Aussie pipeline signifies issuers' market

Lumpy deal flow requires broad business focus, says ABN AMRO Australia.

Three executives behind ABN AMRO's Australian business talk to FinanceAsia about the upcoming Federal election, a lumpy deal pipeline and review highlights for the firm in the first half of 2004. The executives are: Angus James, CEO; Richard Wagner, head of corporate finance; and Col McKeith, head of financial markets.

The Liberal government has announced a federal election on October 9, what impact is a Liberal or Labor victory likely to have on the financial market?

James: It 's going to be a closely fought election that's likely to come down to a battle for marginal seats. A lot of the policy debate will focus on healthcare and education, but there will be a bit of discussion around taxation and how the two parties differ on their industrial relations policies. As yet, Labor hasn't articulated what it plans to do on this front, other than to say that it wants to wind back some of the industrial policies of the past. For the financial markets, fiscal discipline is a given, but they will also be looking at infrastructure spending and regulatory reform.

The Howard government has had a dream run with the economy due to the low interest rate environment. Is this going to continue?

James: The Reserve Bank has done a great job managing interest rate policy over the past few years within the Government's overall economic framework. What happens to interest rates in the next six months will depend on two things: the employment market which is linked to consumer confidence; and the US Presidential election. I don't think there will be any movement until after the outcome of the US election is decided. Housing refinances have calmed down over the last month or so which will allay some of the Reserve Bank's concerns.

Will the Australian economy continue to move somewhat independently of the global markets?

James: We have traditionally followed the ups and downs of the global markets but, in the last three or four years, Australia diverged from this pattern, largely due to good fiscal management by the Government and the Reserve Bank. Our stock market faired better than others that were battered by technology losses and our companies have continued to deliver strong results. But now I think things will equalize and we will return to tracking global trends. Our fortunes will depend on a few things such as the price of oil, the demand for commodities and the activities of markets like the US, Japan and China.

Has the Australian dollar stabilized?

McKeith: We're unlikely to see the great fluctuations that occurred up until the middle of this year. Trading will be more within the range of the last six months, unless there are significant shocks around oil or global economic growth.

What have been the highlights for ABN AMRO in the first half of 2004?

Wagner: We've had a good first half and are currently either 1 or 2 in the M&A league tables. We acted as joint defence adviser for TAB on the takeover offer from TABCORP; we were the sale adviser to Loy Yang A when it sold to AGL; we are acting for Lend Lease on the GPT deal; and we also played a significant role on the Westfield restructuring. The M&A market has changed a lot in the last few years. Deals are not clear cut anymore - financial markets are becoming more sophisticated and everyone is looking for an edge. Deals can be complicated by any number of factors, whether they be related to tax, competition restrictions, stakeholders or differing shareholder requirements. It's a very competitive market for an investment bank, so we try to stay focused on our core relationships.

Has there been much cross border activity?

Wagner: The last 12 months have been relatively slow because of the appreciating Australian dollar. Offshore buyers have to be certain that Australia is part of their core strategy and willing to make a long-term commitment. Having said that, we just completed a deal for San Miguel which bought the Berry juice company, and advised Singtel on the acquisition of Uecomm. Domestic companies are also more cautious about going overseas. The stock market has punished the companies that have taken a wrong step in their forays offshore. The market is wary of companies going offshore for the sake of growth. As a result, companies have been more focused on capital management.

By this you mean returning money to shareholders?

Wagner: Companies haven't been shy about returning cash to shareholders and buybacks have been popular. Wesfarmers, Rinker, Lend Lease, CSR and BlueScope Steel have all undertaken buy-backs through us.

What has this meant for new issuance? Are the debt markets suffering as companies focus on capital management?

McKeith: Globally the new issuance debt markets are down by 20% on last year, so there is plenty of money floating around and not many people issuing, particularly corporates. This has been mirrored in Australia. There has, however, been a good level of activity in securitization and although mortgages still make up the bulk of issuance in Australia, other asset classes are now coming to market. Assets like commercial leases and small business loans. Only about 70% of our deals now involve straight mortgages compared to about 90% three years ago. The lack of issuers globally makes it attractive for Australian companies to tap offshore markets, and this year we have completed US Private Placements for PBL, BlueScope Steel and CSR.

IPO markets have been fairly quiet. What has your equity team been focusing on?

James: Issuance has been lumpy in the IPO market. But there has been a lot of secondary market activity with rights issues and placements. We did 10 placements for smaller cap companies in the first quarter, including deals for Nufarm, Danone and Bank of Queensland. The other day we were appointed to undertake a convertible preference share deal for Adelaide Bank. So, the middle market has been very active. Any big deals will come in the form of infrastructure raisings.

Such as?

James: Well, the equity to fund the building of the Mitcham-Frankston freeway in Victoria.

McKeith: There are a number of other deals in the infrastructure pipeline and these will generate further issuance in debt markets. Most are social infrastructure (PPP) projects such as the Perth Court, the convention centre in Darwin and the Royal Women's Hospital in Melbourne. ABN AMRO is the most active bank in the PPP space.

How competitive is the infrastructure sector?

James: Each bid is different and these deals are always hotly contested. As clients, governments always run bidders down to the wire. These projects require banks to take a lot of risk, usually by underwriting the deals until the financial close. This requires a strong balance sheet and long term commitment, which is one of the reasons why ABN AMRO plays in this space. We have the stomach for the financial risk and we are also prepared to spend the man-hours and sunk costs needed to pitch.

I hear ABN AMRO is establishing a new private equity fund?

James: Yes, we're in the market raising a A$300 million fund at the moment. We have had a lot of success in seeding businesses and then taking them to market. We completed a great IPO for Transonic Travel this year. We think this differentiates us from other investment banks in the market. The other things that we like to highlight are our joint ventures. We own 25% of the mortgage originator Wizard which not only contributes to our bottom line on its own, but also feeds our Financial Markets division with securitization deals. We also have two retail broking, financial advisory joint ventures - ABN AMRO Morgans in Australia and ABN AMRO Craigs in New Zealand. Together, these firms employ over 500 advisors in 67 offices across both countries, making them the largest retail broking presence in the region. Having this distribution capability into the retail market allows us to create demand tension for IPOs and hybrids.

Since the Goldman Sachs/JB Were tie-up there hasn't been much consolidation in the investment banking market. That must make Australia a pretty competitive place to do business.

James: It is a very competitive banking environment, though not everyone plays strongly in each business. A lot of the competition comes from boutiques in M&A and debt. Believe it or not, there are a number of banks that aren't already in the market that are looking to establish beachheads here. We don't really worry about it. We try to stay focused on the clients we want to do business with; where we can add value and build relationships.

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