Top Arrangers See Debuts Following 108 Issuers: Australia Credit

More debutants are lining up to sell bonds in Australia after the busiest year for issuers since before the global financial crisis, the nation’s leading underwriters said.

The market attracted 108 different borrowers in 2013, the most since 2006, according to data compiled by Bloomberg. Bank-managed bond sales totaled A$111.2 billion ($99 billion), a volume last exceeded in 2010, and 22 issuers from Melbourne to Seoul and Caracas made debut public offerings.

“We would continue to expect more new credits to come to the market in 2014,” said Paul White, head of the global debt syndicate at Australia & New Zealand Banking Group Ltd., the No. 1 bond arranger last year. “There continues to be strong investor demand for new credits that will allow them to diversify their portfolios.”

Yield premiums on company debt last year fell to the least since 2008, as record-low Reserve Bank of Australia interest rates spurred investors hunting for higher yields to buy notes with longer maturities or ratings closer to junk. Issuance was also bolstered by record bank-syndicated sales by the federal government, which looked beyond auctions to fund the growing budget deficit.

“Liquidity’s been abundant and supportive of credit markets and it’s continued to compress spreads,” said Gavin Goodhand, who helps oversee about A$550 million as a money manager at Altius Asset Management Pty in Sydney. “The fact that the market was able to print transactions, especially in the longer tenors, and they were well supported, will actually be quite good for banks to basically go out and say the market is open.”

Unprecedented Issuance

The volume of issuance in 2013 grew 2.4 percent from the A$108.6 billion achieved in 2012, Bloomberg-compiled data show. Last year was the biggest on record apart from 2009 and 2010.

The number of separate issuers rose from 99 in 2012, with borrowers from across the spectrum of investment-grade credit ratings.

The federal government, one of just 10 sovereigns to hold a AAA ranking from all three major credit-rating companies, issued an unprecedented A$12 billion of bonds by syndication in addition to regular auctions held by the government funding arm. It created three new bond lines through the offerings, including a 2033 bond that is the sovereign issuer’s longest ever nominal bond and an inflation-linked security maturing in 2035.

State Sales

Other AAA rated borrowers included the states of New South Wales and Victoria as well as sovereign-backed and supranational agencies such as Germany’s Landwirtschaftliche Rentenbank and Inter-American Development Bank.

“There was a lot more volume in 2013 from the state and federal governments, and that’s probably a theme that’s going to continue, especially given the fiscal situation,” said Peter Dalton, head of the debt syndicate at Westpac Banking Corp., the No. 2 arranger last year.

New borrowers with lower credit scores were a feature of the market in 2013, and there was an increase in the amount of issuance at the seven-year tenor. Aurizon Holdings Ltd., a rail-freight company that carries the third-lowest investment grade at Moody’s Investors Service, sold A$525 million of seven-year notes, while north Queensland port operator Adani Abbot Point Terminal Pty Ltd., ranked at the lowest non-junk level, placed A$500 million of 2018 securities. Transpower New Zealand Ltd. printed a A$300 million 10-year deal.

Along with the federal and state governments, the four biggest Australian banks remained among the top issuers, selling a combined A$23.7 billion of notes, down 35 percent from 2012, Bloomberg-compiled data show. ANZ was the most active, followed by National Australia Bank Ltd., Westpac and Commonwealth Bank of Australia.

Mortgage Backed

Part of the decline was accounted for by a re-opening of the market for residential mortgage backed securities, which improved enough to allow the government to end its support program. Securitized issuance based on mortgages and other assets climbed to exceed A$32 billion in 2013 from A$21.5 billion the year before, Bloomberg-compiled data show.

New foreign issuers of non-securitized debt in 2013 included miner Anglo American Plc, Korea South-East Power Co. Ltd. and Corporacion Andina de Fomento, a Venezuela-based supranational development lender. Perth Airport Ltd., Port of Brisbane and desalination plant builder AquaSure Finance Pty Ltd. were some of the locally-based debutants. Qantas Airways Ltd., the carrier that had its credit rating cut to junk last month, issued the first bonds in its home market for more than a decade earlier in the year.

“Given the strong domestic market we would expect to see more domestic corporates opting to issue bonds locally as an alternative to other funding opportunities,” said ANZ’s White.

Underwriters Ranking

The biggest domestic banks held on to the top four underwriting positions for a third-straight year in 2013, with CBA ranked third and NAB in fourth spot, according to Bloomberg-compiled data. UBS AG, the highest-ranked arranger from overseas for five years running, was fifth overall, while Citigroup Inc. came in sixth. A record 34 underwriters were involved with transactions, three more than in 2012.

A compression of credit spreads over the past year has helped to rein in borrowing costs for companies and states even as economic improvement in the U.S. and elsewhere drove up government bond yields. Australia’s benchmark 10-year government bond rate rose 96 basis points to 4.24 percent in 2013 and was at 4.32 percent today. The Australian currency, which dropped 14 percent through last year, traded at 89.02 U.S. cents as of 12:57 p.m. in Sydney.

Credit Supportive

The average yield premium for company notes over swap rates was 107 basis points on Dec. 31, down from 125 at the end of 2012, according to Bank of America Merrill Lynch indexes. The gap was as little as 102 on Nov. 29, a level unseen since March 2008.

Company bonds in Australia have returned 2.62 percent more than government debt in 2013 and state government notes offered an excess return of 2.25 percent, the Bank of America data show.

“There’s a sense that, barring a major collapse in the markets, credit spreads are likely to keep crunching in and that will prompt investors to look for yield by taking on riskier credits and more duration,” Westpac’s Dalton said.

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