Good credits will find open windows, says Merrill banker

Solid investment-grade issuers that have strong balance sheets are the ones that will find opportunity in the volatile credit markets, says Jason Murray.
Jason Murray joined Merrill Lynch Australia in mid-July as head of debt capital markets. He came from Citi where he spent six years in debt origination, and prior to that, from JPMorgan where he was a fixed-income trader for eight years. We interviewed him about his plans for growing MerrillÆs debt business and the outlook for the markets as a whole.

Why did you make the shift to Merrill?
I wanted to be part of the firmÆs strategy to further integrate its investment banking, debt capital markets and equity capital markets businesses in the Asia-Pacific region. Merrill is a top-flight institution globally, and while there may have been a lack of clarity surrounding its business in Australia in early-2000, there is a real commitment to the market now, a genuine long-term plan in place to build a sustainable business. This strategy incidentally is the same as MerrillÆs strategy globally. While people often debate whether there are too many investment banks competing with each other in Australia, I think the landscape is different than it was in the last cycle. This time the corporate sector is more mature. There is a core group of healthy well-run corporates that need investment banking expertise. At the same time, Merrill has become a more globally integrated institution û generating 60% of its revenues from outside the US. So the success of a business like ours in Australia is key to the firmÆs future.

How do you plan to grow the debt capital markets business?
Merrill has always had a strong FIG franchise offering structured finance, hybrid and capital management products to financial clients. We absolutely need to continue that, and improve the general flow of activity in that space. We also see a real opportunity to expand further into the corporate sector. This compliments the strategy that is being pursued by the investment bank and DCM plans to follow a similar path. Merrill has already worked on a couple of high-profile corporate deals that speak to our capabilities: like the Ç350 million eurobond the firm did for Fairfax media; the debt financing for the Veda Advantage private equity deal; and the $475 million high-yield bond for Griffin Coal.

Do you need a bigger team to achieve your plans?
Daniel De La Cruz joined at the same time as me and we are in the process of hiring an associate and an analyst to complement the existing team. The team we have is solid and the client list offers a lot of potential. What we want to do is increase our client coverage beyond the top 20 to 50 ASX-listed companies. We will do this by leveraging off the relationships that we bring with us and by feeding off the relationships on the investment banking side of the business.

At the moment Merrill focuses on offshore debt issuance for Australian clients, would you consider moving into the domestic debt markets?
Currently there is no change in our position regarding the domestic market. However, at some stage such a move may make sense. We certainly have the expertise within the team to originate and syndicate Australian dollar deals. We already execute structured credit transactions in Australia, so moving into the plain vanilla markets wouldnÆt be a stretch.

What opportunities do you see for issuers to execute bond deals given the current global credit conditions?
The activity of recent weeks is a short-term dislocation of the credit markets. And with every downturn comes opportunity. On the buy-side, there are plenty of opportunities for distressed funds to buy structured credit. And on the sell-side, we think it is a good time for solid investment grade corporates that have strong balance sheets to tap the markets. There will be fewer opportunities to issue in the high-yield markets because this is where most of the pain is being felt. The offshore leveraged loan markets are effectively shut, but the Australian syndicated market remains open for the right credits. There is a pipeline of bridge financing and leveraged loans offshore that needs to be cleared before new credits might consider issuing again.

Will credit spreads widen further?
I donÆt think so. They were at historically tight levels anyway, so the dislocation has really just normalised spreads around the globe. We will, however, see more volatility in the next six months, particularly as the banks involved in some of the big private equity financings in Europe and the US have another crack at getting their bridge loans executed in the capital markets. So there will be a few more bottlenecks to work through yet.

Are the private placement markets in the US more open than the public markets?
Yes, the private placement market is buoyant and open. When it comes to negotiating pricing, the balance of power has moved slightly towards the investorsÆ advantage. Investors will be looking for transactions that offer them access to fundamentally good credits. They will be more focused on corporate earnings and cash flow. You really need to have an investment-grade profile and the financial metrics that support that, to get a good reception. ItÆs the same in the public markets û if you are a solid investment-grade company, then, on a relative basis, you offer greater security to investors.

Have the offshore debt markets lost their competitive advantage compared to the local debt markets as a result of the global squeeze?
My observation of the Australian dollar market is that it is suffering from the same dislocation as the global markets. In large part, you still need to be an investment-grade credit with a rating to get a deal done here. Whether, at the margin, it would now be cheaper to issue here than offshore would be specific to each credit.

Do you expect volumes for debt issuance in 2007 to beat 2006 numbers?
No. While I believe the current dislocation will be short-term, it will make enough of a dent on volumes to ensure that 2007 is a smaller year than 2006. This is partly due to the healthy nature of the corporate sector in Australia. Earnings remain strong and debt ratios are low, so companies can afford to wait until things improve.
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