Since the global financial crisis (GFC) of 2007/2008, buyers of large assets have had to think more laterally about where to find money, creating new and intriguing market patterns
Basel III was introduced following the GFC, and the new recommendations on bank capital adequacy, stress testing and market liquidity were adopted in Australia four years ago. One of the consequences has been that local banks face higher capital costs particularly if they lend money beyond five years.
For buyers and holders of long-term infrastructure assets, such as AMP Capital, this has encouraged us to look harder for alternate sources of financing. Buying assets measured in the hundreds of millions of dollars with a long-term timeframe takes work to identify potential lenders in the market.
All deals depend on the asset involved – for example airports or regulated utilities or public private partnerships or lifestyle assets – and certain lenders have specific areas of expertise. But undoubtedly the market has evolved and grown.
It has also triggered a change in mindset from the local banks.
Australia’s major banks increasingly view large, long-term loans as part of their institutional portfolio, rather than corporate business. It means that instead of viewing a deal on the basis of a loan-to-valuation ratio, they are thinking about it in terms of a company investment. What are the cash flows going forward? What’s the business like as a going concern?
It is commensurate with how AMP Capital thinks about investing. Our primary interests are what distribution is being paid and what is the end value? This different emphasis from the local banks about financing an asset helps AMP Capital access larger volume loans and/or achieve better pricing.
Notwithstanding the change in emphasis from the local banks, buyers of large assets are looking more broadly for finance.
US private placement market
A private placement is a capital raising via selling securities to a limited number of investors. In the US it does not have to be registered with the Securities and Exchange Commission and has minimal regulatory standards to abide by. As a result, it is relatively inexpensive and quick to access. The flipside is that the investors, who are generally pension funds, typically expect higher returns due to the inherent illiquid nature of these types of transactions.
The US private placement market is the favourite go-to market for Australian infrastructure borrowers. There is money available for debt with lending periods out to 20-30 years. In recent years, the market has become more competitive as funds have scaled into it. As a result, there has been a sharpening of pricing and more flexibility around terms and conditions.
The growth has triggered greater activity in the currency swap market, though there has also been a rise in US private placement providers who are willing to lend Australian dollar denominated debt directly.
The beneficiaries have been the borrowers. There are now greater opportunities in the US private placement market in terms of both price and conditions, along with the emergence of direct placement transactions with one, or a small group of these investors.
Players in the Japanese market
The Japanese banks have been funders of large assets for several years. In the past couple of years, life insurance companies and pension funds have entered the market. In some cases, they have set up their own private debt teams and in other instances they are using intermediaries.
The Japanese market has become known as a provider of longer term, flexible funding and there are now 10-15 year loans on offer. They can be in Australian dollars, documented under Australian law, are typically floating rate and come with flexibility around repayments.
Australian bond market
The Australian bond market remains a public market for the most part. As such, it requires an independent credit rating before issuance. This incurs increased costs and can increase the leadtime to issuance if such a rating is not already in place.
Volume is typically not as strong as has been seen in offshore markets and tenor generally remains most liquid at around 5-7 years, although some infrastructure borrowers have been able to find good appetite in the 10-year space.
The public nature of the market means it is more susceptible to market shocks than the private style markets, however, it can also offer attractive terms and pricing when market conditions are favourable. As a result of this, it can be viewed more as an opportunistic market for issuance, which has meant that equity investors have more often looked at alternate markets for debt financing.
The local superannuation industry remains a buoyant source of funding, although many of the larger operations now invest directly. As retirement funds merge and grow, this trend is likely to continue.
Korean investors have become more prominent in the market in the past couple of years. The loans have long-term horizons – 15-20 years – though they prefer fixed-rate loans. The relative reduction in Australian interest rates recently has meant there’s been a reduction in appetite from that market as investors are generally minimum coupon driven.
International banks also continue to offer facilities to local institutions. There is lending available from Malaysian and Taiwanese banks, although they tend to have a 5-to-7-year tenure. Some European banks are offering long terms loans of 15to-17 years.
The availability of loans from a broader range of providers is good news for buyers of large assets such as AMP Capital. The benefits may come in terms of price, tenor, flexibility of conditions, or a mix.
Of course, all borrowers need to be very cognisant of who they are dealing with, pay great attention to the detail in documentation and have a diversity of funding sources.
Footnote: AMP Capital’s debt advisory unit was established in 2003 and raises funds for mergers & acquisition, debt refinancing and growth funding. It transacts across local and Asian markets, including Japan.
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