Wider swap spreads for Aussie offshore issuers

A spate of Kangaroo issuance hasn''t provided any pricing relief to borrowers that want to go offshore. But the wide basis swap won''t hinder issuance, says Cynthia Whelan.

Cynthia Whelan joined Barclays Capital Australia last month as head of debt capital markets. She has a 12-year career in fixed-income working at UBS on sales and origination and at Merrill Lynch, first as head of their Australian dollar syndicate desk and then in debt capital markets. Her last job was with Westpac where she ran the alliance with Bank of America for US private placements. Here she discusses debt market opportunities for Australian issuers this year.

Looking at the year ahead, why would an Australian company consider issuing offshore?

Whelan: The reasons haven't changed - funding diversification, access to cost competitive capital, etc. For certain corporate borrowers the domestic markets are quite limited. If you are rated below A- then you will still be restricted in terms of tenor and volume. There were some great advances made in the domestic market last year with transactions such as Snowy Hydro, a BBB+ borrower, raising 10-year debt, but the deal was only for A$170 million.

Given the relatively small size of the local market for such corporates, there is greater execution risk in the local markets than in many of the offshore capital markets. The US private placement market for example carries very low execution risk for corporate borrowers due to the depth of the investor base and their willingness to invest in lower rated and unrated credits. That being said, there are still opportunities for some corporates to issue locally and there are a number of benchmark borrowers who will continue to fund very successfully in their home market.

So the swap rate isn't going to dampen enthusiasm for offshore issuance?

We don't think so. There have been a large number of Kangaroos issued in the last couple of months and we were expecting that this would put downward pressure on the basis swap but the flow of Australian borrowers funding offshore continues to keep the basis swap high.

Who has been issuing the Kangaroos?

Predominantly financial institutions and agencies. Kommunalbanken and BNG have done deals this year, as have the Province of Quebec and Morgan Stanley. However even this pick up in Kangaroo activity doesn't outweigh the fact that there are a number of Australian banks and corporates with funding requirements that will take them offshore.

So it is still economical to issue in a foreign currency?

Absolutely. Even when the basis swap costs 10 or 12 basis points, if this amount can be saved on the credit spread, the cost of the basis swap is mitigated altogether. The relative cost advantages still point to a strong offshore debt pipeline.

What about issuing in Asia?

This is a market where we see plenty of opportunities for Australian banks and corporates. Whether in yen, US dollars, Hong Kong dollars or Singapore dollars there is good investor demand for names from this region. Bank of Queensland recently completed a successful Asian targeted US dollar deal and we anticipate more issuance into Asia this year.

Who is buying the paper?

Mostly investors in Hong Kong and Singapore. There is increased focus on China, but the bulk of the paper is still placed in these two financial centres.

The US private placement market was very active last year, mostly for unrated borrowers. Is there any reason why a rated Australian borrower would go this route?

A large number of rated Australian borrowers did access this market last year. If a rated borrower is contemplating the US non-SEC registered markets, it comes down to an analysis of the traditional private placement market versus the 144A market. The advantages of going the private placement route include the ability to structure flexibility into a transaction such as multi-currency and multi-tranche issuance. Another appealing aspect of the private market is the ability for companies that have been through a period of structural change to explain their credit to investors. Private placement investors are willing to listen to a company's story and invest on the strength of their own analysis rather than rely on a credit rating.

Tell us about your alliance with ANZ.

About a year ago Barclays formed an alliance with ANZ to offer their clients access to the US private placement market. The alliance combines the strength of Barclays US private placement distribution with ANZ's strong Australian corporate relationships, particularly mid caps.There are a number of potential issuers in this segment. The alliance has completed four deals since inception and our pipeline is strong.

Who will be issuing in the euro markets this year?

We expect to see issuance from a number of corporates this year as well as the financial institutions who are all well regarded in Europe and all fund successfully there on a senior and subordinated basis. Most of the banks are also very active MTN issuers in Europe and Asia and this issuance will continue.

Is there such thing as a private placement market in Europe?

There are private placement investors in Europe who will invest in small, unrated deals but traditionally the public euro corporate debt market has been for rated borrowers. However last year Barclays acted as joint book-runner in a euro issue for Heineken which is unrated. This was the first unrated 10-year corporate eurobond. Deals like this illustrate the continued expansion of opportunities in the euro markets.

On a more general note, there is talk about a slow down in a few sectors in Australia, do you see this impacting the willingness of or ability for companies to borrow?

Our franchise focuses on the top 50 companies in Australia and most of these clients have ongoing funding requirements. Australian companies are well regarded in the capital markets for their solid management and strong corporate governance so this provides them with good access to capital. The strength of the currency is certainly a consideration for many of our clients however we are not anticipating any slow down in borrowing activity.