Australian companies are selling record amounts of bonds in the U.S., tapping the lowest relative yields since 2007 as the swaps market makes it cheaper to exchange money raised abroad into local currency.
Telstra Corp., National Australia Bank Ltd. and Woolworths Ltd. (WOW) led borrowers selling $30.7 billion of notes in U.S. currency in 2011 as of April 14, the biggest start to a year on record, according to data compiled by Bloomberg. The cost of bringing the proceeds back to Australia, gauged by the five-year basis swap, has fallen 7 basis points this year to 20.5 and dropped last month to the lowest since September 2009.
Australian firms need to refinance as much as A$80 billion ($84 billion) of maturing borrowings this year, according to National Australia Bank, as well as fund expansion to meet demand in an economy that the central bank estimates will grow 4.25 percent this year. Bond sales in the U.S. surged 24 percent to $452.4 billion in 2011 compared with A$44.1 billion of sales in Australia. U.S. relative yields touched 145 basis points on April 8, the lowest since October 2007, a Bank of America Merrill Lynch index shows.
“We have had a lot of Australian companies tapping the U.S. markets to diversify their funding and lengthen their maturity profile,” said Natalie Vanstone, Sydney-based head of debt capital markets at JPMorgan Chase & Co. (JPM), which helped manage the Woolworths and Telstra sales. “The depth and breadth of credit appetite in the U.S. market is why a lot of issuers will look at it.”
Telstra, the nation’s biggest phone company, sold $1 billion of 4.8 percent 2021 notes on April 7, its largest U.S. dollar bond offering and its first since 2002, Bloomberg data show. The company raised A$200 million in November selling bonds due in July 2020, priced to yield 7.595 percent.
The 2021 bonds were sold to yield 133 basis points more than Treasuries, and that gap has since widened to 135, BNP Paribas SA prices show.
Woolworths, Australia’s biggest retailer, sold $850 million of five- and 10-year bonds on April 5, including $300 million of five-year notes that cost about 97 basis points more than the bank bill swap rate once the proceeds were swapped back into Australian dollars, according to Perpetual Ltd. The supermarket operator paid 105 basis points over swap when it sold A$500 million of 2016 notes domestically on March 7.
“The U.S. market is deeper, so companies can issue in larger size than in Australia,” said Ben Byrne, Sydney-based credit analyst at Nomura Australia Ltd. “They can also often sell debt of a longer tenor, at a cheaper cost.”
There hasn’t been a non-financial corporate bond sale of more than A$1 billion in Australia’s domestic debt market since Reliance Rail Finance Pty sold A$1.9 billion of notes in February 2007 to fund the construction of new trains for Sydney’s rail network, Bloomberg data show.
Average yields of 4 percent on U.S. investment grade corporate debt compare to 6.7 percent in Australia, Bank of America Merrill Lynch indexes show.
The extra yield investors demand to hold U.S. investment grade corporate debt instead of Treasuries has dropped 20 basis points to 146 basis points this year, while the Australian equivalent was last at 162 basis points, the indexes show.
Australian business investment climbed to a record in the fourth quarter, and companies forecast investment of A$128.9 billion in the year ending June 30, according to the statistics bureau. The increase in bond sales comes after bank lending to businesses shrank on an annual basis in February for a record 20th month, declining 1.7 percent from the same month of 2010, according to data from the Reserve Bank of Australia.
Asciano Ltd. (AIO), Australia’s largest port operator, sold $1 billion of debt on March 31 including $750 million of 5 percent 2018 notes priced at a yield premium of 220 basis points, Bloomberg data show. The spread has narrowed to 193 basis points, according to Royal Bank of Scotland Group Plc prices.
Resource producers must spend at least $115 billion in the next five years to build new mines or upgrade and run existing operations, Australia & New Zealand Banking Group Ltd. estimates.
The nation expects to earn a record A$220.6 billion from exports of commodities in the 12 months ending June 30 as faster economic growth in China boosts demand for raw materials.
The RBA raised its forecast in February for 2011 growth to 4.25 percent, from a November prediction of 3.75 percent.
The boost from commodities helped spur the Australian dollar’s advance to a record $1.0584 against its U.S. counterpart on April 8. The currency climbed 14 percent in the past 12 months to trade at $1.0544 as of 5:44 p.m. in Sydney.
Australian five-year government bond yields climbed 38 basis points to 5.35 percent in the past six months as the Reserve Bank raised interest rates seven times between October 2009 and November 2010 to curb inflation. Yields exceed those on similar-dated Treasuries by 325 basis points, down from last year’s peak of 405 in November.
The gap between yields on Australian government bonds and inflation-indexed notes show investors expect consumer prices will rise an annual 3.03 percent for the next five years, the fastest among eight developed nations tracked by Bloomberg.
Bringing money borrowed in the U.S. back to Australia is getting cheaper.
Cheaper Swap Rate
The five-year Australian dollar basis swap was at 20.5 basis points today. It peaked at 48 basis points in November 2009, and has averaged 21 basis points this month.
The basis swap measures the cost of switching interest based on the London interbank offered rate for payments linked to Australia’s bank bill swap rate. It falls when overseas borrowers sell debt in Australia and seek to swap the proceeds for U.S. dollars, and rises when Australian issuers make the opposite transaction. Libor is the rate banks say they charge to lend to each other, as collated in London by the British Bankers Association.
“Currently the combination of relatively good credit margins in the U.S. and favorable cross-currency swap margins combine to make the U.S. bond market attractive,” Telstra Corporate Treasurer Cliff Davis said in an e-mailed response to questions.
Corporate sales are also increasing in Australia’s own bond market. Westfield Retail Trust raised A$900 million from 5.5- year notes on April 12, a record in Australian dollars for a REIT and the largest non-financial corporate debt offering in the nation this year, according to data compiled by Bloomberg.
Woolworths’ five-year debt offering in Australia last month priced at a lower borrowing cost than General Electric Co.’s sales in the nation, the data show.
“The Australian market is an attractive alternative for many corporates,” JPMorgan’s Vanstone said.
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