We know the listed debt and hybrid market in Australia is dwarfed by the wholesale…
Australia has long been a net importer of capital due to a low domestic savings rate and traditionally, Australia has always had a greater focus on equity and property, with debt capital markets receiving less attention. The participant mix of the fixed income market in Australia is also far from diversified when compared to other overseas markets – the supply side is dominated by the banks, who have been regular issuers of senior, subordinated and hybrid bonds of various maturities and structural features, rather than “true” corporates as widely defined by bond investors – industrial companies instead of financial institutions or government related entities. Although this could be partly explained by the fact that Australia is predominantly a services-based economy and demographically a small country without a full, end-to-end industrial base, it also reflects on the general lack of risk appetite and appreciation of the demand side for industrial corporates.
But this appears to be changing as local Australian industrial companies have started to increase activity levels. In 2017, Utility company Ausgrid completed a $1.2 billion seven-year bond issue, the largest Australian corporate bond deal by a local industrial company. That followed a $US2 billion private placement deal in the United States, a record for a non-American issuer. Packaging company Visy also completed a $150 million 10-year debt instrument to Australian Super and IFM Investors through a private placement. In fact, issuance volumes from local industrial companies more than doubled in 2017 compared to 2016 (Figure 1).
Figure 1. Australian Non-Financial Corporate Bond Issuance
At the same time, International industrial corporates are increasingly tapping into the Australian Kangaroo bond market – borrowers such as US Telco Verizon ($2.2 billion in August 2017), UK Telco Vodafone ($1.15 billion in December 2017) and US Agri-machinery maker John Deere ($250 million in July 2017) have added to the list, marking an almost 50% rise in total issuance volume from 2016 (Figure 2).
Figure 2. Non-Financial Kangaroo Bond Issuance
On the demand side, it has been very encouraging to see (as represented by the Visy transaction) that Australian super funds have started to accept credit risk relatively further along and down the credit curve. It sets a positive precedent for the large numbers of Australian industrial companies with comparable credit profiles and financing needs to Visy, for similar transactions in the future. Of course, for the $2.4 trillion pool of retirement savings in the hands of Australian super funds, it may take still longer for the average super fund to become comfortable lending to relatively riskier industrial companies. Traditionally, super funds have had limited appetite for relatively illiquid assets such as privately placed bonds and loans, despite having long-term capital in their hands.
On the retail market front, Australian corporates have traditionally been reluctant to issue debt directly to the Australian public via a stock market listing, which may be partially explained by a lack of enthusiasm to educate end-retail investors and advisers due to cost and efficiency considerations. This may well change further as more providers such as BondAdviser offer retail investors greater education, and ready investment opportunities. While we think it unlikely that Australian corporate bonds are traded by mum and dad investors on a daily basis, there should be increasing investment pools being allocated to fixed interest, especially if toppy equity markets falter and/or yields rise significantly.