Corporate Australia makes hay in global markets

CROASDELL There have been significant inflows into European credit funds throughout 2024. Overall, euro corporate bond yields remain above dividend yields and the corporate world has demonstrated greater resilience to wider volatility. Overall, we continue to see strong liquidity in our asset class.

This has driven performance and also supported a strong primary market throughout the year. Syndicate bankers are the same as corporate treasurers in the sense that we think about mitigating risk and prefer to make the most of a receptive market. On this basis, 2024 was expected to be front-loaded into the first half of the year – but supply has continued all year.

This is despite some pretty significant geopolitical and economic news flow. Time after time, there have been fairly significant events yet we were printing new euro deals within a couple of days.

CROASDELL There are two elements. Certain sectors and names had found the primary market challenging. A few ofthese are now taking an opportunistic look at a market that seems much more stable and constructive.

There is also an element of taking a bit of risk off the table for 2025 by executing some pre-funding. The reality is 2025 is a large redemption year in the euro market especially – a lot of the COVID-19 financing from 2020 is rolling off, and there is also a big capex pipeline and, maybe, M&A coming back when rates allow. These dynamics have definitely helped support supply since [northern hemishpere] summer and we have also been kept busier post US election than most had expected.

TRIGONA We managed to execute our funding strategy to our original plan in 2024, which is unusual. The markets have been very resilient this year.

GRAHAM Our funding need in 2024 wasn’t in the same quantum as NBN Co but it was a significant one in the context of our business – and our experience was pretty similar. Given it was a relatively large funding task for us, executive management wanted a good understanding of our indicative funding strategy early on, including when and where we planned to issue. By and large, we were able to execute very close to the original funding plan – within a week or two and perhaps A$50 million (US$33.4 million) up or down in volume per transaction.

MCHUGH Navigating the volume of issuance in the market has been more of a challenge. Thinking back to February-March, a lot of corporates were issuing more or less on top of each other, and in this context being nimble was more about slotting into a window that worked for the issuer and trying to avoid too much competition – particularly in euros.

Our plan going forward is to stay on top of our nondeal marketing so we have flexibility to move quickly. One of the really positive things about the euro market is that issuers can get in and out quickly – and, I hope, the same is increasingly true about the Australian dollar market.

VAN DER GEEST Europe in September has a lot of competing supply thanks to favourable conditions that many wanted to take advantage of. Deliberate, focused execution was key to getting ahead of pipeline. We completed an in-and-out strategy, launching and pricing on the same night. It was a busy night with nine other transactions in market. For us, being known to the market, we could execute without material transaction marketing.

VAN DER GEEST Definitely. Unless an issuer has a GMTN programme in place, the cost of issuing in the US is quite prohibitive. It is also quite restrictive, with less flexibility on tenor and narrow issuance windows. Its major benefit is execution certainty and volume. For Telstra, the US market has significant prominence from US-based telcos so differentiation may be a challenge. Meanwhile, the cross-currency swap has been expensive relative to euros for a while.

It becomes a question of how many core markets an issuer needs for its size of debt book. We are able to get funding diversity in various fashions and, overall, this means we enter the US market less frequently.

MOMDJIAN We are a little different. Given the size of our balance sheet and funding objectives that cover diversification of funding sources and maintaining capacity for future issuance, we proactively prepare documentation for the US 144A market as standard procedure in providing ultimate issuance flexibility – despite the associated cost and time commitment.

While prevailing swap dynamics often steer us towarda particular market from a relative pricing perspective, our decisions to access individual markets are typically not pre-determined. We were spoiled for choice this year, with all markets performing well across standard and nonstandard tenors. The US 144A market is a core funding market for us, alongside euros, US private placements and the domestic market. At any point in time one market may be more attractive than another from a cost and risk-management perspective.

Printing three deals across seven tenors and six currencies over 2024 allowed us to effectively survey the swap pricing landscape. I was amazed at the swap credit and execution charges we received from most of our banks.

TRIGONA Our US dollar deal was similar – I was pleased with the execution of the swap. The 144A market forms part of our strategy due to our funding requirements.

Our funding task won’t be as high in 2025 and our expectation is that we will consider all the markets we access but potentially for smaller volume in each. This should also support our goal of tightening spreads, while maintaining our presence in all markets.

CROASDELL Managing frequency of interaction is certainly a consideration. We are constantly asked by euro investors when certain issuers will be returning to our market. Australian names have been in demand in secondary and more frequent issuance would be very well received by the investor community.

DELA CRUZ We recently roadshowed Export Finance Australia and the overwhelming feedback was that investors preferred frequency over size. They would rather see an issuer access the market regularly and have liquid bonds than much larger size less frequently.

MOMDJIAN We typically issue A$1-2 billion or more a year so it makes sense for us to be active across multiple capital markets. The domestic market is now a core funding option with the emergence of strong demand at longer tenor.

Theoretically, issuing benchmark-sized deals across multiple markets in any given year is an effective way to address funding needs while generating strong price tension for those with larger balance sheets. This may be slightly different in practice, with upsized deals often doubling down on successful outcomes achieved and particular markets swapping back to comparatively stronger levels versus others at times. This can limit diversification opportunities.

GRAHAM There used to be a rule of thumb that when an issuer got to a certain size it needed the 144A market. But with the Australian dollar and euro markets being strong, I’m not sure if the same thing still applies – particularly if there isn’t a need for natural US dollar funding. There is certainly a view currently among many borrowers that it isn’t necessary to pay up 20-30 basis points or more to access 144A.

MOMDJIAN I agree with this. We have experienced many a situation where the US 144A market was pricing 30-plus basis points above our other core funding options, after swap costs, noting we typically target the delivery of a balanced mix of cost and risk-management outcomes when it comes to market selection.

Notwithstanding the size of our balance sheet – it is close to A$13 billion equivalent – and while diversification of funding sources is important to us, we are not forced to spread ourselves too thin across multiple markets.

VAN DER GEEST I certainly agree that a lot of market participants have had this view historically. My feeling is that, as an issuer, we have to do deals to prove that markets work. The domestic market has matured. There is strength from domestic investors, and dynamics look strong and here to stay. I believe the Australian market is set up well.

DELA CRUZ In 2021, APAC G3 issuance added up to roughly US$500 billion. This was a record year that included a lot of high-yield supply. The last three years have been more like US$250-290 billion.

Money has flowed into Australia as investors are comfortable with the risk: it is a triple-A country with investment-grade, well-run and transparent businesses and industries. Yields are still very attractive since the Reserve Bank of Australia has delayed rate cuts to next year.

WATERS One thing I would note is that the Asian response to Australian credits is not homogenous. A-band credits price very well and the airports also price well inside global levels, because their credit stories are fantastic. But there is actually much less interest in triple-B balance sheets.

It means a different mix of investors. Asia has stayed at 20-25 per cent of our books over the years, regardless of deal size or market conditions. There have also been distinct price breaks for larger volumes done by triple-B names in Australia – of A$500 million through to A$1 billion.

CROASDELL The US market was the one that was always open – there might be a price for accessing it, but it was always there. The euro market can now lay the same claim, giving corporate treasurers even greater comfort that this is the right spot for them, come rain or shine.

WATERS While the domestic market has been very good we still need to acknowledge the fundamental pieces that are missing, or at least lagging. One of the reasons why the US 144A market is always open is that there is a massive amount of secondary trading. In Australia, there are perhaps 10-15 core intermediary banks and only three of them have a reliable secondary market capability that investors rate.

When conditions are good and investors are not adjusting portfolios – and therefore do not require a lot of secondary liquidity – this issue falls into the shadows somewhat. But it is still one of the things that makes it difficult to be confident that the market will be consistent over time.

TRIGONA Investors have provided us with feedback that we should be careful with the selection of the joint lead manager group in our domestic deals, to ensure the banks selected can make secondary prices in our bonds. We now ask all our banks to provide us with their turnover statistics in our bonds.

VAN DER GEEST We all have a role to play in talking to every bank about its relative performance in secondaries, to ensure appropriate investment in their teams.

WATERS This is a really good point – it’s very important.

TRIGONA The banks’ sales forces are selling our stories to investors – we must ensure they know our story.

CROASDELL Transparency helps drive confidence in the market. Europe now has trade reporting obligations – APA data – so we can actually see what is traded in the secondary market. This is similar to what the US has with TRACE. This enables us to assess the liquidity in any name or bond and also means we see our own market share in any sector, name and bond.

TRIGONA This also helps us choose which banks we put on offshore primary deals. We ask banks if they are trading our bonds in secondary – if they aren’t, how can they sell us in primary?

TRIGONA It may be different for other issuers, but NBN has A$7 billion equivalent outstanding in green-bond format and it has been very important for us, especially in the euro market. The European investor base did not know us when we first went there and we knew we had to offer it something that differentiated us from other issuers – including other Australians. This was green bonds.

We did a lot of work with some significant European investors around our most recent deal. They hadn’t participated in our transactions previously, but they loved what we do on ESG and understood our assets, so they put in significant orders – in one case of €150 million (US$163.1 million) or more. This was an investor that we knew was putting the bonds into its flagship green fund. It really helped the deal – including our ability to drive spreads tighter.

The last time we went to the US market, by contrast, we had one question about green bonds – and this was from a European-based investor. We are not considering issuing green bonds in the US market.

In Australia, we did a dual-tranche deal in 2024 that included a three-year vanilla note and a seven-year green bond. There was good interest from green funds. It is not critical to issue green bonds in the Australian market but they do well when we offer them.

MOMDJIAN We previously printed a sustainability-linked loan and a sustainability-linked bond, where we delivered improvements across the entire ESG spectrum. While there was previously a more balanced focus on all three components of ESG, we have definitely experienced an increasing focus on environmental factors on the issuer and investor side, specifically in relation to carbon emission reductions – whether or not they are under our operational control.

TRIGONA I have heard from my peers that more boards are pushing back on target setting. While I believe green bonds are here to stay I think sustainability-linked instruments have their challenges.

GRAHAM We are devoting a lot of capital to the transition to renewables in our networks as we move to a new regulatory reset period, so we would be pretty comfortable attaching our name to the green-bond format given the linkage with use of proceeds and our asset base.

Our shareholders have a strong focus on ESG and are typically supportive of these initiatives, too. With this context, we could realistically consider green bonds in a market where this format makes sense in the future – one of which is euros.

WATERS My sense is that the market has refocused – there is more emphasis on governance now, whereas for a long time it was just about environmental and social. This has the effect of slowing everything down. The reality is ASRS [Australian sustainability reporting standards] are coming and we all want to know how these will work and how we are positioned. We don’t want to trip up on governance, and this is giving us all a reason to slow down and be more cautious.

MCHUGH ESG is definitely a focus in Europe and I have been in lots of investor meetings where an ESG analyst has come along. But I agree that they are more focused on strategy than specific data points or detailed questions.

There seems to be an acknowledgement that as long as issuers keep pushing forward in ESG strategy it is okay not to have green issuance. Specifically, though the airport is a leader in how it is managing its scope-one and scope-two emissions, scope-three is a significant challenge for the aviation industry. This makes it challenging to issue in labelled format.

SHEDDEN The recent ATL Endeavour did was sustainability-linked, and it had some innovative aspects in the sense that the business was in the process of resetting targets. The loan incorporated the existing targets, which are a couple of years old and which Endeavour is meeting – so there was an immediate margin reduction – but it also has a period in which to agree new targets.

And it goes beyond this, too. The loan has a 10-year tranche, which means targets agreed in the next 12 months also aren’t going to be enough for the full life of the facility. So there is also a mechanism for agreeing further future targets. This is something we will explore across other transactions. 

DELA CRUZ There is definitely a move toward investors considering the overall ESG DNA of borrowers as opposed to overly focusing on specific targets or disclosures. They want to know that a borrower is doing the right thing more holistically.

WATERS To be clear, ESG strategies are certainly very important.

CROASDELL We have data to back this up. We studied all our primary orders in Europe over the last few years, and one in six of the asset managers and insurers identify as dark green. One might say 16 per cent is still a relatively small number but those investors make up more than 50 per cent of the orders by notional volume. We also have many cornerstone accounts with clear ESG alignment.

Our data suggest orders from insurance and pension funds with this ESG alignment are one-and-a-half times larger for ‘dark green’ labelled instruments.

The most important thing remains, as Daniel mentioned, a holistic view of the issuer. Investors want to know what ESG strategies issuers have and whether they have targets in place. This isn’t just for the most tightly managed Article 9 funds – it determines whether an investor can fit an issuer into all the various pockets it manages.

On the other hand, market conditions in 2024 have had an impact. Markets have been so conducive that it’s hard to argue there has been much of a greenium available in 2024 – everything has gone well, effectively. If the market starts to become more fragmented in future, we believe ESG will again become a stronger differentiator on cost for our issuers.

VAN DER GEEST I think it’s very positive that investors expect issuers to be able to answer questions on ESG strategy. It keeps everyone engaged and promotes the overall transition.

MCHUGH We did a nondeal roadshow in Asia in July because we had had plans to access the Australian market. I believe this paid good dividends and was time well spent. We did one day in Singapore and one in Hong Kong.

Across markets in 2024 – and Asia is no different – the take-up of physical meetings was really strong. We had more one-on-one meetings on the nondeal roadshow than we did when we were marketing the deal.

Our deal was strongly supported by Asia – at around 40 per cent of the book – and the quality of the book impressed me, including strong representation from long-hold Japanese life insurance investors. We are happy with this sort of distribution profile as long as the quality is there.

Momentum is building in our programme as our global presence increases. For instance, since we became more active in euros we see the same investors supporting our domestic deals.

TRIGONA When we marketed our US 144A deal in 2024, we first went to Singapore and Hong Kong. We were selling a US deal, but we were also selling a potential Australian dollar deal. Our meetings were with accounts that could invest in both. We hadn’t been to Asia for face-to-face meetings before – or at least not outside Japan. It was a good opportunity to combine, effectively, a deal and a nondeal roadshow.

MOMDJIAN We also travelled to Singapore and Hong Kong as part of our domestic deal roadshow, particularly as we hadn’t printed a domestic deal since 2011 and hadn’t passed through Asia since our last US 144A deal, in 2016.

Approximately 45 per cent of the peak orderbook for our recent domestic deal came from Asia, with strong price leadership also demonstrated. This highlights the importance of the region.

VAN DER GEEST The marketing we did in 2024 was focused on Asia and on building relationships across the regional investor base. We were very well supported in both our Australian dollar deals – about 40 per cent of demand came from Asia across the two.

Engagement remains very important but how regular this should be depends on the frequency of the issuer. To be market ready, my sense is that perhaps a nondeal update every 18 months is appropriate.

Format can be tailored: we have found the roundtable format works quite well when we are in Singapore as the investors are quite engaged and willing to talk. Japan is better suited to one-on-one engagement.

GRAHAM Asia is a really important investor base for us – it is an important bid in any public Australian dollar deal. It is also worth noting that about 20 per cent of VPN’s debt book is issued in private placement format and the vast majority of this is sourced out of Asia.

Our major shareholder is Hong Kong-based and is really well supported there, and we have quite a few Hong Kong private placements in our debt book due to this connection. We are committed to meeting Asian investors – in fact, we are doing nondeal work in the region in mid-November.

MOMDJIAN Reverse enquiry demand presented to us from complementary Asian jurisdictions, including Korea and Taiwan, is less prevalent than it was perhaps five years ago.

CROASDELL Korean investors were indeed more active in US dollars and euros a number of years ago. But I sense the available liquidity and indeed the hedging costs back to won have made them more marginal players in recent years.

DELA CRUZ Taiwanese insurance investors are still licking their wounds from the sudden rise in interest rates. My sense is they are still on the sidelines. However, we have seen the resurgence of the US dollar Formosa floating-rate note market, which is mainly driven by Taiwanese banks.

CROASDELL From my perspective, the net has actually shrunk in the sense of which geographies the key Asian corporate buyers come from. But the places that are active have become more granular, with more plentiful investor numbers in each of the centres. Japan is a great example. It was historically dominated by a handful of big accounts but there is now a much broader cohort of investors in Japan that will look at offshore credit assets.

WATERS In Australia, we tend to talk about ‘Asia’ as if it is a homogenous market. But it is actually a very large place made up of very different investor groups. As we all focus more globally, I think Asia will become even more important – and not just as a source of Australian dollars. Our interest will
also be on a country-by-country basis, because they have very different specific ways to support deals.

WATERS There is clear precedence around the world for markets to operate in this way – to start the transaction process with wide pricing. It’s important to remember what the purpose is: it is an efficient way to find a clearing price.

We have followed the European convention of starting wide with a desire to generate momentum in the book. The challenge here is that there seems to be a reluctance on the banks’ part to go back and revisit the price more than once, and sometimes not by more than 10 basis points. This takes away the efficiency of price discovery aspect – which ought to be the purpose of doing it.

This pushes all our efforts back to the pre-deal or IOI process – trying to get the right number into the market at this stage. It’s quite difficult to manage.

To answer the question, I think it would be a positive development if we adopted the whole process in Australia. We would be able to go to our boards and, if necessary, say we tested tighter pricing but too many investors started to fall away so we now know what the clearing price is.

MCHUGH We have done quite a few euro deals so we are used to the process there, and it is all very transparent. The conversation we had earlier on secondary pricing is relevant here: there is high confidence about where pricing is going to end up because we have good visibility of secondaries.
It isn’t the same in Australia. There is less secondary activity and the main thing we achieved from the IOI process is a sense of what the Asian bid is going to be – there is limited visibility of domestic demand.

On price revision, we were able to revise three times in our domestic deal given the strong demand. It helps to have a cap on volume. It is less transparent than the euro market for issuers – investors in Europe are more forthcoming with pricing feedback.

TRIGONA Execution in the domestic market is still reasonably conservative. The investor base, however, has grown – which improves execution and increases the capacity to tighten spreads.

CROASDELL It has been like this really ever since the ECB [European Central Bank] intervention, which is quite a long time ago now. We adopted the practice of having more elevated IPTs [initial price thoughts] and it has remained the norm.

I agree that the market is mature and participants are very familiar with the processes used to ensure best execution. For borrowers that are new to this more recent market process, it understandably takes time to explain why we start with an IPT this far above where we are aiming to land.

But the investors closely follow all recent primary trades and starting too close to expected landing levels can be off-putting for them. They are nervous that the regular market tightening of 30-35 basis points would take deals to a level that is too low for them to participate.

Starting at wider IPTs facilitates the ‘drive-by execution’ style we have already discussed. But even this accelerated intraday process doesn’t prevent more sizeable moves from IPT – it is all still on the table.

GRAHAM It can be reasonably stressful. For instance, with VPN’s March 2024 AMTN we had to manage internal messaging on the IOI price we were going on screen with, given this was not where we expected the deal to land – and historically in this market we don’t typically get as much price progression from IOIs as, say, euros. Fortunately, we managed to move pricing to where we wanted to be. But it isn’t always an easy position to navigate.

DELA CRUZ There is a material difference between the feedback received on deal and nondeal roadshows in Europe. In the former, investors are more engaged – they are happy to provide information and preliminary IOIs where they see relative value.

TRIGONA I think it will still be a strong market and I am positive we will be able to execute our funding needs. In fact, I think the market has developed significantly in 2024.

VAN DER GEEST Subject to risk events, I agree that the outlook should remain for a strong, liquid market in 2025.

SHEDDEN It is worth noting that we had a lot of geopolitical events in 2024 and the market always reopened, and indeed became very active very quickly afterwards. It feels pretty buoyant, and markets have been able to absorb and roll with most of the shocks.

WATERS I believe the market will continue to be strong but the volume printed by Australian corporates domestically will be less than in 2024. There is a limit on issuance based on the size of Australian corporate balance sheets and a good proportion of large corporates have issued sizeable transactions in 2024. A lot of the names that need to issue will likely look offshore.

TRIGONA The Australian dollar investor base is building as well, though – more offshore investors are participating in Australian deals. There was always a perception that what could be issued in this market was capped, but it’s not just Australians buying Australian dollar bonds anymore – it is a much broader investor base.

DELA CRUZ Globally, I think it’s worth circling back to a point Toby made earlier: a significant portion of the funding raised in 2020, the onset of COVID-19, is coming up for refinancing in 2025-26. Redemption flows are going to be massive.

CROASDELL We expect further growth in euro corporate issuance in 2025: €410 billion is forecast by our research team. Credit fundamentals may well face further headwinds as we turn through the cycle, but market technicals should remain very supportive.

The lower level of rates combined with current spreads should make funding attractive for issuers and may well spur some further interest in the M&A arena. We are expecting a fast start and look forward to another busy year on the corporate front in 2025.