Retail bond issuance gaining momentum

As this publication flagged on Monday, Tabcorp has announced a retail bond issue to raise approximately $200 million. The bonds will be listed on the ASX with a minimum subscription parcel size of $5000.

Tabcorp's retail bond issue follows on from the retail issue announced by AMP less than three weeks ago. The success of the AMP issue, which is due to close on April 2, cannot be judged yet but Tabcorp and its advisers have been motivated by the same factors to tap the retail market.

They need to establish diversified sources of funding and thereby increase funding flexibility and extend their debt maturity profile.
 
The retail market provides an ideal funding alternative when bank lending is constrained and wholesale debt markets are frozen to all but the very best of credit risks.

Tabcorp is tapping the retail market at a time when interest rates are at record lows, the share market has taken a beating and the retail market controls almost one third of the country's compulsory superannuation savings via self managed superannuation funds.
 
The Tabcorp bonds are not subordinated and therefore will rank equally with Tabcorp's existing bank facilities and debt securities. This is the first such senior bond issue by an investment grade company since the Commonwealth Bank issued the last of its Commets in 2001.

Tabcorp is rated BBB+/stable by Standard & Poor's and the bonds will carry a BBB+ rating.

The Tabcorp bonds will have a five year term to maturity and will pay a floating rate coupon of between four per cent and 4.5 per cent over the three-month bank bill rate.

The final margin will be determined through a bookbuild to be conducted on April 1. The offer will then be opened to investors and will close on April 24, with the broker firm offer closing on April 29, if not before. Trading on the ASX will commence May 4.

Investors who still hold initial holdings of $10,000 to $50,000 after the first year, will receive an additional 0.25 per cent interest from Tabcorp.

On a relative value basis, the AMP Notes are offering Australian investors a coupon of 475 basis points over three-month bank bills for subordinated debt that nevertheless has been rated one notch higher, at A- by S&P.

At best, the Tabcorp bonds will pay 450 points over the three month bank bill rate for senior debt rated BBB+.

In the wholesale market subordinated debt will always attract a greater credit margin than senior debt, with credit ratings not providing a direct means of comparison.

On this basis, the Tabcorp bonds appear to offer good value but the bookbuild should see the credit margin set closer to the wide end of the range - 450 basis points.