Transgrid draws record demand
NSW Electricity Networks, the financing entity of Transgrid, raised A$1.4bn (US$868m) from a heavily oversubscribed, dual-tranche subordinated note sale on Tuesday, underpinned by huge local real money demand.
Final orders for the operator of Australia's largest electricity transmission network exceeded A$7bn, a corporate record, despite the notes' Baa3 Moody's rating, just one notch above high-yield status.
Such heavy bidding reiterates the transformation of the once famously conservative Australian fund manager fraternity, many of whom would not deign to glance at low Triple B offerings only a few years ago.
One asset manager said the buyside had developed a deeper understanding of the asset class across the credit curve.
"The amount of research and resources now available has boosted acumen meaning more investors are comfortable with Triple B corporate names that, in our opinion, have roughly the same default risk as Single A issuers," he said.
Violetta Astor, associate director for DCM at NAB, told IFR that demand was partly fuelled by the need to find investments to replace Additional Tier 1 paper from banks, which is being phased out in Australia, and investors’ appetite for enhanced yields at a time of historically tight spreads.
The Australian Prudential Regulation Authority in December confirmed the phasing out of bank AT1 capital, to help simplify bank capital rules. There was around A$44bn of such paper outstanding in January,
“Transgrid management’s investor engagement over years and extensive marketing campaign for Australia’s first dual-tranche corporate hybrid issue was another supportive factor as was the cornerstone bid from Clean Energy Finance Corp,” said Astor.
CEFC, a government-owned specialist climate investor, bought A$550m of the 30-year non-call five note, which will be used specifically to fund Transgrid’s renewable projects.
Astor also said the notes’ Baa3 rating meant the offering could maximise demand by attracting eligible funds with investment-grade mandates.
Sub investment-grade or high-yield offerings have a significantly smaller investor base, as highlighted by freight operator Pacific National, whose A$500m December sale of 30-year non-call 5.25 subordinated notes, rated BB/BB (S&P/Fitch), drew a final book of A$765m.
Transgrid followed close on the heels of a A$950m 30-year non-call six note issue on February 2 by AusNet Services, Victoria state’s largest energy delivery. AusNet's hybrid notes which have Baa3 and BBB– scores from Moody's and S&P, secured final orders above A$4.8bn.
Secondary performance
The Transgrid A$1bn 30-year non-call five floating-rate note, which included CEFC's A$550m allocation, priced inside initial 230bp–235bp price talk and revised 220bp–225bp guidance at three-month BBSW plus 205bp on a A$3.65bn final book.
The A$400m 6.277% 30-year non-call eight fixed to floater received A$3.35bn of orders before pricing below 255bp–260bp initial price thoughts and 245bp–250bp revised guidance at asset swaps plus 225bp.
Despite such substantial price traction the scale of unfilled orders helped the notes perform strongly in the secondary market with the respective spreads seen down at 195bp and 206bp on Friday.
Nomura's credit research team saw fair value for the 30-year non-call five notes at BBSW plus 195bp and for the 30-year non-call eight tranche at plus 215bp.
Astor believes the success of the Transgrid trade, which confirms the great strength of the hybrid corporate market, can only encourage further supply.
“Corporates with large capex needs, particularly utilities, property and infrastructure companies are more likely to consider hybrid trades, following this transaction,” she said.
Australian and New Zealand investors bought 69% of the 30-year non-call five, Asia 29% and EMEA 2%. Asset managers and insurance companies were allotted 78%, middle markets 10%, banks 4% and others 8%.
Antipodeans took 74% of the 30-year non-call eight, Asia 22% and EMEA 4%. Asset managers and insurance companies received 62%, middle markets 24%, banks 4% and others 10%.
Barrenjoey was sole structuring adviser and joint lead manager with ANZ, CBA, NAB and Westpac for Transgrid which is rated Baa2/BBB (Moody’s/S&P).
The subordinated notes will be assigned 50% equity content by the rating agencies.