Euro investors hungry for Aussie bond issuers

The message from the debt capital markets leaders at BNP Paribas' Australian office is that issuance into Europe by Australian banks had "paved the way for other Australian credit", with Australian covered bonds especially appealing to European pension funds.

Other European investors were becoming more familiar with Australian corporate issuers, but there was still plenty more appetite from investors seeking to diversify their portfolios, senior BNP executives said during a wide-ranging media briefing yesterday on the 2014 performance and near-term outlook for the French major's Australian operations.

In its review of the global bond markets, BNP was quick to point out that its largest Australian corporate clients raised over A$10 billion in the past six months from Europe's capital markets, with long-dated bond issues from Brambles, Scentre, Sydney and Melbourne Airports and Wesfarmers.  

This led Kate Stewart, head of debt capital markets at BNP Paribas in Australia, to dub 2014 "the year of the euro."

"Australian companies can now borrow long-term money in Europe and swap it back into Australian dollars at competitive interest rates," she said.

"Also, in contrast to the US private placement market - where they account for up to 15 per cent of total activity - Australian issuers only account for three per cent of the total euro debt capital market issuance."

This led Stewart to surmise there is plenty of unmet appetite for Australian corporate paper among euro investors.

Stewart was backed up by her colleague, James Hayes, head of fixed income at BNP Paribas in Australia. "Corporates should take advantage of the current low financing rates now and lock in long term debt at an average of five per cent for investment grade issuers," he said.

There are a number of reasons behind the strong demand in Europe for debt issued by Australian companies, noted Stewart. Primarily, these are:

•    negative deposit rates in Europe have made the yield offered by corporate issuers very attractive to investors there,
•    the euro market is also experiencing "negative net issuance", with the volume of bonds maturing and redemptions exceeding the amount of new issues,
•    a lack of mergers and acquisitions requiring funding, and
•    Australian issuers tend to be well-regarded in Europe and are seen as a way to add diversification to an investment portfolio.

And, while she criticised the unwillingness of most Australian companies to raise finance from domestic institutional investors and thereby build a deeper and more liquid local market, Stewart was equally unimpressed by recent issuance of unrated bonds to retail investors, guided by broking firms.

This was not the right way to kick off a retail bond market in Australia, Steward suggested, describing it as "a bit dangerous."

Stewart also said that, in the aftermath of the financial crisis, companies had been funded on a mix of around 70 per cent bank debt financing and 30 per cent through bonds.

"We are now at the stage where companies are looking to switch that around, aiming for 75 per cent in the debt capital market, and 25 per cent from the bank debt market, more for working capital [than for long term funding].

"Historically, this has been the pattern in Europe, where there has been [more of a] bank debt market, rather than a debt capital market, as has been in the US, where companies have always been bond market funded," she said.