Difficult calls on transaction format
Asian investors say their market can fulfil even the largest Australian funding needs – but they still value the liquidity they believe a 144A leg adds to deals over the Reg S-only format. All they are asking for, they say, is fair allocation.
FUND MANAGER 4 There is certainly good appetite for Australian-origin Yankee bonds, to the extent that I think in many cases issuers can afford to build demand in Asia even before they go to the US.
I’d like to look at an example here. If you consider Transurban, which has parent bonds and bonds from the Queensland subsidiary, I don’t think the spread between the two is just a function of there being two entities. If you talk to market participants, some are not as aware that there is a subsidiary bond for Transurban Queensland – because it was only issued in Reg S.
In fact I think it is to the benefit of the issuer and overall liquidity that, given sizeable US interest in the Australian Yankee bond market, the issuer should go the extra mile and try to issue in both 144A and Reg S format. Doing so helps end-investor appetite, too.
FUND MANAGER 3 I think that’s a really good point on liquidity, because the Asia-US dynamic in secondary naturally lends itself to a more liquid bond. It also probably helps in the future if the issuer is trying to build out a curve or wants to tap markets – especially in periods of poor sentiment.
However, in our experience Australian issuers tend to have a really strong bias to US allocations – which we suspect is driven by syndicate desks as well as the issuers themselves. When we provide feedback to our sales coverage the response tends to be that their hands are tied because it’s the US end of the lead group that is really driving allocation.
BANK INVESTOR On 144A, while I agree that there is certainly nothing wrong with this type of issuance I concur that when we see a 144A deal we can safely assume that a lot of the allocation will go to the US. We’re not actively involved in this market yet, to be fair, but we are watching it closely.
"I've had plenty of experience with Australian investors that demonstrates the mindset hasn't quite shifted yet. I think it's very much an education story, to help Australian participants get up to speed with what the Asian market is really like today and that it is not what it was five or 10 years ago."
BAINES One of the things we find, and we do so quite consistently, is that when issuers have gone to the trouble and expense of setting up 144A documentation they feel it’s a US trade. The view is: “I’ve spent all this money so I want to tap US investors.”
PRIVATE-BANK INVESTOR I have met at least two dozen Australian issuers over the past two years and I always get the sense that, including their domestic bond market and the US private placement (USPP) market, if they come to Asia they almost want it to be the tightest option of the three.
If it is not, they just assume they can do US$150 million in the USPP market and wonder why they ought to bother with Reg S, travelling to Singapore and Hong Kong for a roadshow and so forth.
I think issuers should consider committing to developing a long-term, diversified investor base in Asia – and that’s something worth expending time and energy on. Obviously USPP liquidity and pricing are in favour of issuers right now but you never know how long that will last. It depends how an issuer views its investor base – but it shouldn’t just be about funding levels in the near term.
BAINES I think that’s right, but there is a spread of issuer approaches. Some very much want to have a funding platform with multiple options. These credits will be prepared to issue strategically, even to the extent of being willing to pay perhaps 10 basis points to maintain a relationship with an investor group.
On the other hand, as I’ve mentioned previously it’s certainly true that, in some cases, issuers like diversification until they have to pay for it. This is where, when push comes to shove, issuers tend to default back to the Reg D market.
I think one area where we can help to nudge issuers is less around the Reg D pricing differential but more around the allocation piece for 144A. Effectively, this means having the conversation with issuers that even though they might have spent US$500,000 on 144A legals they don’t have to allocate the whole trade into the US.
There’s a strategic element here. It wouldn’t cost issuers anything, but it is incumbent on lead managers to get the message home. The problem, at that stage, is that it’s easy for issuers to agree in principle about the value of Asian allocations and then continue acting in the same way as they always have when push comes to shove.
PRIVATE-BANK INVESTOR I also think there is a something of a myth that remains prevalent among issuers in the sense that they feel Asian investors are there opportunistically while US investors are long-term supporters – so they have to give allocation to the US accounts because they are the ones that will always be there in deals.
In fact, I think – and the conversation today makes this very clear – that this has pretty obviously flipped. There is a natural bid out of Asia. We are looking for the kind of risk high-quality corporate assets provide.
“I think there is a bit of a myth prevalent among issuers in the sense that they feel Asian investors are there opportunistically while US investors are long-term supporters. In fact, I think that this has pretty obviously flipped. There is a natural bid out of Asia.”
FUND MANAGER 3 I agree, and I think it is a function of perception in Australia not really catching up with the reality of the shifting in the centre of gravity in the market towards where we are now. Because what’s actually happening is already perhaps different from what some issuers perceive.
For instance, I saw a research note recently that looked at bookbuilds over time for Australian issuers which showed a clear shift from very US-centric issuance from the top-tier Australian issuers who are doing US$500 million to US$1 billion deals. There is now much more of a balance between US and Asian distribution.
To be fair to issuers, it’s not just them. I’ve had plenty of experience with Australian investors that demonstrates the mindset hasn’t quite shifted yet. I think it’s very much an education story, to help Australian participants get up to speed with what the Asian market is really like today – and that it is not what it was five or 10 years ago.
HA There is also a market infrastructure issue whereby, whenever there is a 144A or an Securities and Exchange Commission-registered global note, international institutions have internal structures set up such that their order comes out of their Newport Beach or New York branch even if the money is coming from Asia. In other words, it appears that it’s the US buying when it’s actually money coming out of Asia.
BAINES This may even be a reaction to the allocation process. Issuers habitually allocate to the US and if investors have the option of putting in bids via a US branch they know they have a better chance of getting filled.
