Apple smashes Aussie records

IFR 2097 22 August to 28 August 2015
5 min read
Americas
John Weavers

Australia’s underused corporate bond market received a major shot in the arm last week when Apple, the world’s biggest company by market value, made its Kangaroo debut.

Apple broke several records with Australia’s largest offering of bonds from any overseas issuer, a feat that could clear the path for other global blue chips to make the trip Down Under.

The A$2.25bn (US$1.65bn) raised is also more than double the local record of A$1bn for a non-financial corporate issuer, which Australian mining giant BHP Billiton set on two separate occasions – in October 2012 and March 2015.

The unprecedented issue reveals the depth of demand for high-quality corporate paper and raises hopes that Australia’s bank-dominated local market will become a more important funding alternative for global issuers.

Pricing was all important because, while Australian asset managers were keen to add Apple to their rather narrow portfolios (a useful marketing tool to help attract clients), there was no guarantee they would place large orders.

Joint lead managers CBA, Deutsche Bank and Goldman Sachs clearly understood this as they went out with attractive initial guidance two days after last Tuesday’s well-received round of calls to Asian and Australian investors.

Fixed-rate tranches of four and seven years were marketed at 70bp area and 115bp area over asset swaps, respectively, along with four-year floating-rate notes.

With Westpac’s dual-tranche five-year print on July 17 at 90bp over asset swaps and three-month BBSW, corporate-starved Aussie fund managers were offered compelling terms to pick up the Apple paper.

On an interpolated curve basis, Aa1/AA+ rated Apple was indicating a 85bp margin for a five-year offering, just 5bp tighter than Australia’s four major banks, which are rated lower at Aa2/AA–/AA–.

Even after Friday’s Apple trade, Australian dollar senior unsecured bank issuance (domestic and Kangaroos) in 2015 is more than four times the amount that foreign and local companies raised – A$32.1bn versus A$8bn, respectively.

Supply constraints

Lack of supply has long been a problem for Australia’s corporate bond market, because the country’s biggest companies – and high-yield issuers – typically target the deeper US and euro markets. On the other hand, smaller firms are more likely to access the competitive domestic syndicated loan market.

Crucially, Apple’s initial guidance was also attractive in terms of relative value currency, with a 9bp premium offered over its euro November 2020s, which would swap back into Australian dollars at around 106bp over BBSW.

This represented an essential carrot for Asian investors and the Australian funds that could otherwise buy cheaper Apple bonds overseas. Local funds often look to offshore comps as key pricing references even if they lack the currency flexibility to invest overseas.

The leads compiled a bumper book in excess of A$3bn and as such were able to tighten guidance to 65bp70bp and 110b115bp without a significant decline in orders before Friday’s pricing at the tight end of those ranges.

Demand was balanced between the two maturities. The A$1.1bn two-piece four-year comprised A$700m of floating-rate notes and A$400m of 2.85% August 28 2019 fixed-rate notes, priced at 99.887 for a yield of 2.88%, equivalent to 96bp over the 2019 Australian Commonwealth government bond. The A$1.15bn 3.7% seven-year priced at 99.939 to yield 3.71%, 141.4bp wide of ACGBs.

Besides being Australia’s biggest corporate bond, Apple’s stellar debut is the first multi-tenor corporate offering in the Kangaroo market. The seven-year piece also represents the longest maturity to date for a corporate Kangaroo.

False dawn?

While Apple’s debut is a clear success, previous false dawns have dampened predictions of a surge in corporate Kangaroo issuance. Well-received deals in the past few years from the likes of BP, Total and Korea National Oil Corp, for instance, ended up doing little to give the market a long-term boost.

Importantly, Apple raised a similar amount in US dollar-equivalent terms as it did in its four other overseas ports of call – November’s €1.8bn (US$1.99bn) trade of eight and 12 years, this February’s SFr1.25bn (US$1.28bn) trade of 10 and 15 years, June’s ¥250trn (US$2.1bn) five-year global yen print, as well as last month’s £1.25bn (US$1.95bn) 14 and 27-year sterling issuance.

One advantage of Kangaroo trades is that they can be lubricated by Australian banks’ huge demand for foreign-currency funding, estimated this year to be equivalent to around US$40bn–$50bn. Since Aussie banks must pay hedging costs on their foreign-currency borrowings to avoid adding to systemic risk, offshore issuers can benefit by taking the other side of the hedging contract when they borrow in Australian dollars.

Apple smashes