Hunt for yield pushes out $A bond tenors

The Australian medium-term note (MTN) market has seen a sharp growth in 10-year bonds, particularly in the infrastructure sector, driven by the hunt for yield amid the current low interest-rate environment.

“Infrastructure companies are attracted to the longer tenors on offer as these bonds provide a good asset-to-liability match, while investors are drawn to the defensive nature of the sector and higher return,” Craig Shortus, ANZ Head of Utilities and Infrastructure said.

Companies that have issued long-dated bonds in tenors of 10 years or longer include supermarket giants Woolworths and Coles, telecommunications operator Optus Singtel, Brisbane Airport, Port of Brisbane and most recently rail operator Aurizon.

Preference

Corporate bond volumes in Australia year-to-date has jumped 27 per cent at $A8.6 billion at the time of publication, accounting for around 5 per cent of total volume of the market, according to ANZ Markets data. While issuance of eight years and more account for 55 per cent of the year-to-date volume compared to the 32 per cent for 2019 the data shows.

The average tenor for corporate issuers in the Australian MTN market is around seven years and 10 years for some selective issuers. Typically Australian companies have to tap the US Private Placement, US 144A/Reg S or European markets for longer-dated funding which is dominated by insurers, pension funds and other long term asset managers who have appetite for maturities of 15 years and beyond.

“Investors are looking for yield in a low rate environment. More so than ever, if investors are comfortable with the credit there is a preference for longer tenors for incremental spread pick-up” Andrew Brown, Director – Debt Capital Markets at ANZ said.

Port of Brisbane recently tapped the market for a $A500 million bond, divided into a $A200m seven-year tranche and $A300 million 10.5 year tranche. The bond was heavily oversubscribed resulting in significant scale bank. The order book totalled more than $A2.75 billion with slightly more demand in the 10.5-year tranche. ANZ was one of the joint lead managers.

While the recent transactions in Australia are an encouraging sign of a maturing corporate-bond market in Australia, the US Private Placement will still continue to be an alternative source of long-dated investor capital for Australian issuers according to Brown, although “cost of funding in that market is not competitive at the moment,” he said.

“Those predominately yield-based investors have not adjusted as quickly to the depressed interest rate environment, therefore demanding relatively higher yields,” Brown said.

Yield hunt

The theme of yield and duration was clearly evident in the Australian Office for Financial Management’s (AOFM) longest-dated bond as part of an unprecedented social support program to help Australians through the Coronavirus pandemic. The government has indicated it needs to raise around $A240 billion in 2020-21.

The AOFM in August issued a $A15 billion 30-year bond maturing in June 2051, the largest of this duration ever seen in an Australian government bond. Some 150 investors piled into the bond which generated an order book of more than $A36.8 billion, underscoring the depth of demand.

ANZ jointly led the deal with Commonwealth Bank of Australia, Deutsche Bank, JP Morgan and UBS. The agency last week tapped the market for a $A21 billion bond maturing in 2031.

“The strength of these order books demonstrate the ability and willingness of investors to chase yield in the risk-free end of the spectrum,” Darren Sloane, Director – Debt Capital Markets at ANZ said.

“It is the same theme playing out across the credit curve as global interest rates are so low.”

Sharon Klyne is an Associate Director, Communications at ANZ Institutional