Orica experiments with novel US private placement

The Aussie chemical company issues 10- and 12-year floating rate notes to US institutions, but this time in Australian dollars.

Orica Finance, a wholly-owned subsidiary of the Australian chemical company Orica, tapped the US private placement market for a third time on Friday, but this time issuing in Australian dollars. The company raised A$559 million in guaranteed senior floating rate 10- and 12-year notes.

In a new twist, Orica received the proceeds in floating interest AUD, leaving it up to the participating investors to transact a simultaneous cross-currency interest rate swap.

Orica is claiming a world first with the deal. The traditional practice is for issuers to raise US dollars and then swap back into Aussie rates after the transaction. Though, in the past 12 months, there have been a number of dual currency deals with companies issuing USD tranches in conjunction with smaller AUD tranches.

The only other issuer to attempt a purely AUD transaction has been Macquarie Airports (MAp), the airport investment fund managed by Macquarie Bank. However, sources say the small number of investors who bought MAp's paper conducted their own swaps after the deal through individual bank relationships.

Orica says last week's deal is ground-breaking because of its size and the fact that the swap was transacted simultaneously by investors. Citigroup, who arranged the deal, also performed the swaps, giving each investor the same terms.

"The deal is unique because Citigroup was the only counterparty," says Frank Micallef, Orica's corporate treasurer. "Investors priced the swap at the same time and used the one set of documents, so the deal was fair and transparent."

Citigroup says it was able to achieve the simultaneous swap because it had recently established long-term clean lines with each of the private placement investors involved in the deal.

Micallef says Orica was able to pull off the Aussie dollar placement because of its track record in the US market. "This was our third US private placement in five years so investors were comfortable with us and knew our growth story. So we decided to ask for exactly what we wanted, and that was bonds in Australian dollars."

The company's deputy treasurer, Geoff McMurray, says there were a number of advantages to transferring the currency risk to investors. "With no responsibility for the swap we didn't have to use up our credit limits with our own relationship banks," says McMurray. "It was also cheaper for the investors to do the swap because of the arbitrage between the rates offered to us and the rates available to them." Issuing in local currency also removed any hedge accounting requirements.

McMurray says, despite this, Orica "was not going to accept Australian dollars at any price". He explains: "We made sure that we had our own lines available just in case the pricing from investors wasn't right and we wanted to go the traditional route of issuing in US dollars."

Friday's deal was split into two tranches. The A$267 million 10-year tranche was priced at 6-month BBSW plus 65 basis points, and the A$292 million 12-year tranche was priced at 6 month BBSW plus 67bps. "We picked the sweetest spots in the curve," says Micallef, explaining the term selection.

Orica has tapped the US private placement market twice before; once in October 2000 raising $255 million in 7, 10 and 12-year tranches; and again in October 2003 raising $185 million in 12 and 15-year tranches.

Friday's deal also attracted four Australian investors, pointing to a trend whereby local buyers are participating in offshore transactions. Micallef says this could spell a turning point in the behaviour of Australian investors.

"Local companies are the biggest issuers in the US private placement market because this is where they can get longer tenors. Domestic investors haven't traditionally supported debt out to 15 years. But now these investors are realising that unless they play the game, they will lose good names to the US market."

Orica will use the proceeds from Friday's deal to repay bank lines and commercial paper on issue. This will result in an increase in the weighted average tenor of Orica's debt from 4.5 years to 8.3 years.

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