Australian bond issuers are responding to a growing Asian liquidity pool that is institutionalising, and keen for high-quality credit supply – and with an increasingly strong appetite for Australian debt, in particular.
Inevitably, Asia is becoming a much more prominent source of debt funding to corporate Australia.
The change has come on the back of the growing wealth in Asia, which has moved past Asia refinancing itself, and moved to where the market needs asset diversity – and Australian credit is stepping up.
Asia also has a typically high allocation to fixed income. Moreover, the Asian investor base’s understanding of Australian corporate names has grown: it is researching the credits thoroughly, and getting comfortable with them.
While this is welcome news to the companies and bank debt capital markets teams taking issue roadshows to Asia, there is plenty of work to do on matching the currency denomination and tenor of the deals to the sweet spot of investor demand.
“Asian demand for Australian corporate bonds tends to be concentrated in A$ and US$, but there are, of course, pockets of demand for local currencies, such as HK$, and there have been a number of Australian corporates that have done this successfully,” says Duncan Beattie, co-head of debt capital markets at J.P. Morgan.
“The demand is really being driven by the broader institutional investor universe – life insurers, asset managers, sovereign wealth funds and banks – and, it's spread throughout Asia, including China, Hong Kong, Singapore, Korea and Taiwan. While Chinese investors are important, it’s not the only country driving demand.”
Of course, China is the elephant in the room of Asian asset management, with potentially $US30 trillion under management by 2022, according to consultancy Oliver Wyman. To put that into context, the Japan Investment Trust Association (JITA) puts its assets under management (AUM) figure at 202.60 trillion yen ($US1.84 trillion). And China’s real influence is even larger than these numbers would suggest: the institutional funds world in jurisdictions such as Singapore, Hong Kong, Korea and Taiwan often has a significant component of funds from mainland China.
From the major Australian credits that kicked off the market in the 1990s – the likes of BHP Billiton, Rio Tinto, Wesfarmers and Westfield – the market has matured to the point where highly specific sectors, such as universities, have found a receptive Asian investor base.
Where resources trade relationships kicked off the market, natural shifts in the Australian economy are being reflected in the newer kind of issuer: universities such as University of Sydney, Macquarie University and Australian Catholic University (ACU) are tapping the bond markets, where their "names" are increasingly well known.
Value and diversity
Being well known, however, is not absolutely necessary: the depth of the market, and its need for diversification, means that issuers without a natural link to the Asian region through ownership or business operations can find Asian investors prepared to look at their bond issues.
“We took Incitec Pivot to the market and investors looked at it purely on the basis of relative value and diversity, and because it was high quality from a high-quality jurisdiction,” he says.
Asia’s Reg S bond investors (Regulation S allows global and regional corporates to offer $US-denominated debt securities outside the US) have also shown an appetite for non-rated Australian credit, he adds. For example, Australian-based recruitment website operator Seek operates job employment websites in seven Asian countries.
Even the physical geography – and the unphysical nature of timezones – plays into this: issuers can more easily conduct a roadshow in Asia in a handful of days, and then make issue with a minimum of timezone lag.
The combination of attributes of the Asian market has many bond market participants prepared to countenance that it ultimately becomes the default debt capital market for Australian companies, but caution is the byword for others.
Large pool of money
“Asia has a significant role to play in financing Australian corporates, which is underpinned by our geographic proximity and the large pool of money that sits in the region,” says Beattie.
Each of the bond formats available to an Australian corporate Treasury – in particular, the USPP (private placement) and US 144A formats, Reg S $US issuance into Asia, local Asian (Hong Kong and Singapore dollar) niche issuance, and $A corporate bond issuance – will have its own benefits attached to it in terms of pricing, covenants and documentation. “Reg S is an important part of this mix, but it comes down to the objectives of each issuer as markets change and benefits of each format are viewed against that backdrop,” says Beattie.
While everyone understands that markets change, but fundamentally, Beattie expects to see demand remain.
“The region is growing, and our geographic proximity, combined with the large pool of money that sits in the region, are strong signals that demand will be stable. As market conditions change, the issuer’s objectives change, so we advise our clients that it’s important to remain flexible when it comes to a new issue, as there’s a time and place for each format,” he adds.
This article was first published on April 5 2019 in the Australian Financial Review’s Special Report on Rise of Asian Liquidity