Credit markets show ability to digest greater complexity

By Joel Morton

Structures and executes a wide range of corporate debt capital market transactions and is based in Melbourne.

The influx of cash into the pockets of investors, fuelled by macrotrends, such as the deployment of central bank balance sheets, and the rise of wealth being managed in the Asia-Pacific region, has helped drive credit spreads to the lowest levels since the global financial crisis. If we look back briefly at the way credit default swaps (a broad indicator of credit risk) have acted in the last three years (see graph), we see that apart from a brief spike caused by Chinese stock market instability, credit spreads have generally trended lower, and were at an 8 year low at the end of 2017.

The effect of this contraction has been marked, with investors globally needing to adjust investment parameters further down the credit spectrum to earn the same fixed yields as they did previously. This challenge has been further exacerbated in areas such as Europe where benchmark yields are negative. Investors have reacted to this challenge in different ways – in Taiwan, for example, although there has been some softening of the traditional hard floor of an A- credit rating, longer dated investors have also been offering to invest in 20 year and 30 year tenors, so that the yield of the instrument matches their investment targets.

Locally, we have seen an expansion in credit investment in those names that are either explicitly rated high yield (Ba1/BB+/BB+ or lower), or unrated (though unrated can be either investment grade or high yield, generally it tends toward the latter), fuelled by the same investment thesis. These types of names yield higher so are therefore more attractive on a return basis if the risk can be justified. There is a smaller universe of investors, so investors who pursue the opportunities are often competing with less peers to have bonds allocated to their portfolios.

During 2017, the AUD market has seen a combined AUD725 million of new issuance (or about 1% of the overall market in AUD) from unrated or high yield issuers, of which over 75% was new funding, rather than the refinancing of existing instruments. This eclipses the volumes printed in the unrated class in previous periods (2016: AUD474 million, 2015: AUD560 million), including trades from names such as Qantas, Alumina Limited, Qube Limited, Mcphersons’s and G8 Education. Discussions with investors in the early weeks of 2018 suggest that this broader trend is set to continue as an ever increasing number of market participants reference their willingness to look at more esoteric structures in a bid for increased yield.

The standout transaction of 2017, which demonstrated Australian unrated credit’s ability to attract strong onshore institutional support, and attract Asian and even European-based investors, was SEEK Limited’s floating rate 5 year AMTN, its debut issuance in the capital markets. At the time, Treasurer of SEEK Ed Collis was quoted by trade magazine KangaNews in regard to the ability of investors to do their analysis outside the formal credit rating process – “Given we [weren’t] seeking large volumes we believed we could rely on investors to do their own credit work,” Collis said.

Bond Case Study:

SEEK Limited’s AUD175 million 5 year floating rate notes

  • On Tuesday, 11 April 2017, HSBC acted as a Sole Global Coordinator and Joint Bookrunner for SEEK’s debut bond issuance, an AUD175 million 5 year Floating Rate Note
  • The bond set a record for the AUD market, representing the largest ever corporate transaction in unrated, senior unsecured format
  • The transaction also saw broad institutional investor distribution, a first for the unrated bond markets in AUD and was based off SEEK conducting a comprehensive roadshow, meeting over 45 investors across Asia and Australia
  • Post roadshow, SEEK announced a 5 year AMTN transaction in FRN format, with the end transaction pricing at the tight end of initial guidance, and significantly upsized from initial indications of AUD100 million
  • HSBC’s role as Global Coordinator included sole-arranging SEEK’s debut EMTN programme, acting as sole roadshow co-ordinator, and Billing & Delivery bank on the notes.

SEEK’s bond recently won the Kanganews award for 2017’s Best Unrated Corporate Transaction of the year.

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