Australian Infrastructure Funding

:
Making Strides
Primary Credit Analyst:
Anthony J Flintoff, Melbourne (61) 3-9631-2038; anthony.flintoff@standardandpoors.com
Secondary Contact:
Thomas Jacquot, Sydney (61) 2-9255-9872; thomas.jacquot@standardandpoors.com
Table Of Contents
Rebuilding After The Global Financial Crisis
Demand For A Deeper Local Corporate Bond Market – Where is the
Disconnect?
No Easy Solution, As Bank Loans Remain Mainstay
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Australian Infrastructure Funding: Making Strides
Things have been looking much brighter for both borrowers and investors in the Australian infrastructure space. For
borrowers, access to funding and debt pricing are probably the best they've been for years, thanks largely to strong
competition among banks and a greater willingness by yield-hungry bond investors to lend. And for investors, a flurry
of government funding and privatization commitments, combined with investment incentives and bumper prices from
recent asset sales, auger well for a healthy pipeline of infrastructure-related projects that will need long-term financing.
Although there's reason for market optimism, challenges remain for the sector. Chief among them is making progress
on the long-held ambition for more long-term debt issuance for large infrastructure projects and utilities in the
Australian domestic bond market. This issue, and other trends related to infrastructure funding in Australia, were
explored by market participants at a recent forum hosted by Standard & Poor's Ratings Services in Sydney.
Rebuilding After The Global Financial Crisis
Following the the global financial crisis, few sectors were having as tough a time as infrastructure. This sector was hurt
by market turmoil as funding options dried up in the wake of the collapse of the monoline insurance sector, which had
provided 'AAA' rated credit-wrapped bond funding for many years. Making matters worse, investors were scarred by
the failure of some high-profile infrastructure projects, particularly in the local toll-road sector, a few years ago.
Although many institutional lenders remain unwilling to take construction or ramp-up risk in "greenfield" projects, it
seems some investors are developing a taste for investments in Australian infrastructure again, attracted by the
probability of stable, long-term returns from this asset class. The rise in investor appetite over the past year has been a
boon for many infrastructure companies, who have been able to achieve longer debt maturities, and at cheaper rates,
from a wider range of sources.
At the same time, there are signs that the board of directors of many companies want to raise debt from a wider range
of sources and diverse markets to reduce refinancing risks. Historically, Australia's major banks have dominated
funding for local infrastructure businesses needing money to refinance maturing debt or fund projects and acquisitions.
Banks are likely to remain the main funding source, at least for the time being. But, with many borrowers seeking to
diversify away from bank loans and increase tenor, more and more infrastructure treasurers in Australia are turning to
both local and offshore capital markets to broaden their debt footprint and to avoid an overreliance on bank loan
funding.
It seems that the Australian infrastructure sector may be setting into the paradigm of banks funding projects at the
initial stage (ramp-up and construction) and then when business performance and prospects are more settled, longer
term funding is sought from capital markets, either locally or offshore.
Over the past few months, many bond offerings have been heavily oversubscribed, far exceeding borrower
expectations. Some infrastructure companies, including Sydney Airport, have also been able to tap the European
debt-capital markets for the first time. Others have accessed the U.S. and Canadian debt markets.
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Demand For A Deeper Local Corporate Bond Market – Where is the
Disconnect?
Australia still does not have a deep and liquid corporate bond market. On one hand, Australian infrastructure
borrowers have expressed a strong desire to tap local capital markets as part of their push for more diversified funding
strategies, and to eliminate the need for costly cross-currency swaps. And on the other hand, domestic institutional
investors are natural long-term investors, and infrastructure assets can provide that. So where is the disconnect?
We have started to see more transactions closing locally, with maturities of seven years becoming popular, mainly by
companies in the 'BBB' rating category. Despite this trend, many players highlight the lack of liquidity and depth within
Australia's underdeveloped bond market. Some borrowers, many of which are seeking longer tenors of 7-10 years,
describe the local bond market as unreliable and unpredictable for term investing.
In recent months, on the other hand, international bond markets have been widely open to local assets, including
Australian companies at the low end of the credit-rating spectrum. Apart from the attraction of a much bigger pool of
investors, a key attraction for Australian companies sourcing funds from markets offshore is the longer-dated debt
instruments available and ability for repeat issuance.
No Easy Solution, As Bank Loans Remain Mainstay
It won't be easy to generate a sudden and significant increase in participation by domestic infrastructure borrowers in
the Australian corporate bond market, which has never been particularly vibrant for local non-bank corporate issuers.
Borrowers say part of the problem is that they can readily access the local bank loan market for shorter tenors or
offshore bond markets for longer tenors easily, quickly, and at a competitive rate.
Bank loans, in particular, remain compelling from a cost perspective, despite the typically shorter debt maturities of
between three and five years. Like other corporates, Australian infrastructure companies (including utilities), many of
which seem to value the ease of execution and cost of funding more than the tenor available elsewhere, say it's very
difficult to compete with the size and scale of the local bank-loan market for convenience and pricing. Bank loans have
become more price-competitive recently, partly because of slower credit growth, the return to Australia of European
banks keen to win back business, and more aggressive Japanese banks.
Another attraction for many companies is that borrowing from the banks is a well-worn path for them, and the
documentation is largely standardized, enabling transactions to be drafted, priced, and sold down to a reliable pool of
well-known lenders. Even so, it's clear that the sheer size of infrastructure needed in coming years means banks won't
have the capacity to provide all the funding.
For investors, a source of concern is the lack of widely available and sizeable bond offerings in the Australian market
by well-regarded companies that have strong credit profiles. For example, some institutional investors don't find it
worth the effort if they only get small allocations. Part of the problem is there's also a lack of knowledge by local
investors about investing in bonds (Australian allocation to fixed-interest debt is a very low circa 10%).
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Australian Infrastructure Funding: Making Strides
Restricted retail investor access to fixed income issues, the defined-contribution framework of the local pension fund
system, and differing investment mandates of larger local investors--some of which have rules about investing in
certain sectors or lengths of maturities--have also held back sizeable deals being brought to the Australian-dollar bond
market. A lack of ongoing communications between institutional investors and issuers has also been cited by some as
another negative.
According to investors and borrowers, the solution to alleviate some of these perceived concerns and deepen the
development of a local corporate bond market--could include: more investor education to explain the complexities of
this market and to restore confidence in this class of instruments; greater transparency in areas such as forecasts,
modelling, and mandates; better standardisation of debt documents; more co-ordination between market players; and
a more supportive regulatory framework.
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