A recent poll of Asian institutional investor attitudes towards Australian debt securities has revealed a strong preference for corporate bonds, marking a general shift in the relative weightings of what Asian investors want to buy.
As many as 41% of respondents to a survey of investors conducted by FinanceAsia and National Australia Bank indicated they would like to increase the level of corporate bonds in their portfolios.
The poll of Asian institutional investor attitudes towards Australian debt securities was published in FinanceAsia in September and builds on evidence collected in a similar survey conducted last year.
Jessica Tilton, head of markets Asia for NAB, said interest is coming from yield-focused investors.
“These investors want higher coupons but without some of the risks that come with investing in bonds issued by entities based in Asia,” said Tilton. “They are typically asset managers, hedge funds and private banks.”
While Australia’s medium-term note market has been around since the late 1990s, it has gained genuine momentum in the past three years. The trend was highlighted during a series of debt conferences hosted by NAB in Hong Kong and Singapore earlier this year where delegates were told the MTN market now accounts for one in every three dollars raised by Australian corporates in global bond markets. As many as 50 MTN deals are executed each year, reflecting a concerted attempt by corporates to diversify their debt funding sources.
The survey shows yield is clearly important when analysing debt securities, with 82% of respondents in the latest poll listing it as essential factor, compared to 62% who cited yield as an essential component last year.
Connie Sokaris, general manager of investment grade origination at NAB, said appetite is particularly strong for corporate issuers with Asian links. “Australian companies that have a strong Asian story to tell and are deriving some of their revenue from the region – either through local operations or as a destination for exports – are attracting a lot of interest.”
Investors are less swayed by, though still mindful of, issue size and tenor when it comes to analysing a debt security.
Nearly 50% of respondents said the exchange rate was either marginally important or not important in their decision-making process. “By investing in the securities they are already taking a view on the currency and deciding they want to hold it in their portfolios,” said Sokaris, adding this is why 54% of participants in the survey said they don’t hedge their foreign currency exposures. “The Australian dollar has also been fairly stable in recent years and this reduced volatility means investors are happy to take on some hedging risk themselves.”
Two recent deals arranged by National Australia Bank exemplify the increased appetite for corporate issuers.
In July this year, the Port of Brisbane issued its 2nd MTN deal via a 7 year A$200m MTN, which priced at a record low 145 basis points over swap (NAB JLM). This marked a record low spread paid for a triple B issuer in the 7 year tenor in the Australian MTN market, and was 45 basis points inside its debut 7 year A$300m MTN deal exactly one year earlier.
The milestone transaction saw very strong interest from Asia which accounted for over 30% of the final order book, and followed the Issuer undertaking extensive dialogue and meetings with Asian and Australian investors in Q2, 2014.
This deal was followed in August by a transaction for financial institution Members Equity Bank which issued a tier-2 bond with a 10-year non-call-five structure, raising A$300 million. “Close to 50% of the orders came from Asian accounts chasing yield,” said Tilton, indicating the bonds priced at 3-month BBSW plus 270bp. “Demand was present across a spectrum of investors particularly asset managers and private banks.”
The Port of Brisbane deal, and others executed for airport and road operators, point to a growing interest in infrastructure as a sector.
“Australia has a long history of well-run infrastructure projects and this is an asset class in short supply globally,” said Tilton. For debt and fixed-income investors, 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, and terms and conditions remain fairly robust.
Issuance has increased in the sector with about a quarter of all corporate bond deals in the first half of 2014 issued by infrastructure names. When asked what type of industry investors would like to invest more in, 21% of poll respondents said infrastructure, followed by telecoms (19%) and the consumer sector (18%).
Looking ahead, Sokaris expects Australia’s bond markets to be event driven.
“Recent figures show M&A activity is on the increase, both in the traditional markets and also in the area of privatisation. Several large states in the country are reviewing their public infrastructure portfolios and considering asset sales in the energy and utilities sectors,” she said. “This will drive M&A activity which itself will drive demand for funding.”
To view the full poll results in FinanceAsia’s September Australia Report, subscribe here.