discussion private placement perspectives€¦ · economy now is double what it was seven to 10...

ROUNDTABLE DISCUSSION

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THE ECONOMIC BACKDROP

Cuneo This year is under way with a backdrop of widening spreads – at least in public markets. How quickly have USPP spreads reacted and what effect is this having on investors’ views and preferences?n KNOX Hartford Investment Management Company (HIMCO) is a relative-value buyer so as public markets move – and spreads did widen at the end of 2015 – we look at deals on a relative basis. There’s often a time lag with the private market, so that if public spreads widen abruptly there may be a period of time when there is diminished value in the private market. A few months later it usually rebounds.n MOORE It’s the same story at Babson Capital Management (Babson) – it’s a relative-value game where the private market continues to track what’s happening in the public market. Right now, with the volatility in markets and the lack of secondary trading and liquidity, what becomes interesting is getting a handle on where new-issue premia are on the public-market side. That’s always a discovery process and I agree with John Knox that it can take some time for the private market to catch up.

We are constantly looking at where public-market new-issue premia are versus private new-issue spreads, and tracking this as best we can. It’s always a trade-off between buying the public, if

new-issue spreads are gapping out, or the private – because all the institutions around this table have the ability to do both.n MAZLISH I echo these comments and also add that when markets get dislocated one of the things we will work very hard to do is distinguish between quotes on bonds that are never going to trade versus executable levels. We will use TRACE data to make sure we are using real levels with which we feel comfortable.

Cuneo Not only have credit spreads been pushing out, but Treasuries have also been on a rollercoaster. How does the underlying benchmark and outright yield affect investment criteria?n WINCHESTER There are often absolute yield hurdles that affect our decisions. The combination of relative value, as the other investors have suggested, with absolute yield will dictate whether or not we find a particular transaction attractive.

In the discovery process we will also look at electronic public sources and also stay in close contact with our public-portfolio managers to get their read on what they see as an appropriate benchmark in the public market.

Greenberg The world’s economies appear to be moving in divergent trajectories

PRIVATE PLACEMENT PERSPECTIVES

PARTICIPANTSn John Arentz General Manager, Treasury and Planning STOCKLAND n Matthew Brassington Chief Executive Officer AQUASUREn Chris Kendall Deputy Treasurer TRANSURBAN n John Knox Vice President HARTFORD INVESTMENT MANAGEMENT COMPANYn David Malek Chief Financial Officer BRISBANE AIRPORT CORPORATION n Lenny Mazlish Managing Director, Fixed-Income SecuritiesCIGNA INVESTMENT MANAGEMENT n Simon Milne Treasurer and Deputy Chief Financial Officer AUSTRALIA PACIFIC AIRPORTS CORPORATIONn Jim Moore Managing Director BABSON CAPITAL MANAGEMENT n Ben Nolan Manager, Treasury and Commerce PORT OF BRISBANEn Josh Winchester Vice President, Private Credit VOYA INVESTMENT MANAGEMENT

MODERATORSn Lori Cuneo Private Placement Group Head J.P. MORGAN n Gwen Greenberg Director, Debt Capital Markets ANZ n Daniel Leong Associate Director, Debt Capital Markets ANZ n Samantha Swiss Chief Executive KANGANEWS

n January 21, ANZ and J.P. Morgan teamed up with KangaNews to

host a roundtable discussion in Miami, taking advantage of US private

placement (USPP) investors and Australian issuers attending an annual

industry event. Last year produced another record for Australian corporates in the

USPP space, and issuers and investors say their mutually beneficial relationship is

set to continue.

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with the Federal Reserve (Fed) hiking, the Reserve Bank of Australia still appearing to be on an easing path and Europe apparently maintaining a steady course. What effect are divergent rates patterns having on investors’ appetite for Australia as an investment destination, or indeed for Australian dollars?n MOORE For us it doesn’t change much at all – at the end of the day we are a US dollar portfolio so whether we are providing US or Australian dollars we look at deals in much the same way as the issuers, on a T-plus or swap basis. As a result, underlying benchmark rates don’t generally affect us much. It gets back to the relative-value game I’ve spoken about, and where spreads are in the private market relative to public markets at any point in time. n MAZLISH It is the same for us. Also, since Q4 last year my personal view has been that rates are going lower rather than higher. Regardless of what the Fed does, the deflationary pressures are too significant – there’s no inflation in the US and growth is pretty anaemic. So our view has been that solid triple-

Bs with low-4 per cent coupons, when the 10-year US Treasury was at 2.25 per cent, felt pretty good. In fact, my view is that if investors still have hurdles, they are a lot lower than 4 per cent.n MOORE I’m no expert on the liability side of insurance companies but I think that, in terms of the insurance product we underwrite, whether we like it or not we’ve become accustomed to the low-rate environment. I think product offerings have been adjusted as a consequence. Clearly we’d like to see rates increase, but in my opinion it’s hard to see this happening in a material way anytime soon.

Back in 2008-09 things got extreme from a minimum-yield perspective because conditions changed so quickly. There was a shock factor and people were trying to hit a minimum yield. Now, however, we have become used to a sustained low-coupon world, whether or not we like it, and the liability side has adjusted to that. So in general, the focus is more about relative value.

Cuneo To what extent is volatility in public high-yield markets giving USPP participants

“Our issuance decisions are also about execution risk. This is definitely more pronounced in Australia andthere also aren’t the benefits we get in the USPPmarket in terms of deferred tenor, volume and – at the moment – pricing.”D A V I D M A L E K B R I S B A N E A I R P O R T



“THE ISSUERS THAT HAVE BEEN IN THE PRIVATE-PLACEMENT MARKET IN THE RECENT PAST, PARTICULARLY IN HEAVY INFRASTRUCTURE, HAVE BEEN LEVERED TO THE CHINESE ECONOMY. WE NATURALLY LOOK AT THIS, AND CERTAINLY THE INVESTMENT COMMITTEES TO WHICH WE ALL REPORT ARE SENSITIVE TO IT.”J O S H W I N C H E S T E R V O Y A I N V E S T M E N T M A N A G E M E N T

n GREENBERG How concerned are US private placement market participants about the Chinese economic story, and what impact do views on China have on their Australasian investment intentions?

BRASSINGTON The figures coming out of China differ so much that I don’t think anyone knows what the real growth rates are. But the Chinese economy now is double what it was seven to 10 years ago. So if growth was 7 per cent and is now 4 per cent so be it – but 4 per cent of a very big number is itself a big number.

n SWISS Nevertheless, we hear that one of the biggest concerns among investors outside Australia is the country’s connection to China and what effect a serious slowdown in the Chinese economy might have on Australia. Is this the

number-one item on investor checklists?

WINCHESTER There’s no question about it – this is correct. As a natural-resource driven economy you can’t get past the connection to China.

ARENTZ That’s a misnomer though, because at the end of the day resources comprise around 10 per cent of Australian GDP.

WINCHESTER It is, however, certainly the case that the issuers that have been in the private-placement market in the recent past, particularly in heavy infrastructure, have been levered to the Chinese economy. We naturally look at this, and the investment committees to which we all report are also sensitive to it.

KNOX Reality might differ from perception but this doesn’t take away from the fact that perception is important.

BRASSINGTON Australia’s exchange rate has dropped by 30 per cent in two years, and this has helped us enormously. So while there is some bad news in Australia with regard to resources, overall the exchange-rate movement has helped. We have seen a number of sectors – including education, healthcare, financial services and agriculture – grow strongly.

The biggest problem we have is not economic – it’s political. The prime minister has changed five times in five years and this instability has an impact on confidence.

MOORE Everyone has been sceptical of numbers out of China for a long time now – it’s not just a recent phenomenon. We zero in on China a lot more in some sectors than in others. When I look at our portfolio names in Australia, we are very diversified across sectors – and in most cases China is a net

THE CHINA EFFECT positive factor. We can debate what the pace of growth is, but demand is growing and this is critical from a credit perspective.

We all view the investment-grade space as a safe-haven asset class relative to some others right now, such as equities and high yield.

n SWISS Perhaps this comes back to the strength of the credit analysis for which investors in the private-placement market are renowned. In other words, although there may be some justified reaons for keeping a close eye on Australia’s regional links, investors back their ability to pick solid credits that will be reslient to economic headwinds. Is this a fair comment?

MAZLISH Industries don’t go bankrupt, companies do. And this takes us back to all the reasons we liked Australia in the first place. You have good industry structure with large, well-positioned players – and there’s a natural hedge with the currency coming off.

The reality is that we buy cyclical credits and, while

cause for concern? Are there fears of contagion?n MAZLISH We have been buying! We are an active NAIC-3 buyer. It’s typically 10 per cent of our volume and last year it was higher. A good chunk of our buying will be in the secondary market. Just as industries are cyclical, so are markets. We think we do good underwriting in good times, while in bad times we try to be ready to take advantage of opportunities.n KNOX A new open door for HIMCO is looking at sub-investment-grade issuers. The initiative is small at this point

but, similar to what Lenny Mazlish says, our approach is no different from how we look at investment-grade issuers. We take a long-term view of the credit and look at all the same fundamentals. Any reactionary occurrences at our shop tend to be on the public side, in the high-yield area.

Our asset class is viewed as a consistent, steady performer over long periods of time. The same view will apply for the below-investment-grade initiative.n WINCHESTER I can’t predict what will happen in the high-yield market, but we also have a bid for high-yield private-placement

Investors insist that perception is almost as important as reality when it comes to the effect of China on Australia’s economy –and the perception is definitely that a slowdown in China will have an impact.

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assets. Like HIMCO, our bid is relatively new and therefore relatively small. But what we all have said pretty consistently is that this asset class takes the long investment view. We certainly do this in investment-grade credits and we will do the same below investment grade.n MOORE We have a limited basket for below-investment-grade credit. I always find that the limited basket means our general account will tend to spend this elsewhere, and in other parts of the high-yield market. I also don’t think what’s going on in the high-yield market affects our appetite for investment-grade

Australia has had a long period of sustained growth, if there’s a bump in the road we think our underwriting helps us pick companies that can navigate difficult conditions and survive a downturn.

Having said this, the concerns around China have made pricing more interesting. But from our standpoint we are quite constructive.

BRASSINGTON One thing to factor in when it comes to Australia is demographics. We have been welcoming an average of more than 175,000 new people into the country every year for the past decade – unlike a lot of the major economies our population is continuing to grow strongly.

Relatively speaking, these new migrants are all ‘rich’, which has been a significant boost to our economy. It is driving a lot of construction, for instance. This hasn’t helped the property market, which has gone a bit crazy partly because of the incentives embedded in the tax system. But overall it has been a huge positive.

ARENTZ Chinese buyers have had an impact on the property market but it’s more in the high-density areas. The banks have been further regulated by the Australian Prudential Regulation Authority to try to reduce their exposures to investor loans.

This has slowed the market. Clearance rates in Sydney went to the high-50s per cent at the end of 2015, from 85

per cent in the middle of last year. So there has been some moderation in the market and prices have cooled a little. However, it’s still solid.

At Stockland we are more focused on the growth corridors and on owner-occupiers, who comprise 74 per cent of all our buyers.

The Chinese focus is more on higher-density apartments, rather than land. A lot of their investment in property is parents in China buying properties for their children when they come to Australia to study – and spend money. So from this perspective the development is good for the Australian economy.

MALEK The growth story is supported by the passenger numbers we are seeing. At Brisbane Airport we have seen 27.5 per cent year-on-year growth in Chinese inbound passengers. Of course, as has been said earlier, the currency has helped – we are now 20 per cent cheaper than a year ago.

ARENTZ You can’t underestimate the potential in tourism either. I’ve seen reports that in a number of years there will be half a billion Chinese tourists around the world. Australia is one of the destinations of choice.

KENDALL Given we are managing urban roads in areas with solid demographics, traditionally we haven’t seen these sorts of factors having a material impact.

private placements, including deal flow out of Australia. A lot of what is happening in the high-yield space is focused on oil and gas – for good reason. This is where a lot of the volatility is. Oil and gas was a hard sector last year, and I think it will continue to be so this year. This won’t change our outlook for the traditional private-placement market going forward.

ISSUER PERSPECTIVES

Greenberg What views have issuers formed around the cost of accessing the various available capital markets at the start of the new year?n ARENTZ One comment I would make is that while spreads are moving out, base rates are moving the other way. So all-in cost doesn’t change significantly. This obviously comes into any issuance decision, particularly when we are looking at fixed-rate debt. n MALEK At Brisbane Airport we are in a slightly unusual situation as all our debt securities maturing after 2022 are USPPs. We see this market as a pretty good one for us, given we are an airport infrastructure asset. Pricing, volume, and tenor are all fundamental but for our next issue one of the key considerations will be the cost of diversification over existing markets.n BRASSINGTON At Aquasure we’re in a similar position – with an extra comment that a key consideration for us is execution capability. We look at whether we can get the deal done in a time frame that works for us with relative control over price volatility. In this sense, the USPP market has been the only place in the last three years where we have been able to get the volume we’re looking for, at the right price and against a timetable we can live with.

If spreads move in the wrong direction for us but we need to do a refinancing, we will just have to work with this. To a degree, the price will be what the price will be.

We like the USPP market because we know investors are highly educated, they know what they are doing, they follow through and we get a very good-quality outcome compared with certain other markets.n KENDALL We have seen spreads widen in all markets and, given current volatility, it is currently difficult to form a view on forward markets, including USPP.

Transurban has a funding plan in place that should not be materially affected by short-term volatility. We expect to access the USPP market on an ongoing basis. Our decision to choose USPP or any other funding option is subject to market conditions in this and other markets at the time.n MILNE We are going through a funding analysis at the moment as we have a maturity in August this year and a capex requirement. Having said this, we maintain at least 6-18 months of liquidity to cover capex, business interruption and known capital-markets refinancings. We have total bank facilities of A$1 billion (US$695.3 million), which are currently undrawn



to A$250 million. So our A$250 million maturing in August is essentially done. This gives us the flexibility to go to the market when we want to, not when we have to.

We have US$600 million of USPPs outstanding, €1.2 billion (US$1.3 billion) in the euro market and A$845 million of Australian domestic bonds. We have a table which shows pricing in five, seven, 10, 12 and 15 years in euro, USPP, 144A and Australian dollars. And we might add sterling, Swiss francs or Canadian dollars to this list. We are looking at 3-5 markets at any given point in time, on a fully swapped-back basis.

The USPP market is very appealing right now because it trades through volatility. Given where swap spreads are at, and the volatility in public markets, it’s hard to look past the USPP market at this point in time.

The USPP market is not necessarily only a rainy-day option, though – if you are a good credit and you have a good story, investors will support you. This is essentially a long-term bank market provided by life-insurance companies, which benefit from the same terms and conditions as our banks. They are relationship driven, they are very credit focused and loyal, and in most instances they are highly supportive.

Knox I’m curious to hear whether the issuers around the table consider issuing in the US public bond market, and how they come to their decisions on this issue. n BRASSINGTON This is not a market that would work for us – there are complexities around Aquasure that will always make issuing into such a market a real challenge.

We have looked at Europe. At the moment Europe doesn’t work for us on a swapped-back basis. And it seems like too

“There’s often a time lag with the private market, so that if public spreads widen abruptly there may be a period of time when there is diminished value in the private market. A few months later it usually rebounds.”J O H N K N O X H A R T F O R D I N V E S T M E N T M A N A G E M E N T C O M P A N Y

much hard work – there’s a lot of upfront effort and cost, and then when you get there if you find the swap-back is 50 basis points out, like it is now, it’s not very appealing.

We have issued into the Australian bond market and it wasn’t a great experience because we ended up getting half the volume we were after. In my view the Australian domestic market is poor because there’s not the same volume capacity as there is in the USPP market. Historically the Australian market can literally shut for several months at a time.

By contrast, the USPP market worked for Australian issuers from January through to August last year. There were only a couple of months when it didn’t work, and now it has settled down again.

We look quite broadly at the various markets, because we’re always aware that there may come a point where we are tapped out in USPP format. We have borrowed almost US$1 billion here and we think we have another big deal in us in a year to 18 months. I’m not sure whether we will be able to get the volume but it’s certainly something we will look at closely. n ARENTZ I agree that the Australian domestic market can be fickle, and it tends to focus on financial institutions (FIs) rather than corporates. It likes some of the big offshore players like Apple or Intel Corporation – but when they issue big deals, as they did last year, the market becomes flooded. The domestic market can be pretty tough for local issuers.

Regarding other public markets, we have a euro programme, we’ve done sterling deals and we’ve done smaller private placements in currencies like Hong Kong dollars. We have a euro line on issue and we will go back to this market.

Diversity is key for us. Matthew Brassington raised the point about when issuers will hit capacity in the USPP market. At Stockland we have the equivalent of A$2 billion borrowed out of the USPP market, so we are a fairly large issuer. It has been absolutely fantastic but we also monitor investor appetite closely, to ensure that we know what incremental costs will be and whether we’re reaching limits in terms of total size. NOLAN At Port of Brisbane we are all about all-in costs – so spreads moving out doesn’t concern us. It’s about timing and being sensible about what we do when it’s time to issue.

We are too small to go to the US public market but we have been very happy with our experience in the USPP market – it has been a great option and I’m sure it will continue to be this way.

Sponsor participants

LORI CUNEO J.P. MORGAN GWEN GREENBERG ANZ DANIEL LEONG ANZ

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all-in coupon. We’re not interested in the margin to swap – we just want to know what the coupon is, because that’s what we pay out every six months. n KENDALL There were certainly concerns during the financial crisis that swap lines were too thin. However, I have observed expectations solidifying since this time. To date, and we haven’t seen any signs of this changing, swap lines continue to be available in the volume and tenor we require. Achieving clean swap lines presents little issue at all for us.

Moore Do Australian market participants believe their domestic market will change at any point?n GREENBERG It is changing – certainly a positive is the strong bid out of Asia, which has long-dated demand. We are getting real private-placement interest for long-dated tenors.

We can put club deals together for A$100-200 million, which can be tapped at a later date. One strategy is to issue a 10.5-year transaction, which gives the issuer an option to tap and thus create a more liquid bond. This is why we’ve seen a couple of long 10-year deals being done – primarily from FIs. However, we are also starting to see demand for longer tenors from domestic fundsn MILNE We did a very good domestic deal in September 2015. We did it without a ratings step-up – which was in our prior deals – but pricing stayed competitive even so. Probably about a third was sold to offshore accounts, and we did the deal without a couple of the big investors that typically cornerstone transactions.n KENDALL We have little concern around capacity for well-structured, smaller-sized deals in the local market. But it has a tendency to be more ‘finicky’ in terms of getting volume and tenor away, so larger deals remain subject to these kinds of considerations.

The Australian market has clearly been traditionally less liquid than larger, offshore markets – the US in particular. But for the right size of deal the domestic market remains extremely competitive. Domestic pricing is usually cheaper than offshore, so the decision around which market to access often comes down to whether there is domestic capacity and certainty of execution. n GREENBERG Apart from the economic aspects to take into consideration, issuers also have to look at the swap and how many legs they are crossing. Sometimes it is less expensive to swap from euros back to Australian dollars, for instance. The swap is definitely something we consider when we make recommendations about which markets to access.n NOLAN Absolutely. That swapped-back cost is the one we look at. No decision is made and no analysis is made unless it’s on a swapped basis.n ARENTZ I agree – it has to be an all-in Australian dollar cost. n MILNE It’s the same for us. Our treasury policy is to issue in fixed rate and swap back. So we are looking at the fixed-rate,

“At Port of Brisbane we are all about all-in costs – so spreads moving out doesn’t concern us. It’s about timing and being sensible about what you are doing when it’s time to issue.”B E N N O L A N P O R T O F B R I S B A N E



Leong In landed-cost-of-funds terms, how are issuers viewing relative-pricing dynamics between the USPP and domestic options?n MALEK We recently raised debt in the Australian market but it was bank rather than capital-market debt. The local market was very volatile at the end of last year. On the other hand, we have issued USPPs each year for the last four years, which shows that pricing in this market works for us.

Our issuance decisions are also about execution risk. This is definitely more pronounced in Australia and there also aren’t the benefits we get in the USPP market in terms of deferred tenor, volume and – at the moment – pricing. n BRASSINGTON The Australian domestic market really doesn’t go beyond seven years – with only the occasional 10-year transaction. The bank market in Australia can reach seven years if you stamp on the banks hard – in fact we’re about to do a seven-year deal in Australia and we’ve had plenty of appetite.

If we are looking for five or seven years we don’t need to go to the capital market because we can get this funding out of the banks – and it’s a lot easier, quicker and less expensive.

If we want to go beyond seven years we have to come to the USPP market – where we can do up to 20 years. If there has been any constraint it has been whether issuers can get clean swap lines. Last year the issuer for the Melbourne train station – Southern Cross – managed to get clean swap lines for 17 years, amortised. This has given the rest of us the opportunity to go to our own banks and ask where our 17- or 20-year clean swap lines are. We were constrained last year because of the swap – not because of tenor.

We would like to come back to USPP in the next year and go long – we’d like to do a 20-year amortiser. The constraint, we thought, might be the swap price. At the moment it looks

like the swap price is pretty good, because there’s no principal exchange at the back end on an amortiser. This really helps.

Leong Has the tightening of bank capital regimes made cross-currency swaps more expensive in your experience?n BRASSINGTON For some banks, yes – although swap pricing is all over the place. There are banks out there that don’t have any concept of how to price some of these instruments. We’ve just seen some pricing for basic seven-year interest-rate swaps: quotes from the banks ranged from 3 to 15 basis points. n GREENBERG It really depends on risk management within each bank and how quick they are to adapt to the Basel regulations. There is huge disparity and it can be frustrating when you’re pushing internally to get realistic pricing.

Swiss Have issuers seen any changes in swap costs specifically with regard to the USPP market?n BRASSINGTON In the second half of 2015 costs blew out a little. One of the reference points we looked at last year was New South Wales Ports. The company did a good deal in March and came back to the market in September. I think their treasury reference point moved out 20 basis points between the two deals and on the swap back the issuer lost another 15 basis points. So relatively speaking the end-of-year deal was quite expensive, whereas the March deal was an absolute cracker. n ARENTZ The other side of this, which issuers have to take into account, is the movement on the US side between swap and Treasury. Right now swaps are trading below Treasury so that’s a cost to us, whereas it was a benefit previously. This also increases costs and means issuers can’t just look at the Australian basis.

“There were certainly concerns during the financial crisis that swap lines were too thin. However, I have observed expectations solidifying since this time. Swap lines continue to be available in the volume and tenor we require.”C H R I S K E N D A L L T R A N S U R B A N

“I’ve been of the opinion that the 144A deals arechallenging for issuers as they don’t trade very well. The comments around Australian economic concerns are much more likely to affect quoted public-market bonds than private placements.”L E N N Y M A Z L I S H C I G N A

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Leong Australian corporate issuers – like many others – were reluctant to advance or increase funding tasks when capital markets were conducive to issuance. To what extent might there now be a sense of having to go to market, given the possibility that such opportunities may be waning?n MILNE We have to decide whether to take risk off the table and get a USPP deal done for US$200-300 million, or whether to sit back, build up capacity and do a benchmark trade in euros. Given the volatility in public markets, there’s a strong argument to take the risk off the table.n BRASSINGTON We are looking at prefunding and the USPP market would definitely be a good place to do this. The rules of the game changed after the financial crisis. You go early now, and you go hard – because you never know what will happen in the future.

In the bank deal we are doing at the moment – which is to take out a 2016 maturity – a lot of what’s driving our thinking relates to our October 2018 maturity. So we are already setting up for 2018 refinancing. A lot of issuers I talk to are doing the same.

Clearly, margins are moving out again, after bottoming out about six months ago. They will now slowly drift away from us for the next period. So we have to assume that once the trend is going against us it will keep doing so. This provides even more reason to go early.n KENDALL We have an established funding plan in place which we regularly update and refresh. We have been accessing the US, European, Canadian and Australian markets regularly over the last couple of years, and expect to continue to do so.n MAZLISH One comment I would make – away from Australia – is that there are various markets, particularly in Europe, that have been red hot over the last couple of years. This means that

USPP investors have lost a lot of flow as deals have been issued in fairly liquid public markets. It’s true that the private market is resilient, but issuers around the world need to be reminded that markets freeze and markets close. n MOORE One reason why our market works so consistently is historic. It has been around for a long time and has a deep and entrenched investor base.

There are few geographies around the world that have a long-dated and consistent private bond option for issuers, particularly on an unrated basis – and Australia is a good example. All our institutions, along with 40 or so others that have played ball in the market, have lived with the asset class through lots of cycles. Time and time again the market has remained open for business in volatile times.

It will be interesting to see how markets in Europe and elsewhere react to the current volatility. It could very well be an opportunity for us, much like we saw post 2008-09 and in the early 2000s. This would be great given the current new-issue supply and investor-demand imbalance.

INVESTOR PREFERENCES

Cuneo How much incremental capacity do investors have for Australian issuers – especially as 2015 saw a higher level of issuance by Australasian-origin names into the USPP market?n WINCHESTER We certainly aren’t constrained in terms of our exposure. However, notwithstanding the reality that natural resources represent a small part of the overall economy, there is still sensitivity to this among our investment committee. So while we don’t have a capacity issue, there is probably a greater degree of scrutiny now with respect to Australian issuers.

“Back in 2008-09 things got extreme from a minimum-yield perspective because conditions changed so quickly. There was a shock factor and people were trying to hit a minimum yield. Now, however, we have become used to a sustained low-coupon world, whether or not we like it.”J I M M O O R E B A B S O N C A P I T A L M A N A G E M E N T

“Right now the USPP market is very appealing because it trades through volatility. Given where swap spreads are at, and the volatility in the public markets, it’s hard to look past the USPP market at this point in time.”S I M O N M I L N E M E L B O U R N E A I R P O R T



“WHEN WE HAVE TALKED ABOUT DIRECT AUSTRALIAN DOLLARS IN THE LAST FEW YEARS WE HAVE FOUND THAT THE PRICE WE COULD GET FROM THE MARKET WAS MORE EXPENSIVE THAN WHAT WE COULD GET BY TAKING US DOLLARS AND SWAPPING THEM OURSELVES.”J O H N A R E N T Z S T O C K L A N D

CURRENCY MATTERSSome US private placement (USPP) investors believe being able to buy non-US dollar deals could help them secure more beneficial allocations, so they have been working towards obtaining approval for foreign-currency bidding. Such issuance is not without challenges, though.

n LEONG Are issuers currency-agnostic in terms of getting their all-in cost of funds back to Australian dollars, or do they prefer to receive direct Australian dollars?

MALEK Our preference would be to get direct Australian dollars but if doing so costs more we are happy to do the swap. We are agnostic as to whether we do the swap or it’s done by the investor – as long as the all-in cost of funds is in line with our targets.

ARENTZ We are also agnostic. We will take whichever gives us the best price and tenor. However, we also have to take

into consideration exposure to the banks and whether or not we are likely to get clean lines. This can have a bearing on what we do.

NOLAN We are in absolutely the same position. Having said this, we have found in recent times that when we have wanted Australian dollars we have been able to get them. So the market has worked itself out to cater for what we’ve requested.

MILNE If we are able to drive pricing with a different currency, we are more than happy to do so. We would happily have three US dollar tranches and an Australian

dollar tranche in a USPP deal, if the pricing makes sense for both us and investors.

n GREENBERG Investors have always been able to buy in a range of currencies but over the last two years we have seen higher volumes being done across multiple currencies. Has the capacity for Australian dollars among investors increased or remained steady?

MOORE At the moment we are pretty neutral – if a new name comes to the market and we want to invest US$75 million equivalent we would be indifferent between Australian

and US dollars. Our preference would be US dollars and we would price the Australian dollar, but it wouldn’t change the amount we do.

This is partly because we are managing one general account, whereas other insurance companies may have third-party money in a US-dollar-only portfolio as well as certain purchaser accounts that can do the swap.

We evaluate each deal differently. To some extent, though, we are also looking to differentiate ourselves in order to get the allocations we want. We may do this via pricing, maturity or currency, or a combination of these.

If I look at our current Australian exposure, the vast majority of our deals are US dollar denominated. However, with increasing capital pressure on banks I expect our Australian direct deals to increase given our ability to swap very efficiently. When issuers look at all-in Australian dollar funding, there may come a time when we are more competitive than the banks due to our counterparty rating and swap costs relative to banks.

MAZLISH To be candid we are not crazy about non-US dollar investments. We did some

If you look at our allocation to Australia, we have been a large-scale participant for many years. So our allocation relative to many of our peers is higher. This being said, we are still very hopeful that 2016 will be another good year for Australian issuance and we are certainly ready to participate.

Swiss Does this mean you don’t have a specific portfolio limit that you can allocate to Australia?n WINCHESTER We discussed this during the global financial crisis, but I’ve not heard much on the matter since. n KNOX This is true for HIMCO as well. When we look across our entire general account the Australian exposure is actually very small, and it’s pretty much all in the private-placement portfolio. There has been some internal discussion about quantifying limits, from time to time.

We will continue to participate because Australia has been a great source of longer-term deals. The discussions in Australia around infrastructure mean we expect this to continue.n MAZLISH We have a very large exposure but we don’t have a practical constraint. I don’t see capacity as an issue for 2016.

I think the more interesting thing is that I’ve been of the opinion that the 144A deals are challenging for issuers as they don’t trade very well. The comments around Australian economic concerns are much more likely to affect quoted public-market bonds than private placements. And I think whether or not there is leakage in USPP spreads is a bigger issue for 2016 than whether or not investors have capacity for Australia. n MOORE I’d have to say ditto all round. I’d also add that Australia is a smaller percentage of our portfolio than I thought it would be – so I expect it to grow proportionally

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before the global financial crisis but during the crisis they were both illiquid and challenging. As an active player in the secondary market, we came away with a lesson learned.

Coming out of the crisis we stopped investing in other currencies, but then in the last year or two we have received approval to do this again. Really this is for competitive reasons – with 15-20 per cent of volume going to non-US dollar tranches we feel like we have to at least have the ability to buy in Australian dollars.

KNOX We are probably the outlier here as we continue to have a US-dollar-only focus. This is changing though, as we’ve recognised the trend for more issuance in Australian dollars, sterling, euros, Canadian dollars and some New Zealand dollars.

As other investors have said, we recognise that there can be better allocations if we offer bids in other currencies. There’s also a discussion within our company to be more globally focused generally in terms of the investments we make.

Like Cigna Investment Management, we are active in the secondary market – both buying and selling – possibly

more so than some of our peers. As a result, one of the things we consider is that if something is in a foreign currency and it has a hedge associated with it, it is less liquid by nature. However, there is, I think, a proportion of our portfolio where we can afford to have less liquidity.

These are all the factors we consider. But I think, probably in the second quarter of this year, we will open the door to being able to offer Australian dollars or other currencies.

WINCHESTER We have historically been solely US dollar investors – at least for our general-account clients. We did have one third-party client that with a natural euro bid. Our experience with this client was of getting better allocations in transactions where we were able to present a bid in more than one currency – so we have petitioned for, and received, approval to make foreign-currency bids.

It’s not unlimited but nonetheless we now have the authority to bid in foreign currencies and to put the swaps in our general-account book.

n SWISS This all sounds pretty positive for Australian issuers.

ARENTZ Yes, but it comes down to price. When we have talked about direct Australian dollars in the last few years we have found that the price we could get from the market was more expensive than what we could get by taking US dollars and swapping them ourselves.

NOLAN When we were in the market a couple of years back we did an Australian dollar tranche, and it absolutely worked for us to have the investors do the swap. It was a function of the market at the time – and we recognise that this dynamic won’t always be there. However, when it does work it’s great to know there is capacity.

n ARENTZ The question I have is whether, when investors buy in foreign currency, it restricts what they can do with the bonds – especially in terms of ability to trade in the secondary market. Does this play a big part in your decision-making?

MOORE Yes, and you make a great point. That’s why our natural instinct, when we’re putting foreign currency on the table, is to do so up the credit curve. We are not a big seller of assets historically – we are a buy-and-hold account. Even in 2008-09 we didn’t sell

much. Putting all this together, anything can go wrong but if you’re focused on quality and you’re a long-term, buy-and-hold investor through good times and bad, you minimise the risk. And then on the rare occasions when you have to sell, you sell.

MAZLISH Honestly, we don’t sell! Non-US dollar bonds are not liquid.

n NOLAN We see very few trades of our notes. So much so that any sales I have seen have been internal – within the same organisation. Is this typical or am I just an outlier in terms of what I’m experiencing?

ARENTZ No, you’re not an outlier. In our portfolio it’s pretty rare to see bonds change hands. As I’ve said, we have A$2 billion (US$1.4 billion) equivalent of USPPs on issue. The number of bonds that changes hands is minimal.

MAZLISH In general, this makes sense. We are outsized in terms of the size of our secondary programme and there are no good statistics available. I’d say if new issuance is US$50 billion a year, it would be hard to see secondary volumes being more than US$1-2 billion.

or slightly higher relative to overall assets under management over time, particularly given the expected infrastructure flow in the coming years.

As more is issued out of Australia it creates a natural refinancing need. We also have an initiative to increase our overall hold times generally, and I think Australia is a great

source of name diversification. This is one of the big attributes that attracts us to Australian issuers.

Leong Last year, Transurban Queensland issued a jumbo-sized deal of US$695 million equivalent. Chris Kendall, do you have any

“We are looking at prefunding and the USPP market wouyld definitely be a good place to do this. The rules of the game changed after the financial crisis. You go early now, and you go hard – because you never know what will happen.”M A T T H E W B R A S S I N G T O N A Q U A S U R E



concerns around reaching capacity in the USPP market?n KENDALL The final volume of this transaction was very pleasing with the key attraction for us being the ability to obtain multiple tranches at attractive pricing. Generally, in terms of public-market deals we have executed, there is a broad expectation from investors that there will be repeat issuance. In the USPP market we have found there is probably less of this expectation.

Leong Everything else being equal, do investors have any concern about large deal sizes relative to what has previously been considered ‘normal’ in the USPP market?n MOORE We don’t have any hesitation about deal sizes – we’d be fine with a US$1 billion plus deal, for example.

If you are talking about whether an issuer could get tapped out in this market, I don’t think that’s a concern either. From a demand perspective the private market is night and day compared with where it was five years ago.

Having sat on the sell side, if someone came to me five years ago and asked whether the private market could step up for a US$1 billion project financing, I would have said to our syndicate desk that we could probably get there but we’d be scratching for the last dollar with limited price competition. Now, we are seeing US$1 billion club deals being put together with relative ease – because of demand growth. This is a positive sign for potential infrastructure funding needs in Australia in the coming years.

Obviously it’s credit-specific – low triple-B issuers won’t necessarily be able to reach the same volume. But for the types of credits that come out of Australia generally – the very sound credits – there is huge capacity going forward.

In a nutshell, bigger deals don’t bother us – if anything if the deal is too small it becomes a bit of a nuisance from an allocation and resourcing perspective.n WINCHESTER Allocation is a big concern, so if a larger deal comes to market we feel it is an opportunity to get closer to what we are looking for in terms of our bid. •

n SWISS How are USPP investors currently aligned in terms of SRI within their funds? Just one Australian-origin issuer has issued a green USPP, and only two Australian corporates have issued them anywhere. Is there appetite for more?

WINCHESTER Our firm is active in promoting green initiatives. Voya Investment Management wants to be known as being environmentally friendly. This being said, our focus in the private credit group is business- and financial-risk profile, structure and relative value. If it happens to be that an issuer is also green or more broadly socially responsible, that’s fantastic. And if we saw more of this type of issuance I can assure you our marketing group would use it.

KNOX I’m on my firm’s environmental committee and there is a big focus on

this at Hartford Investment Management. So far, though, it hasn’t formed part of the overall fiduciary duties. So from an investment perspective we’re in the same camp as Josh Winchester – looking at the fundamentals. If there is also an environmentally advantageous aspect to the investment that’s an additional benefit.

In terms of green bonds themselves, we have looked very hard at the market. The thing we have perceived in the public bond market is that the deals are typically small, so they are not necessarily liquid and there isn’t any pricing differential between the big-volume public bond issues and the green-bond issues to compensate for illiquidity.

We are less attracted to green bonds because they are not as liquid and we are not being paid for diminished liquidity.

So far that’s an issue, but the market is growing very rapidly and it’s moving away from domination by supranational issuers – corporates are issuing green bonds more and more. I think this market will develop and over time we may see it become part of our fiduciary duty.

n SWISS John Arentz, when Stockland issued its euro green bond in 2014 did you find that pricing was the same as your vanilla bonds?

ARENTZ Yes – and we wouldn’t have done it if it would have cost us more. If you go through the book we had just fewer than 30 accounts participate in a €300 million (US$325.6 million) transaction. Of these, probably only three were purely SRI funds. Then there’s a group that’s somewhat ‘grey’ as they are big fund managers

SRI A LONGER-TERM PROSPECTUS private placement (USPP) investors report that socially responsible investment (SRI) is not yet part of their fiduciary duties. But they believe the market is set to grow.

and some would have been allocated to SRI funds, but we couldn’t see through to exactly where the funds went. There are undoubtedly also a lot of ‘normal’ bond investors buying because it’s a bond and it offers relative value.

The market is growing, though, and it will become bigger. People are also getting more sensitive to these issues. As a company in the property sector, being green and socially responsible is a massive issue – and it’s a great marketing tool for us as well.

Stockland has been involved in sustainability for more than a decade and we’ve been named number one in property globally through the Dow Jones Sustainability Index two out of the last three years. So we take it pretty seriously – which means that when we went to issue a green bond it was relatively easy for us.

For issuers that have not been as involved in this space at a corporate level, there’s a lot of work involved. We already had infrastructure in place to measure our SRI performance so we were able to piggy-back off this in the bond market.

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