Big Four Lead Bond Charge Abroad as Costs Fall: Australia Credit

Banks are leading Australian offshore bond issuance that’s expanding three times faster than local sales as demand from U.S. and European investors cuts costs.

Fund raisings abroad by companies including Commonwealth Bank of Australia rose to $48.6 billion in the first half, up 31 percent from a year earlier. That was the third-strongest first half on record in Bloomberg data going back to 1999. Local issuance excluding government and supranational organizations climbed 9 percent to A$30.8 billion ($29 billion).

The nation’s four largest lenders are tapping overseas markets as credit growth in Australia accelerates to the fastest in five years, buoyed by central bank interest rates at a record low. The cost of shifting funds from dollars and euros into the Australian currency has fallen this year, while credit spreads in the U.S. and Europe have tightened.

“In previous years Australian banks have had to pay up a little bit to access funding offshore compared to their domestic market,” said Lucas Pontifix, a Sydney-based director in the debt capital markets business at Barclays Plc, the third-biggest arranger of first-half overseas bond sales by Australian companies. “That hasn’t been the case for most of this year.”

Top Borrowers

CBA was the leading offshore borrower in the January-to-June period, having sold $11.5 billion of debt, followed by Westpac Banking Corp., with $10.1 billion, Bloomberg-compiled data show. The other two largest lenders, National Australia Bank Ltd. and Australia & New Zealand Banking Group Ltd., raised $8.7 billion and $8.1 billion respectively.

The average yield premium over the swap rate on U.S. company bonds fell by 17 basis points this year to 105 yesterday, while for European debt it dropped 13 to 81, according to Bank of America Merrill Lynch indexes. That compares with a 14 basis-point decline for Australian bonds to 93.

The cost of switching five-year funding from greenbacks into Australian dollars, as measured by the basis swap, has averaged 24 basis points this year compared with 26.8 in 2013. It fell as low as 21.3 basis points in February and was 24.8 as of 3 p.m. today in Sydney. The equivalent-length Australian dollar-euro basis swap has averaged 29.9 this year versus 50.1 in 2013 and was 32.4 today.

The basis swaps fall when overseas borrowers sell debt in Australia and seek to switch the proceeds into a foreign currency, and rise when Australian issuers do the opposite.

Power, Pallets

Sydney Airport, which sold 700 million euros ($958 million) of 10-year notes in April, is the largest non-financial borrower in 2014, while power company SP AusNet raised $716 million equivalent including deals in euros and Norwegian kroner. Brambles Ltd., the world’s biggest supplier of wooden pallets, raised 500 million euros selling 10-year securities last month.

In Australia, non-bank corporate issuers have mostly tended to sell bonds with maturities of up to seven years, while the dollar and euro markets provide scope for longer-dated debt.

“Australian companies often can achieve greater volumes and longer tenors in some of the offshore markets than they can at home,” Mihkel Kase, a fund manager at Schroder Investment Management Australia Ltd. in Sydney, said in a June 24 interview. “As much as we might like to see the Australian market grow, we’re not missing out on those exposures because we can invest across global markets.”

JPMorgan Chase & Co. was the largest arranger of Australian offshore funding in public markets in the six-month period, followed by Citigroup Inc. and Barclays, data show.

Low Rates

“We’re seeing very strong demand from both European and U.S. investors for credit product at present and Australia is viewed very favorably as a place to invest,” Natalie Vanstone, the Sydney-based head of debt capital markets at JPMorgan for Australia and New Zealand, said in a June 27 interview. “If you’re a borrower with funding needs in U.S. dollars or euros, there’s the added benefit of the low absolute interest rates.”

The Reserve Bank of Australia today kept its benchmark rate unchanged at a record low 2.5 percent, a decision that was predicted by all 29 economists in a Bloomberg survey. The benchmarks for central banks in Europe and the U.S. are near zero.

Australian 10-year bonds yielded 3.56 percent, compared with 2.53 percent for equivalent U.S. securities and 1.25 percent for similar German bunds. The Aussie dollar bought 94.49 U.S. cents and 69.04 euro cents.

Private-sector credit grew by 4.7 percent in the 12 months through May, the fastest annual pace since March 2009, according to Reserve Bank of Australia data released yesterday.

Excluding issues related to government and supranationals, Australia’s local bond market is also dominated by the so-called Big Four lenders. Westpac, CBA, NAB and ANZ have sold A$12.6 billion of notes since Dec. 31 versus A$11.3 billion a year earlier, data compiled by Bloomberg show.

“Markets have been reasonably stable for the first six months of this year and you’ve seen spreads continue to compress to what is very close to historic tights,” Barclays’s Pontifix said by phone June 27. “If you’re an issuer with a reasonable sized funding task, you’re likely going to try to take advantage of the current market conditions because you don’t know what the second half of this year might bring.”

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