THE US private placement corporate bond market is attracting an increased number of Australian companies, offering long-term money with attractive yields. The number of private placements by Australian issuers in the US jumped from 12 to 23 last year, with the total funds raised increasing from $US2.4 billion ($3.12 billion) to $US4.1 billion ($5.33 billion).Private placements do not require a credit rating and the market is open to borrowers that are below investment grade. The market provides fixed-rate funding for terms of from seven to 15 years, which is rarely available in the Australian market.
Australian companies such as Spotless and Murray Goulburn have been able to tap the market as well as larger companies like Coca-Cola Amatil and Stockland.
Westpac has been the biggest arranger for Australian borrowers, in partnership with Banc of America Securities, accounting for $US1.1 billion of the issues last year. Westpac’s head of public markets, Peter Bloomfield, said the market was driven by American insurance companies, which must place a proportion of their funds in long-term assets.
With US cash rates at one per cent, there is a vast pool of money looking for a home, which has pushed yields on sub-investment grade paper sharply lower.
In the private placement market, spreads above treasury bills have come down by about 75 basis points over the past year, from just below 200 to just above 100 basis points, depending on the borrower, for a BBB credit risk.
Citicorp Investment’s head of primary markets, John Gerli, said investors were looking for companies globally that had strong finances and fixed assets. Manufacturing companies had an easier time than services businesses.
“In the Australian market, the top 150 companies may not necessarily be investment grade per se, but they have an investment-grade business performance,” Mr Gerli said. “Given the robust economy of the last eight or nine years, the top 150 companies are in good shape from a capital perspective.”
By the time funds are swapped from US dollars to Australian dollars, the yield may not be a lot lower than is available locally, but the term of the funding is much longer.
Both Mr Gerli and Mr Bloomfield said the main attraction to Australian companies was reducing the refinancing risk. With bank financing typically offered for three to five years, US private placements more than halve the risks of refinancing.
