Blue-chip borrowers in Australia are raising loans at the tightest pricing levels in six years, taking advantage of hunger for quality assets among Asian banks flush with liquidity.
A clutch of top-tier credits, including energy infrastructure company APA Group, construction and engineering firms CIMIC Group and Downer EDI, Port of Melbourne and electricity transmission network operator TransGrid, have tapped the loan market to take advantage of strong demand from Asian lenders.
In the process, several have been able to borrow at pricing levels inside those of their previous outings in the loan market. Investment-grade credits are paying average interest margins of 108.3bp for three-year loans this year, the lowest such annual figure since 2019, according to LSEG LPC data. The data include all currencies, but predominantly Australian dollar borrowings.
“Pricing has continued to get tighter and tighter making it challenging for lenders,” said Gavin Chappell, global head of acquisition finance and syndications at ANZ. “Liquidity is extremely strong and there is more cash looking for a home than there is opportunity to invest. A lot of that money is coming out of Asia. When you have a demand/supply imbalance, there is a risk of downward pricing pressures.”
CIMIC, a subsidiary of Germany’s Hochtief, launched a A$625m-equivalent (US$407m) five-year loan offering opening margins of 150bp over BBSY and 145bp over SOFR for Australian and US dollars, respectively, lower than the 170bp over it paid for the same tenor and currencies last October, based on the company’s Baa3/BBB- (Moody’s S&P) ratings. In a sign of the attractive terms available from Asian lenders, CIMIC’s latest loan includes a yen portion that marks the borrower’s first foray into the Japanese currency.
A handful of other borrowers that unlocked tighter pricing in recent months. In July, NSW Electricity Networks Finance, the Baa2/BBB (Moody’s/S&P) rated financing entity of TransGrid, launched a A$400m loan, offering margins of 115bp and 145bp over BBSY for six and nine-year tenors. That compares with the 175bp margin for a A$250m 10-year loan raised in June last year.
Also in July, Transurban Queensland, BBB (S&P) rated toll road operator, launched a A$300m 10-year loan offering a margin of 150bp over BBSY – well inside the 180bp and 200bp levels on 10 and 12-year tranches of a A$220m borrowing completed in October 2023.
In June, APA Infrastructure, the Baa2/BBB (Moody’s/S&P) rated funding vehicle for APA Group, amended and extended loans from 2022 and 2023 totalling A$1.75bn. The margins were 130bp and 140bp for the six and seven-year extended facilities, lower than the 2023 borrowing which paid 170bp and 195bp for the seven and 10-year tranches.
The same month Woodside Energy Group, rated Baa1/BBB+/BBB+, offered margins of 90bp and 110bp over SOFR for three and five-year tranches on a US$1.2bn revolving credit facility, lower than the 95bp and 115bp paid for the same tenors in July 2022. Of the 26 lenders in the oil and gas giant’s syndicate 18 were from Asia.
“Strong liquidity flows from Asia remain a key driver to the competitive loan market dynamics, underpinned by a continued appetite for Australian and New Zealand investment-grade credit on a relative value basis," said Daniel Farley, managing director, loan capital markets, Australia & New Zealand at Mizuho Bank. "From a pricing perspective, investors are targeting various points along the duration curve to align with their return requirements. In the Asian term loan market, we have seen structures ranging from 5–12 years, effectively matching investor preferences with borrower maturity needs."
In June, Downer EDI closed an A&E of a A$1.3bn sustainability-linked loan, cutting the pricing on four and five-year portions to 140bp and 150bp from 165bp and 175bp over BBSY respectively.
“For high-grade, reputable companies or borrowers, who is to say that there is not potentially further pricing compression? Loan market has continued to tighten a lot over the last year or two. I would not be prepared to say corporate spreads have bottomed,” said Scott Austin, head of loan capital markets Australia and project finance syndications, Asia Pacific at Sumitomo Mitsui Banking Corp.
As pricing gets squeezed, banks are increasingly willing to offer longer tenors to top-tier names for additional yield and are piling into the so-called Asian term loans. ATLs, term facilities targeted at Asian lenders in syndication, typically come with maturities longer than the traditional three to five years. Rail infrastructure manager Arc Infrastructure, Brisbane Airport, Charter Hall Social Infrastructure REIT, Pacific Energy Group Holdings, Qantas Airways, TransGrid and Transurban Queensland are among those that have tapped the ATL market so far this year for a total of A$3.37bn.
As a result, volumes in the Australian loan market jumped 24.2% to US$46.91bn year on year in the first half, nearly two-thirds of which was transacted in the second quarter, according to LSEG LPC data.
Borrowers are spoilt for choice with the bond market offering stiff competition to ATLs. Australian dollar bond issuance increased to A$101.8bn in the first half compared to A$99.3bn a year ago, according to LSEG data. The Reserve Bank of Australia has cut the benchmark rate by 50bp so far this year, with further cuts expected in 2025.
“The bond market has come back strong. Borrowers will be able to decide what is the best relative value – a loan, an ATL or a DCM issue,” said Austin. “A functioning and competitive bond market means that banks can raise wholesale funding at competitive spreads, that in turn supports the liquidity in the loan market. There is a lot of competition in the market and if there are particularly attractive opportunities, banks will bid hard to win mandates.”
Woodside’s loan in June followed a US$3.5bn four-part senior unsecured bond raised in May. The US$500m 4.9% three-year, US$1.25bn 5.4% five-year, US$500m 5.7% seven-year and US$1.25bn 6% 10-year notes cleared 105bp, 130bp, 145bp and 165bp wide of Treasuries.
Transurban Queensland’s latest loan follows a A$255m 7.25-year senior secured bond raised in May. The 5.5% September 2 2032s were priced at a yield of 5.517%, or asset swaps plus 157bp. In July, Lonsdale Finance, the financing entity for Port of Melbourne rated Baa2/BBB (Moody’s/Fitch), closed a A$300m 10-year loan paying a margin of 145bp over BBSY. A A$450m seven-year senior secured bond in November had closed at a reoffer yield of 5.774%, or asset swaps plus 128bp.
"Borrowers remain in a favourable position with access to multiple markets, including ATL, public and private bond markets," said Farley. "Borrowers with access to multiple markets will be looking to execute in the second half to take advantage of buoyant conditions to optimise their funding strategies."
According to Austin, the ATL pipeline is “still very strong and if you look at how well those transactions are supported out of Asia, there is no reason to see that product slow down.”