend our curve in the European market,” she explains.

There was significant capacity in euros as Telstra attracted a book of €3.1 billion, with the issuer pointing out the quality of the investor book at clearing levels. Telstra wanted to follow up domestically to show its commitment to its home market and build a liquid curve, Van Der Geest says. With relatively limited volume, Telstra opted for a quick in-and-out strategy, following investor engagement and noting strength of the orderbook in February.

Telstra’s peak domestic orderbook was A$1.1 billion – lower than the February outcome, which got close to A$5 billion across two tranches. But leads say the new deal has to be viewed in the context of a limited funding need, quick execution process and the issuer’s focus of pricing near to fair value, given the support for Telstra across markets.

Pricing had effectively zero new-issue concession, says Enrico Massi, Sydney-based executive director and head of FI debt capital markets at Commonwealth Bank of Australia (CBA). “The book allowed us to revise the price lower,” he reveals. “Naturally, some accounts passed at the tighter level, but this is a natural result of managing a bookbuild.”

With a reasonably active pipeline of corporate supply, investors are less compelled to “jump into every deal”, Chang says. “The price Telstra achieved was at fair value if not a touch inside,” she adds. “With a lot of supply coming, some investors are perhaps more inclined to wait for opportunities where they may see a bit of new-issue concession.”

Meanwhile, Gary Blix, head of corporate origination at Westpac in Sydney, tells KangaNews Telstra’s return is all part of the issuer’s commitment to the domestic market. “Telstra has been very clear that the Australian dollar market is its home market. It's a core part of the issuer’s term funding strategy, and this transaction adds another data point to a well- established curve in Australian dollars,” he says.

Before the deal earlier this year, Telstra had just two lines outstanding and the most recent transaction now provides five points on the curve for investors including maturities ranging from 2027 to 2034 (see chart 1).

Source: KangaNews 13 September 2024

Telstra has been undertaking investor engagement to make sure it has support across the region: work that leads argue paid off in the most recent transaction. About 43 per cent went into Asia, Blix says. “Work ahead of the previous domestic deal allowed Telstra to move quickly – which was important, because we identified an opportunity for it to get in front of the supply that was coming.”

Van Der Geest adds: “Pleasingly, we are ongoingly well supported by investors across multiple markets. Our return was in part due to the strength of the orderbook in H1 and we were again pleased with the level of demand shown – noting that it was always expected to be a smaller, quickly executed deal.”

The Woolworths deal was even more bespoke, as a capped A$200 million tap to the issuer’s 2031 bond to bring its total on issue to A$650 million. Phil Schretzmeyer, Sydney-based group treasurer at Woolworths, tells KangaNews the transaction size made it well suited to a tap while this approach also shortened the time required for transaction execution.

“We have a consistent and supportive investor base in this market and this trade was no exception. What stood out was the support we received from European investors – a good example of the diversification of the investor base that the Australian dollar market has developed over time,” Schretzmeyer says.

Block says the deal outcome should be viewed in the context of the issuer’s specific need and execution approach. “A total book of A$580 million perhaps reflects a slightly less fervent market than H1, but taking into account that it was a tap with approximately three-times coverage, it is still extremely strong by historical standards,” he says.

As with Telstra, the Woolworths deal focused on price discipline. “Obviously there was some investor attrition after price compression on both transactions, but this is to be expected when going through an exercise like this: it demonstrates investors’ focus on relative value and is a sign of healthy market,” Block adds.

It also shows that the market has discipline, he continues, and that investors are prepared to walk away even from high-quality deals.

Penny Schubach, Sydney-based executive director and head of debt capital markets at CBA, argues that attrition in the Telstra and Woolworths books came down to the “limited, if not negative,” new-issue concessions. “Investors seeking spread will have to gravitate to higher beta names,” she adds.