Ashley Kopczynski, Credit Analyst, discusses how a growing trend has emerged among US corporates seeking Australian investors for their bond issuance.
Investor diversity driving inaugural issuance by iconic US corporates.
The Australian dollar is an attractive funding currency.
Strong support by domestic investors.
Aside from both companies being corporate US icons, General Motors and McDonald's also share something else in common – they both recently issued bonds in the Australian market for the first time.
Given these companies have been around for decades, the question of why they both chose February 2019 to issue their first Australian dollar bonds is an interesting one to explore.
In recent years there have been some notable US companies to access the Australian market, including AT&T, Verizon, Apple, and Coca-Cola. With strong investor demand, these previous issues have demonstrated that the Australian market is very receptive to US corporate debt. For the corporates themselves, they benefit through diversifying their sources of funding through accessing a different group of investors.
For the shorter tenors (the 5 and 7.5 year), McDonald's could have issued bonds in US dollars at a lower credit spread than what was on offer in Australia, but decided investor diversity was a more important consideration.”
Ashley Kopczynski, Credit Analyst
When companies raise debt capital in a currency that isn’t their local currency, they have a choice; they can either swap the proceeds of that foreign currency to their home currency, or elect to keep that foreign currency. While the factors that go into the decision are varied, typically if a company has operations in that country, they can use the debt proceeds to fund that local business. If they do wish to swap the currency back to their own, there can be an additional cost or benefit depending on the demand for the currency by market participants. This is seen through the pricing of a cross currency basis swap.
For US-based companies that borrow in Australian dollars and wish to swap those funds back to US dollars, this is currently close to the most favourable conditions seen in the last five years, as Chart 1 below highlights.
Chart 1: 10 year Australian dollar-US dollar cross currency basis swap (bps)
Source: Bloomberg, as at 4 March 2019.
In prior years, many US-based multi-national companies have also issued bonds in foreign jurisdictions to take advantage of favourable tax laws. With the changes to US tax legislation, which included the incentive to repatriate profits held in foreign jurisdictions, there was a fear that this would reduce the potential for issuance in markets like Australia. The McDonald's and General Motors bond deals indicate that there are more factors at play.
General Motors management visited Australian investors in September 2018, but with the volatility that engulfed financial markets shortly after, the company decided to wait until this subsided before launching their debut Australian dollar bond deal.
In early February, the company released its full year 2018 results and with the quiet Australian summer period over and the Lunar New Year passing, the company decided the time was right to launch a deal. They successfully raised $400m in bonds with a four year maturity (at a credit spread of 205 basis points (bps)), marking the first true corporate bond deal in the domestic market in 2019.
McDonald's took a different approach. The company launched their bond deal shortly after mandating banks to engage with domestic investors. When the books closed, the company had amassed over $1.7bn in demand. The company decided to issue $1.4bn in bonds across three different maturities. Given the company has a significant Australian operation; they certainly have the flexibility to swap the currency proceeds if they wish.
Credit spreads for the McDonald's tranches were:
113bps for the 5 year;
140bps for the 7.5 year;
58bps for the 10 year.
Interestingly, for the shorter tenors (the 5 and 7.5 year), McDonald's could have issued bonds in US dollars at a lower credit spread than what was on offer in Australia, but decided investor diversity was a more important consideration.
These two bond deals provided a chance for domestic investors to add bonds issued by two iconic US brands to their portfolios, while at the same time assisting these companies to source debt capital from a new investor base. Given the strong demand, this may lay the path for similar issuance over the course of 2019.