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Where Does Corporate Debt Go?

In Australia, financial institutions continually use debt capital markets as source of funding. But what about other companies? The majority of ASX200 non-financial groups tend to issue overseas in larger markets such as the UK, the Eurozone, Singapore and the US. From our findings, we discovered on average 44% of borrowings for ASX200 companies that have marketable debt in Australia is domiciled outside Australia (i.e. in the form of Foreign Bonds, US Private Placements and Euro-dollar debt). This is primarily of function of funding diversification, allowing these companies to tap different funding sources when needed.

In Australian debt markets, most of these companies issue in the over-the-counter (OTC) market which is generally out of reach to retail investors. However, how analysis has uncovered 146 different securities that meet special eligibility requirements to be transmuted into listed Chess Depository Interests (CDIs). This enables the holder to receive coupon payments and principal repayment at maturity from the security over which the CDI has been issued without holding the security directly (similar to Australian Government Bonds trading on the ASX currently). This would significantly improve retail access into the fixed income asset class and allow investors to lower the risk of their portfolios by allocating funds further up the capital structure.

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At present, ASX-Listed bank hybrids fit into the Tier 2 and Tier 1 categories while Corporate issued securities tend to be either Subordinated or Preference Shares. If transmutation were to occur, retail investors would gain greater access to the Senior Unsecured level of the capital structure. Senior Unsecured debt investors ranked ahead of all the levels mentioned in the priority of payments and are investors are essentially at lower risk of default. As a result, these types of securities are less volatile than most instruments currently trading on the ASX. As a result, the transmutation process would improve access, increase demand and make ASX200 companies think twice before issuing debt abroad.

Alternatively, retail investors can access these types of securities through investment vehicles known as Exchange Traded Bonds (XTBs). There are currently 39 XTBs on issue and can be accessed through the ASX.

Group Ticker Rated Debt ($Am) Bank Debt% ASX Listed Debt% Aus OTC Debt% Overseas Debt%
AGL Energy AGL Yes $3,129 46% 21% 19% 14%
Alumina AWC Yes $152 18% 0% 82% 0%
APA Group APA Yes $9,366 11% 5% 3% 80%
Asciano AIO Yes $3,839 16% 0% 9% 75%
Ausnet Services AST Yes $6,898 0% 0% 22% 78%
BHP Billiton BHP Yes $50,153 6% 0% 5% 89%
BWP Trust BWP Yes $480 58% 0% 42% 0%
Caltex Australia CTX Yes $694 0% 78% 22% 0%
Coca Cola Limited CCL Yes $2,536 8% 0% 6% 86%
Crown Resorts CWN Yes $3,064 25% 37% 24% 14%
Dexus Property DXS Yes $3,286 37% 0% 18% 45%
Downer Edi DOW No $646 6% 0% 72% 23%
Duet Group DUE No $6,201 56% 0% 31% 13%
G8 Education GEM No $535 0% 0% 22% 78%
Goodman Group GMG Yes $2,873 13% 0% 0% 87%
GPT Group GPT Yes $2,958 59% 0% 21% 20%
Incitec Pivot IPL Yes $2,252 45% 0% 9% 46%
Investa Office Fund IOF Yes $1,098 48% 0% 11% 41%
Lendlease LLC Yes $2,593 47% 0% 18% 35%
Mirvac Group MGR Yes $3,243 39% 0% 19% 42%
Nufarm NUF Yes $1,204 62% 0% 0% 38%
Origin Energy ORG Yes $9,488 7% 9% 0% 84%
Qantas Airways QAN Yes $5,244 77% 0% 18% 5%
Ramsay Health Care RHC No $3,367 92% 8% 0% 0%
Scentre Group SCG Yes $11,103 13% 0% 21% 67%
Seven Group Holdings SVW No $2,210 43% 22% 0% 34%
Shopping Centres Australasia SCP No $762 44% 0% 23% 34%
Stockland SGP Yes $3,677 4% 0% 19% 77%
Sydney Airport SYD Yes $8,181 18% 0% 35% 47%
Tabcorp Holdings TAH Yes $1,411 67% 18% 0% 15%
Tatts Group TTS No $933 45% 21% 0% 34%
Telstra TLS Yes $14,434 6% 0% 19% 75%
Transurban TCL No $12,194 27% 0% 10% 63%
Vicinity VCX No $4,717 56% 0% 22% 23%
Wesfarmers WES Yes $6,282 11% 0% 29% 60%
Woolworths WOW Yes $4,715 1% 15% 21% 64%

Source: Company Reports (last reporting date), BondAdviser Estimates