Prospects for more bond issuance, Qantas style
Qantas (rated BBB-) surprised the market when it announced to the ASX, on Monday, that it had placed A$125 million of seven-year bonds on the domestic market. The bonds were priced at 295 basis points over the seven-year swap rate.No other information was released by Qantas.The market was surprised because very few people knew anything about the issue.The Australian Financial Review subsequently reported that the issue had been underwritten and fully taken up by Deutsche Bank. It is assumed that the bonds were distributed to Deutsche's international funds and investor clients.The nature of the transaction is unusual but not unknown. The Nexus Australia Management transaction discussed below was executed in the same manner.The questions the transaction raises are why undertake a bond issue in this manner and what is the likelihood of more private placements like this?The answer to the first question would appear to be that an appetite existed among Deutsche's internal and external clients around the world for this level of risk and the yield that it provides. It may not have been necessary to structure the transaction as a bond issue, but some investors may be unable to invest in loans.Given the potential global dispersion of investors, the small size of the issue and Deutsche Bank being the sole underwriter, there is unlikely to be any secondary market liquidity.The transaction could also just be a simple arbitrage, with a negative basis existing between the pricing of the bonds and its credit default swap spread. Markit reports Qantas five-year CDS spread being at 195 bps with a liquidity score of two.Therefore, it could be possible to buy the bonds and CDS protection at the same time, and clear a net 100 bps on the deal. However, a liquidity score of two suggests this may not be the easiest arbitrage to achieve.So, following the Qantas offer, which other relatively rare names are now candidates to offer a similar opportunity for risk, yield and arbitrage should Deutsche Bank or another institution be interested in their emulating Qantas' deal?Amcor (BBB) and CSR (BBB+) would appear to be among the more likely candidates. Amcor's five-year CDS is currently trading at just 93 bps and CSR's at 100 bps.The CDS has a liquidity score of two in both cases, but the real question is what sort of yield would be acceptable to both the companies and the investors?Two less likely candidates are Lend Lease (BBB-) and Tabcorp (BBB). These two are considered less likely only because the liquidity score for their CDS is three, so the opportunity for arbitrage is lower.On the other hand, it might well be easier to arrive at an acceptable yield for all given respective CDS spreads of 192 bps and 167 bps.