Insight
Institutional Term Loans taking off in Australia
Sharon Klyne, Associate Director, Institutional Communications | October 2018
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Australian corporates are increasingly tapping Australia’s superannuation funds and institutional investors for longer-dated loans and to diversify their funding sources away from the bank market, paving the way for a slow evolution of a direct lending market.
A number of Australian superannuation funds including AustralianSuper, Construction and Building Unions Superannuation (CBUS), First State Super and Telstra Super and institutional investors such as Metric Credit Partners, Pricoa, Eastspring Investments and Aberdeen have developed direct lending capabilities to improve their fixed interest portfolio investment diversity and overall portfolio returns, which have been relatively depressed in the current low interest rate environment. This comes at a time when Australia’s domestic major banks are progressively subject to higher capital ratios under Basel III and regulations imposed by APRA.
ANZ recently arranged a A$100 million seven-year institutional term loan for listed property trust Folkstone Education Trust (FET) with AustralianSuper providing the debt. The company was keen to tap this alternate pool of liquidity to extend its debt profile and expand its financiers beyond banks. “With bank debt historically, the maturities haven’t extended beyond five years, so with FET’s long lease average expiry of over nine years we looked at institutional term loans and thought it would make sense for us to obtain debt funding beyond five years and also diversify our funding sources,” said Travis Butcher, FET’s chief financial officer.
“The decisions we’ve had to make is around the cost of longer term debt, weighing it up against the benefits of longer tenor and diversification,” he said.
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“It would make sense for us to obtain debt funding beyond five years and also diversify our funding sources… The decisions we’ve had to make is around the cost of longer term debt, weighing it up against the benefits of longer tenor and diversification.”
Travis Butcher, CEO Folkstone Education Trust
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Institutional investors typically have been active in the infrastructure, leveraged finance and property sectors as they are able to provide longer dated debt, higher leverage or mezzanine debt or more attractive terms and conditions. More recently their appetite has expanded to include corporate borrowers. Other companies that have recently tapped the institutional market for loans include telecommunications operator TPG Telecom, Aventus and packaging firm PACT Group. These borrowers successfully raised seven-year loans.
GOOD PROXY
The Australian institutional term loan market could be a viable alternative to the US Private Placement market given the high costs involved particularly for borrowers needing to raise more modest volumes. “I think it probably would be a good proxy for the USPP market for the quantum of debt we were looking for,” said FET’s Butcher.
Borrowing costs in the USPP market can be prohibitive with foreign exchange swap costs involved. FET had previously issued a USPP involving both in US and Canadian dollars that had to be swapped back to Australian dollars. The swap increased the cost of debt and had financial complications when the company eventually had to unwind the swaps to redeem the issue according to Butcher. Legal documentation for USPP issuance is also more complex compared to the documentation used for an institutional term loan.
Investors do expect a premium for providing longer dated debt and a starting point for discussions is US dollar US PP pricing on a swap-back basis for comparable credits.
But ultimately whether a borrower decides to tap institutional investors or the more traditional bank loan market is a function of balancing a number of competing objectives. “There is always a balancing act between the benefits of doing it in terms of having that diversification, the longer debt maturity, versus what the does it mean for the cost of debt, and then how does that impact on investors distribution going forward,” said Butcher.
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