Heathrow takes a long view of the Australian market

In the wake of its October debut in the Australian dollar market, Sally Ding, director, treasury and corporate finance at Heathrow Airport (Heathrow) in London, shares some honest insights about the deal execution experience in Australia relative to other global markets.

Heathrow printed A$175 million (US$124 million) of 10-year paper from its EMTN programme. The issuer’s clear focus was on price and it therefore took less volume out of the market than its maximum indication. It believes this will help create room for Heathrow to return to Australian issuance in 12-18 months’ time.

Heathrow visited investors on a deal roadshow in mid-September and printed the transaction on 4 October. Was this the earliest opportunity to print and what considerations went in to deciding that market conditions would be supportive when you chose to issue?

There were two considerations: one was market conditions and the other investor feedback. After finishing the roadshow, in Singapore on 24 September, we wanted to give investors sufficient time to provide their feedback.

We engaged in ongoing Q&A with investors after the conclusion of our roadshow. This was to enable them to get a clear view of our credit and to undertake comprehensive analysis, given it was Heathrow’s inaugural offering in Australian dollars and we had received subsequent enquiry regarding airport expansion, the potential implications of Brexit and our financing platform.

This unique situation led us to decide we would like to give investors the time they needed to get fully comfortable. Market conditions remained constructive when we elected to launch the following week.

Concerns about a hard Brexit have intensified in the weeks since your Australian dollar deal. Do you view your execution window as fortuitous in this respect?

We did take the view that along with EU negotiations come additional uncertainties, and the closer to the Brexit deadline the more headlines could have a negative impact on investors’ credit views. However, while Brexit was of course on our radar I wouldn’t say it was a major concern.

“Our primary objective in accessing the Australian dollar market was to diversify our funding. Relative value is very important to us and for this reason we weren’t chasing volume – we pressed ahead with the relative-value target we believed was right for us.”

Did any investors decline to participate because of Brexit-related views?

Investors had several questions around Brexit, specifically the extent to which Heathrow is resilient to this kind of credit risk and has contingency plans for this scenario. It is worth noting that we didn’t receive any feedback suggesting investors would not participate because we are a UK credit.

Can you provide a sense of the final orderbook including the level of interest from domestic Australian accounts?

During the roadshow we saw more than 35 investors in Australia and Asia, with around one-third of these participating in the transaction.

The majority of the book comprised around 10 key Australian accounts, supported by 2-3 Asian investors. There was a small oversubscription in the final book, but it is important to mention that we were not chasing volume – rather we felt that having an index-eligible tranche was prudent.

Are you confident that you achieved the best possible outcome in EMTN format? Is there any case to be made for a domestic Australian dollar programme?

We issue debt across seven currencies with the EMTN format. The Australian dollar transaction was well received by Australian investors and there was no resounding preference for Kangaroo documentation.

My understanding is we could appeal to approximately 10 per cent more demand if we issued a Kangaroo deal, but also that we could have appealed to a larger audience if we had focused on a seven- rather than a 10-year maturity.

Our primary objective in accessing the Australian dollar market was to diversify our funding. Relative value is very important to us and for this reason we weren’t chasing volume – we pressed ahead with the relative-value target we believed was right for us.

It is important to note that, as a first-time issuer using EMTN documentation to target a 10-year maturity, we knew from the outset these factors would likely limit the volume we might attract.

With a £14 billion (US$17.9 billion) debt book some investors may have been expecting more volume from Heathrow. Was this a topic of conversation during the deal process?

I think we were clear around volume aspirations when we met investors. We told them we were not chasing volume and were targeting a maximum of £200 million equivalent transaction.

To put this in context, we currently have a liquidity horizon extending to December 2020 and any ramp up of funding related to Heathrow’s expansion is still a few years down the line. So while we could have issued £200 million equivalent in Australian dollars we were not going to sacrifice relative value to do so. We remain open to printing larger volume going forward if pricing makes sense.

If we had offered wider pricing we could have printed greater volume. There is a big play between volume and pricing and this dynamic came through clearly.

Can you give some thoughts on the price-discovery process and how you decided where your threshold would be?

We assess relative value across our global curve and always aim to have fair value in all our currencies. We have recent Canadian dollar and euro bonds that we can benchmark against – and we also benchmark our bonds against other regulated utilities and some of the domestic airports in Australia.

Our goal was to target an Australian dollar transaction with pricing flat to our global curve. We also wanted – to the extent it was possible – to print this deal flat to our recent Canadian dollar transaction. However, we also recognised that the inaugural nature of the transaction meant it could take more time for investors to get comfortable with the credit. In the end we wanted to reward investors for coming into the transaction, and so we priced slightly wider than the Canadian dollar deal.

We believe the quality of the Heathrow credit means that we should price inside similar-rated Australian airports such as Australia Pacific Airports Corporation (Melbourne Airport). Again, to recognise investor support we took a view that we were comfortable printing in line with Melbourne Airport. Factoring in where Melbourne Airport’s outstanding bonds were indicated and adding a new-issue concession, our view is that we printed in line with Melbourne Airport’s local curve.

How did you find the execution process in Australia relative to other markets in which you have issued recently, for instance in Canada?

We very much appreciated the level of investor engagement with our credit. We believe it was well received overall, with lots of questions and good attendance on the roadshow.

If I have to look for a difference that stands out, it is that even after quite a lot of back and forth we still didn’t get quite the same level of feedback, particularly around pricing levels, from Australian investors as we did in Canada. Having said this, Australian investors are not unique in this regard – this level of feedback is very much in line with what we receive out of Europe.

“We wanted print this deal flat to our recent Canadian dollar transaction. However, we also recognised that the inaugural nature of the transaction meant it could take more time for investors to get comfortable with the credit. In the end we wanted to reward investors for coming into the transaction, and so we priced slightly wider than the Canadian dollar deal.”

What are your plans for future Australian dollar issuance?

We are very pleased with the high-quality book we achieved. Particularly bearing in mind as a first-time issuer electing to tap the 10-year part of the curve we recognised this was likely to be a challenging transaction.

One of the key principles of our debt-financing platform is that we want to be a repeat issuer and build a curve in the markets where we establish a presence, pricing allowing. Australia will be no exception to this approach.

We will continue to keep Australian investors updated on our credit and the progress of the airport expansion, and if relative value remains attractive we expect to return to the market in the next 12-18 months.

Would you like to see the market evolve further before that happens?

Australian investors are very sophisticated, taking account of issuers’ global curves and calculating relative value from a buy-side perspective. If they were to look at Heathrow’s global curve from our relative-value perspective and use this as a basis for their theoretical relative-value judgements, it is possible we could access the market again more quickly – and we would be happy to do so.

Heathrow places considerable importance on corporate resilience and sustainable aviation. Can you reveal a bit more about Heathrow’s strategy in this respect and whether this focus means you could issue a sustainability bond in the future?

Heathrow created its sustainability agenda in 1996. A year ago we launched Sustainability 2.0, which is Heathrow’s flagship sustainability leadership plan. We are very aware that Heathrow has a responsibility to ensure the aviation industry plans for sustainable growth for our neighbours, people and future generations.

From a financing perspective, we have seen the extent to which the environmental, governance and social (ESG) bond market is evolving and how ESG-linked bonds are growing in popularity with investors. We are working internally to set up the framework to consider, from a financing perspective, how to make ESG issuance work for us.

If indeed we can, we would absolutely consider issuing an ESG bond in the future. Potentially this could be in Australian dollars.