Asia now plays an important role in the health and development of Australia’s debt capital markets, according to attendees at two one-day conferences in Hong Kong and Singapore in May.
Hosted by National Australia Bank (NAB), the conferences selectively showcased a number of Australian corporates and financial institutions to key Asia-based fixed-income investors.
“I like to think of Australia as becoming the southern part of the Asian capital markets and this is evidenced by the inter-linkages between Asia and Australian capital markets, which continue to grow,” said Steve Lambert, NAB’s executive general manager of debt markets, who opened and chaired the conference.
His sentiments were echoed by keynote speaker Eric Williamson, group treasurer at NAB, who said the bank’s own fundraising activities exemplified how the market is evolving.
“As a group, we have A$141 billion in outstanding term funding and each year we issue between A$25 billion and A$30 billion into the markets with a weighted average maturity of five years,” said Williamson.
The bank has seen an increase in the number of Asian investors participating in its trades, he said. “In 2013, 12% of our term funding was raised from Asia ex-Japan, mainly in US dollars, and one of our top 10 global investors is based in the region. I expect this proportion to reach 20% over time.”
Williamson said Asia is a natural funding source for Australian issuers. “Our debt markets team under Steve Lambert has taken a practical role in forging links between the two markets by supporting education initiatives, simplifying documentation and spreading the word to different investors and issuers.”
Brad Scott, head of corporate bond origination at NAB, talked to conference delegates about the renaissance taking place in the Australian-dollar corporate bond market.
“Australian medium-term notes have been around for about 15 years but have really gained genuine momentum in the past three years,” said Scott, adding that the market now accounts for one in every three dollars raised by Australian corporates in global bond markets.
“We have about 50 issues a year on average, which is a reflection of the big shift towards corporates moving to diversify their debt funding sources,” he said.
NAB has been a lead manager for a growing number of Australian-dollar MTNs for key corporates, including Perth Airport, CitiPower, Mitsubishi Corporation, Telstra Corporation, Mirvac, University of Sydney, Wesfarmers, Lend Lease, Anglo American, Transurban and the Port of Brisbane.
Aside from a rise in infrastructure issuers – which made up a quarter of all deals in the past six months – Scott said the market has also been willing to invest further down the credit curve and there has been a clear trend towards tenor extension. “Investor appetite has extended out from an average of five to seven year years and there are encouraging signs about seeing the market develop further in the ten year maturity bucket, often viewed as being more a sweet spot for offshore investors,” he said.
Scott said many of NAB’s clients continue to talk to the bank about gaining greater access to Asian investors to diversify their investor base. “Over the years, Asian participation in Australian-dollar corporate bonds has grown significantly with interest coming from asset managers, banks and private banks. Sometimes Asian orders account for more than half of all orders, though the current average is about 20% to 30%. ”
As new investors continue to be attracted to investing in corporate bonds, Scott expects oversubscription rates on new deals to continue to hover around 2 to 3 times. “There is more demand from investors than there is supply and this trend will continue to prevail over the remainder of 2014.”
One sector likely to garner much interest from Asian investors is infrastructure.
“Infrastructure Australia puts the pipeline of developments at A$139 billion,” said Sam Watson, head of origination in Asia for NAB, in a presentation to conference delegates. “The agenda is being driven by the privatisation of existing government assets and new greenfield projects that are being funded with the help of the private sector.”
Watson said NSW and Queensland are currently leading the way with the most developed privatisation programme with transport and port assets flagged for sale, as well as electricity transmission and distribution once electoral mandates have been obtained. Watson went on to say that recent announcements from Victoria and WA indicate some assets are likely to come up in those states.
Meanwhile, greenfield projects will be in the form of public-private partnerships for social and economic infrastructure such as schools, hospitals and transport. “We see one or two PPPs come out of each of the key states each year,” said Watson. A third opportunity lies in trade sales. “The asset cycle has run up and some financial sponsors in the market who bought assets a few years back are now getting ready to sell,” he said.
Watson said competition for infrastructure assets is high, and recent multiples achieved on port sales in New South Wales show how buoyant the market is. “There is a lot of capital flowing into Australia with global and domestic pension funds, sovereign wealth funds and dedicated infrastructure funds looking to deploy capital in Australia.”
For debt and fixed-income investors, he said there are a number of features of the Australian project finance market that make it attractive to offshore lenders. “The underlying structure of the projects is sound, execution risk is low relative to other regional markets, terms and conditions remain fairly robust but spreads are starting to come in which is a trend we expect to continue.”
Watson said the bank has deployed twice as much capital to the infrastructure market than any other bank in Australia. “We are the number one debt arranger in the infrastructure sector over the past five years.”