INSIGHT
AUSTRALIAN ISSUERS CAPITALISE ON THE RAPID GROWTH OF ASIAN INVESTMENT DOLLARS & THEIR NEED FOR DIVERSIFICATION, DURATION, AND QUALITY
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Owen Gallimore, Head of Credit Strategy, ANZ Markets | October, 2017
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AUSTRALIAN G3 BOND ISSUANCE IS SHOWING THE RAPID GROWTH THAT HAS BEEN WITNESSED ACROSS ASIA PACIFIC OVER THE PAST COUPLE OF YEARS, WITH NEWCASTLE COAL, MIRVAC, BRAMBLES, GOODMAN, INCITEC, WESTPAC (AT1), QBE, TRANSURBAN, SANTOS, AND WOODSIDE ALL ISSUING BENCHMARK OFFSHORE USD AND EURO BONDS IN RECENT WEEKS. THE USD AUSTRALIA CORPORATE AND FINANCIAL BOND UNIVERSE OF LIQUID BONDS HAS REACHED A CRITICAL MASS OF USD135BN (EXCLUDING SHORT DATED), OFFERING BOND INVESTORS HIGH QUALITY SECTOR DIVERSITY ACROSS THE FULL MATURITY CURVE, FROM AA BANKS AND SINGLE-A GLOBAL MINERS TO AT1 NC10 FINANCIALS AND LOW-B VIRGINS.
Australian bond issuers riding the wave of Asia Pacific’s middle class
Global funding markets are pivoting with USD Asia-ex Japan/Australia bond new issuance up 70% in 2017 to $224bn, and likely to exceed ANZ’s 2017 Outlook forecast of a +55% US$275bn, whilst US investment grade and European bond markets languish with 1-3% growth rates. The USD Asia-ex Japan/Australia bond market may reach US$1 trillion by 2020 according to projections from ANZ, as new issuance grows towards US$400bn/year. China’s share of the outstanding Asia-ex Japan/Australia USD bond universe is only now gradually approaching its GDP contribution of 62%, from January’s 44%.
FIGURE 1:
USD Australia bonds recycled from the US back into Asia Pacific
Source: ANZ Credit Trading
Spot the difference? USD Australia and USD China SOE bond investors merge
Over the past twelve months ANZ Credit Trading has witnessed a step-change in secondary liquidity for USD Australia corporate bonds, with volumes up to several billion as at September 2017. The investor demand for USD Australia is at tight spreads across the maturity curve, with HK, China, and Singapore accounting for 60% of ANZ’s secondary trading volumes. This is a similar story to the primary and secondary volumes ANZ intermediates across the Asia Pacific region, with 78% of USD Asia-ex Japan/Australia’s bond new issuance sold directly into Asia. Increasingly, the secondary investors for USD China state-owned corporate bonds are one-and-the-same as the investors for blue chip USD Australia bond issuers. Primary markets will follow.
FIGURE 2:
ANZ US$m Aus Corp Trading Volume (LTM)
Source: ANZ Credit Trading
USD Australia bonds offer Asian investors duration, diversification and quality
The Asia Pacific investor base is a high quality long-term institutional mix across the maturity spectrum, with Fund/Asset Managers and Insurance alone accounting for 65% of ANZ’s USD Australia corporates secondary trading volumes (LTM). This is near identical to ANZ’s secondary volumes and new issuance in USD Asia-ex Japan/Australia, with Fund/Asset Managers and Insurance accounting for 63% of allocations in 2017. Given this demand for duration in Asia, the USD Australia bond issuers are well positioned to fill the gap in supply of 10 year bonds. USD Asia-ex Japan/Australia 10 year bond issuance has fallen from over 20% in 2015 to just 10% of total issuance in 2017. Australia offers valuable diversification for Asian investors in a AAA jurisdiction, with China’s share of the USD Asia-ex Japan/Australia bond market having risen to 64% of total new issuance. Australian corporates provide high quality investment grade offerings across monopolistic or strongly market positioned infrastructure, utility, and energy assets. The property sector has de-leveraged with gearing well below similarly rated property companies across the region (Goodman Group has 5.9% gearing for example), and the banks have some of the highest capital buffers in the world. There has been positive ratings migration across the Australian corporates in 2017, but there is an argument that ratings are still too conservative relative to the region, with Australian issuers’ conservative management, transparency, strong balance sheets, and long track records.
FIGURE 3:
ANZ US$m Aus Corp Trading Volume (LTM)
Source: ANZ Credit Trading
FIGURE 4:
Issue and they will come – investor interest is broad based across the region
Source: ANZ Credit Trading
The recent new issues show more clearly the dominance of the China/HK and Singapore investors, but as a young market investor appetite is much broader than this based on our frequent investor trips to Japan, Korea, and Taiwan. ANZ secondary trading volumes in the USD Australia corporate bonds for 6 of the recent new issuers above already approaching half of the total issued. ANZ’s USD Australia secondary trading volumes have been similar for both 144a bonds, US-sold with APAC representation, and RegS bonds, Asia/EU-sold. APT (144a) and SGSP (RegS) both turned by more than half in secondary by ANZ alone. However, where USD 144a and euro Australia bonds have been issued without APAC representation the secondary market liquidity and pricing has clearly suffered. The China/HK share of secondary volumes has increased to 49% in these recent new issues (Singapore 24%), and whilst this has also led to Banks’ share rising to 23% of volumes the Fund/Asset Manager share has remained stable at 54%.
USD Australia trading through global peers on the Asia bid
As USD Asia-ex Japan/Australia has outperformed in recent years the Asia premium to US credit (wider spreads) has eroded across various sectors, with for example China NOCs such as Sinopec converging towards the similarly rated US Oils, and China Tech such as Tencent converging towards the similarly rated US Tech. This Asia outperformance has also rapidly changed the proposition of USD Australia credit and the ability to directly fund within the region, as witnessed in secondary markets with the recycling of USD Australia bonds through ANZ back into the region at tighter credit spreads. We do not have to look far for sectors where Asia’s outperformance is beginning to re-price USD Australia credit from its traditional position in-between US/European and Asia credit. The AT1 financials have already seen the USD Australia bonds move inside global peers, as Asia outperformed.
FIGURE 5:
USD Australia AT1s funding inside global peers on the Asian outperformance
Source: ANZ Credit Trading
The USD corporate sector is beginning to follow the larger USD financial sector in this shift towards lower Asian credit spreads, as new issuance develops. The Oil & Gas/Packaging sector is a good example of where the basis to US credit is beginning to narrow on the back of the Asian outperformance. The recent Australian new issues already 15-30bp tighter, against lacklustre US performance, and the likes of Origin almost 100bp tighter year-to-date.
FIGURE 6:
USD Australia Oil & Gas/Packaging attractive versus US and regional peers
Source: ANZ Credit Trading
The growth in issuance of USD Australia bonds directly into the Asian investor base is set to accelerate. Investors will achieve their need for diversification, duration, and quality, whilst issuers will achieve local funding at lower spreads across maturities and quantum. As seen in the USD Australia financials with the AT1s, we expect that the USD Australia corporates will rapidly narrow the basis to global peers on the Asian bid.
Recent ANZ Asia Pacific Credit Desk Commentary
29-Sep ANZ Asia Pac Credit Weekly – OC Town, Hutch, Shougang, Nan Fung, Syngenta
28-Sep Overseas Chinese Town PERP nc3 – 50bp cheap, fair value 4.25% (IPG 4.75%)
25-Sep Shougang IPG T5+195 (yield 3.8%) – pass, buy Hebei instead for the extra 100bp
22-Sep ANZ Asia Pac Credit Weekly – S&P China downgrade, Newcastle Coal, Goodman Group, Postal Bank of China, Beijing Infrastructure, Syngenta, Country Garden, APP
21-Sep Newcastle Coal US$ 10yr – fair value T10+215 yield 4.4% (IPG T+240 yield 4.7%)
20-Sep Postal Bank $7.6bn nc5 AT1 – fair value 4.4%
20-Sep Goodman Group – fair value T10+140 (3.6%) & T30+150 (4.4%)
19-Sep Beijing Infrastructure – fair value T3+120 2.7% yield (IPG T3+150 3.0% yield)
15-Sep ANZ Asia Pac Credit Weekly – Asia-ex USD bond new issuance breaks through $200bn, Westpac AT1, Bank of Qingdao AT1, Shinhan T2, Red Star, Chalco
14-Sep Red Star – fair value T5+190 3.7% yield (IPG T+205 3.8% yield)
13-Sep Shinhan Bank B3 T2 10yr – fair value T10+165 3.8% yield (IPG T+190 4.05% yield)
12-Sep Bank of Qingdao PERP nc5 AT1 – fair value 5.5% (IPG 5.7%)
12-Sep Westpac PERP nc10 AT1 – fair value 5.1% (IPG 5.375%)
11-Sep ANZ Asia Pac Credit Weekly – The Asset 2017 Fixed Income Poll Closing, Santos, Woodside, Hutch Ports, Weichai, Ayala, Sinopec
7-Sep Weichai Power – fair value 3.9% (IPG 4.25%)
7-Sep Santos – fair value T10+200 yield 4.1% (IPG T+230 yield 4.4%)
6-Sep Woodside 20bp cheap – fair value T10+160 (3.7%)
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