April 13, 2015 / 2:10 AM / 5 years ago

Australia's high-yield bond market coming to life

SINGAPORE, April 13 (IFR) - Three more unrated ASX-listed corporate issuers have joined Australia’s slowly evolving high-yield bond market, yet demand for the asset class remains stunted relative to major regional jurisdictions.

FIIG Securities was sole lead manager for these latest trades. Australia’s largest specialist fixed-income broker has now arranged 16 issues totalling A$790m (US$604m) since opening the domestic high-yield market with Silver Chef’s inaugural A$30m print in August 2012.

Dicker Data, a distributor of information-technology products, made its debut last month with a A$40m five-year floating-rate note priced at 440bp over 90-day bank bills.

Also making a foray in March was consumer products company McPherson’s, which sold an innovative A$60m dual-tenor note. The A$30m four-year floater priced at 90-day BBSW plus 430bp, while the A$30m six-year fixed-rate note pays 7.05%.

Moneytech Finance issued a A$25m seven-year non-call five floater last Friday at bank bills plus 465bp.

All the notes, with minimum allocation sizes of A$50,000, were distributed to FIIG clients, mainly high-net-worth individuals and self-managed superannuation funds, who qualify either as sophisticated or professional investors. Some small asset managers also participated in FIIG-led offerings.

Juicy pick-ups

Investors are drawn to the juicy pick-ups they offer over lower-yielding albeit safer alternatives. With three-month bank bills quoted at around 2.25%, the Dicker Data and McPherson’s floaters initially pay over 6.5% annually, more than double the current 3% return for Australian bank five-year term deposits.

These pick-ups are set to get proportionally higher with local money markets factoring in three further 25bp reductions in the Reserve Bank of Australia’s official cash rate, which will take it 75bp below the current all-time low of 2.25%.

“This is a great time for Australian corporate issuers to access the bond market because there is a lot of unmet demand from investors for products offering steady incomes at higher yields than currently available on term deposits,” said FIIG CEO Mark Paton.

FIIG has dominated the non-institutional high-yield sector with its only competition being last June’s A$60m 8.0% five-year sale from data-centre provider NEXTDC, with National Australia Bank as arranger.

Qantas Airways sold the first such bond in Australia’d institutional market in May 2014. The national carrier, recently downgraded to Ba2/BBB+, issued an eight-year bond of A$300m before returning with a A$400m seven-year print a month later. Deutsche Bank was sole lead manager on both prints, distribution statistics for which were not released.

The airline’s two issues make up almost half of Australia’s overall domestic high-yield issuance, which has now reached A$1.55bn, still a small portion of Australia’s overall A$1trn bond market.

Domestic fund management mandates prevent many Australian institutional investors from buying non-investment-grade bonds (rated below Triple B). Consequently, unrated and high-yield Australian firms typically access the very deep US dollar 144A or private-placement markets for large bond funding requirements.

However, US execution and swap costs are usually too high for small deals, while legal and due-diligence outlays are often prohibitive in the Australian ASX-listed retail bond market for modest-sized issues, despite the recent introduction of the simple form prospectus.

These cost restrictions gave FIIG the opportunity to open and develop a niche market for offerings in the region of A$30m-$80m from mid-cap Aussie companies. These are sold to its clients and trade in the over-the-counter wholesale market.

Australia has the world’s fourth-largest pension pool, with total assets of almost US$1.7trn last year, or 113% of the country’s GDP, according to the 2015 Towers Watson global pension assets study. Nearly a third of this pool comprises self-managed superannuation funds.

Only 15% of Australia’s pension pool was allocated to bonds in 2014, less than half the global average of 31%. So, there is a lot of scope for a reallocation away from the dominant equity sector.

Abundant appetite

FIIG has shown there is abundant appetite for unrated corporate paper from Australia’s army of yield-hungry private investors. This indicates that supply rather than demand factors contain the size of the local high yield market.

One syndication manager said that, while many firms would like to diversify their investor bases away from secured bank loans to unsecured bonds, not all might be aware of the opportunities now available.

He also suggested FIIG faced constraints on the number of potential candidates it could visit and assess at any one time, while the current uncertain state of the Australian economy was reducing company borrowing as business investment declines. (Reporting By John Weavers, editing by Daniel Stanton, Tim Sifert and Dharsan Singh)

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