USPP still offers. Issuers Q+A

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1 Issuers Q+A USPP still offers issuers a unique value proposition A Participants range of corporate issuers mainly from Australia, but including one apiece from New Zealand and the UK tell KangaNews that the value of US private placements (USPPs) remains undiminished. Despite progress in the Australian-dollar market and cross-currency swap challenges, none expect to scale back their interactions with USPP investors. n Michael Bradburn Chief Financial Officer Brisbane Airport Corporation n Michael Christensen General Manager Finance, Group Treasury and Finance Transformation DEXUS Property Group n Nathan Dunton Group Treasurer Associated British Ports n Peter Kopanidis Global Director, Corporate Finance Treasury Wine Estates n Richard Stephens Chief Financial Officer ALS n Bijan Taghian Treasury Manager Treasury Wine Estates n Louise Tong Corporate Treasurer Contact Energy Can you give a brief overview of your firm s activities in the USPP market over time, and of how USPPs have contributed to your overall funding task? n Stephens ALS tapped this market three times between September 2010 and September 2013 with maturities ranging from six to 11 years. The relative ease of execution and the long tenors that are available make the USPP market attractive to us as an issuer. ALS has been able to meet an ongoing need for acquisition financing through the USPP market, although as well as this it also provides us with a good long-term funding base for all our activities. Aside from its bilateral domestic and North American bank-debt facilities, ALS seeks the bulk of its capital-markets financing in the USPP arena. n Dunton About one-third of Associated British Ports (ABP) s funding has been sourced from the USPP market. Overall, 25 per cent is in US dollars and 75 per cent in sterling. n Christensen DEXUS Property Group (DEXUS) has been in the USPP market for nearly 10 years, in which time we have done four successful deals for a total of approximately US$1 billion. DEXUS first issued in the USPP market in late 2004 and early 2006 for US$200 million each, before pricing two deals last year in May for US$300 million and in December for US$200 million. Throughout the period that DEXUS has been involved in the USPP market we have maintained good relationships with investors through half-yearly updates and one-on-one meetings. Our history and rapport with investors was an especially important factor in the successful completion of our transaction late last year. This deal was one of the last to be completed before the year end and occurred while we were in the midst of M&A activity. While we could have satisfied our entire calendar-year funding needs when we issued in May, this would have meant carrying surplus headroom. We were also able to achieve slightly better pricing and to spread the two issues over different maturity periods. More generally, we like to access the USPP market as it increases diversification of funding sources, provides good flexibility of tenor and is a long-dated source of capital. n Kopanidis As a new company, we decided that 3-5 year bank debt from existing relationship banks was the most efficient way to start our debt profile. We needed a couple of years of earnings and performance before going to the capital markets. But in the medium term we needed a mix of debt the plan from day one was to do this within a 2-3 year time frame. When we took our deal to the USPP market it gave us exactly what we wanted in terms of tenor and mix we issued a total of US$250 million across four tranches with seven-, 10- and 12-year tenors. Being a natural US dollar borrower made it easier for us as well we had no need to swap proceeds. 42 kanganews march 2014

2 The expectation was always that our capital markets debut was going to be in the USPP market. We never planned to seek an external credit rating: there aren t any rated global wine-only peers so we didn t see any net benefit. n Tong Contact Energy (Contact) was one of the first New Zealand corporate borrowers to access the USPP market, in We issued into this market again in 2003 and then had quite a long break before returning last year. Because of the 10-year gap between issuance, Contact attended the USPP conference in Miami in January This was an opportunity to provide USPP investors with an update on the industry, Contact s business and our funding intentions. USPP issuance meets a number of Contact s objectives, including having a diverse portfolio of funding with a smooth maturity profile. The tenor we can access from the USPP market helps us to manage this profile. USPPs is currently the only offshore market we access directly. Last year we started addressing a reasonably substantial refinancing task which saw around half of our drawn debt maturing at almost one point in time a NZ$155 million (US$128.3 million) USPP in March and a NZ$550 million retail bond in May. We wanted to start executing funding well in advance. The advantage of funding in the USPP market in this instance is that it offers a forward-start option that cannot be achieved in some other markets. By May 2014, once this refinancing is complete, USPP issuance will comprise around one-third of our borrowings. n Bradburn Brisbane Airport Corporation (Brisbane Airport) has raised funding in both Australian and US dollars through USPP issues. In 2011, we issued US$300 million and A$100 million (US$89.2 million) in 10-, 12- and 15-year tenors. In 2012 we issued US$180 million and A$30 million, again in 10-, 12- and 15-year tenors, while last year we raised a A$100 million 12-year bond. Currently, year USPPs account for our largest single debt source, at 30 per cent. Credit-wrapped bonds with 10-year original tenor are also prominent, accounting for 28 per cent. The remainder is taken up by seven-year Australian dollar paper and 3-5 year bank debt, at 22 per cent and 20 per cent respectively. To what extent, if at all, have developments in the swap market especially around collateral costs influenced your funding decisions? Do you expect this issue to become more significant in future? n Bradburn Any requirement around collateral costs would be a negative development and would influence our funding decisions. n Dunton Speaking as a borrower domiciled in the UK, cross-currency swaps can constrain the tenor of a US dollardenominated transaction due to the impact credit spreads have on relative pricing. Sterling investors do not face the same constraints and therefore the company can be more flexible around tenor. n Tong Contact has not seen any evidence of collateral requirements for swap transactions in the NZ market. Swap market developments have had some effect on the spreads that banks models show they require, but against this the market is still very competitive. There is the potential for this factor to become more significant in the future, although it could change either way. n Christensen The first premise is that we look at the cost to issue in all markets on an Australian dollar-equivalent basis, which includes additional costs for raising funds overseas. To date, we have not seen an increase in swap costs, but it is something we monitor closely. Additionally, it is good to see organisations like the Finance and Treasury Association lobby for a commercial outcome on behalf of corporates. n Stephens Although we have swapped some of our US funding into other currencies previously namely into Canadian dollars and sterling we do not have a specific need for Australian dollars. Therefore I don t expect swap market developments to act as a significant headwind for ALS in the USPP market. For the market as a whole, however, I can see that increased collateral costs may have a negative impact going forward. The Australian domestic bond market has progressed significantly. Does this have any impact on the likelihood of your marginal funding dollar being raised in USPP format? n Kopanidis As a natural US dollar borrower the AUD market has little attraction for Treasury Wine Estates (TWE). Additionally, tenors are shorter, less liquid and comparatively more expensive for triple-b and shadow triple-b borrowers. Swap market developments have had some effect on the spreads that banks models show they require, but against this the market is still very competitive. There is the potential for this factor to become more significant in the future, although it could change either way. Louise Tong Contact Energy 43

3 Issuers Q+A Sector perspectives The US private placement (USPP) market has long been a natural fit for long-term, tangible asset-heavy issuers such as credits from the infrastructure and property sectors. But issuance diversity is a growing feature of the market, too. n Property and the utilities and infrastructure sector have long been preferred industries for USPP investors. In your experience, how helpful is it during the deal marketing process to be travelling a well-trodden path in this respect? Christensen It is very helpful. One thing to note in this context is the fact that the US bond markets have sufficient depth and liquidity to allow investors to have dedicated industry-specialised analysts, who understand industryspecific terms and conditions and pricing benchmarks. For example, up until a few years ago Westfield was the only Australian real estate investment trust (A-REIT) borrower issuing in the US dollar 144A market, but now there are three A-REIT issuers including ourselves. The USPP market is similar, with several A-REITs recently entering the market. The increased level and scale of issuance enables us to better market credit qualities that are specific to the Australian property sector to overseas investors. Bradburn Brisbane Airport Corporation is in the infrastructure space which is very well understood by the USPP investor base. In 2013, infrastructure comprised up to 14 per cent of deal volume in the USPP market. This is extremely helpful in the marketing process, which in turn assists in expediting responses regarding the credit, lending appetite and ultimately the completion of the transaction relative to lesser-known industries and sectors. Tong Contact has been an issuer in the USPP market since 1998 and a number of our peers have also issued there. This means that USPP investors have had a long period of exposure to issuers from the electricity industry in New Zealand. In addition, USPP investor staff turnover is quite often low, enabling investors to build up and retain a lot of country, industry and company knowledge. In fact, some of the investors we spoke to in 2013 were also involved in our 1998 and 2003 deals. Dunton We are the largest UK ports company with 21 ports across the country, handling over 23 per cent of UK seaborne trade by volume. While demonstrating a number of the key strengths of a standard infrastructure investment, the company benefits from a high level of diversification by geography, cargo and customer base, and is well positioned on European trade routes. n What complexities are involved in marketing a deal from a sector which is less prevalent in the USPP market? Did you get a sense that investors are actively seeking diversification? Stephens Of the three transactions we have carried out in the USPP market, only the first was preceded by a face-to-face roadshow. This was very important in order that potential investors could become familiar with both ALS and the sector in which it operates. In fact, I got the sense that USPP investors already had a good understanding of our sector they just wanted to hear the story directly from ALS. Investors are seeking diversification across both sector and jurisdiction. As ALS operates in a less familiar industry sector and in many different jurisdictions, investors were able to diversify in multiple ways from just the one investment. We found this worked to our advantage. Kopanidis No-one has been in the market from the wine sector for a long time perhaps as long ago as the late 1990s but this is positive because we offer a proxy for investors seeking exposure to the luxury sector and Asia or Australia. We provide a number of different exposures. However, on the down side we need to deal with some of the volatility which comes from having an agricultural business. Treasury Wine Estates (TWE) marketed its deal broadly but, in the end, we had a reasonably small number of investors who came into the deal with reasonable commitment levels. Our conclusion from this is that we don t appeal to all classes of investors but those to whom we do appeal are willing to invest in size including specialist agriculture-sector investors. USPP investors are pretty strong on their credit work, which potentially plays into the fact that once they are comfortable they are happy to participate in size. Taghian What we think might have driven investors to support our deal was that we did a lot of industry education. The offering memorandum had considerable detail around how the industry works, supply and demand and what the product markets are something which investors won t often see. Obviously there haven t been many winecompany USPP deals recently but the way we approached it was to educate on the market and the industry we are in. Of the three transactions we have carried out in the USPP market, only the first was preceded by a face-to-face roadshow. I got the sense that USPP investors already had a good understanding of our sector they just wanted to hear the story directly. Richard Stephens ALS 44 kanganews march 2014

4 n Bradburn While the domestic MTN market gives a standard tenor of between five and seven years, it won t be too long before we see 10-year deals being done more regularly. The impact on the marginal funding dollar being raised in the USPP market is primarily contingent on the all-in cost of financing for similar deals, as well as the incremental cost of additional tenor which can be raised in the US. n Christensen We have certainly seen the Australian market progress in a positive manner with investors recently having more appetite for triple-b names and for tenors greater than five years. However, we re still not seeing material appetite for long-dated tenors, which the USPP market continues to offer. Notwithstanding this, we have observed greater depth in the AUD market. For example, the last time we went to the Australian domestic market, in 2012, we had reverse enquiry follow up from our A$100 million primary issue. This enquiry translated into an effective doubling of the amount outstanding in that series. n Stephens ALS doesn t currently have a need for AUDdenominated debt. It s not that the Australian domestic bond market couldn t provide debt that we could swap into other currencies we just have not yet had a need to tap into this investor base. The international flavour of our company lends itself to looking to offshore markets, and in particular the USPP market, for debt financing. There has been a lot of commentary around demand in the New Zealand dollar corporate market exceeding supply. From the feedback Contact has received, how does the domestic option stack up against USPPs at present in terms of pricing, but also volume, tenor and other factors? n Tong Both markets provide reasonably competitive pricing and are complementary in terms of duration. In the domestic market, tenor is limited past seven years while maturities in the USPP market typically start at around seven years. As was the experience for Contact in 2009, rated entities can attain senior, vanilla issuance from the domestic market at quite sizeable volumes. However, volume requirements are more typically around NZ$ million and the domestic market is currently quite well suited to companies needs in terms of this tranche size for rated issuers. Do issuers offer USPP investors different terms and conditions from other bond investors or bank lenders? What is the reasoning behind your strategy? n Stephens We try to keep our terms and conditions aligned for simplicity and ease of managing our various relationships. We wouldn t want one set of investors to feel they were being disadvantaged compared with another. n Tong All domestic senior debt has the benefit of a negative pledge, but USPP investors cannot reference this New Zealand document. Our aim is to maintain consistency of terms across all senior debt, so we embedded similar terms and conditions to our negative pledge in the note-purchase agreement for USPP investors. n Taghian The covenant packages are not identical but are broadly in line. They are generally based on the same core set of terms and conditions. We worked hard on making sure this was the case. n Dunton All creditors to ABP receive the same terms and conditions as other senior-secured creditors. ABP has succeeded in a mix of US dollar, euro and sterling funding from a variety of public and private sources. n Christensen DEXUS typically offers USPP investors similar terms to its bank lenders. This is primarily because we have a direct relationship with these investors it is a private market and their investments are long-term in nature. By contrast, the terms and conditions of our public bonds tend to be slightly different but customary across public bond issuance. This is because public-bond investors usually have the ability to sell their bonds, which makes it harder for us to track who owns our bonds at any given time should we need to amend a term or condition. Long-duration lending is obviously a key advantage offered by the USPP market. How important is tenor in your debt book, and is USPP the only place to get it? n Taghian As an unrated issuer, TWE wouldn t have been able to execute a similar deal anywhere else. Bank debt would only have been around the five-year tenor and we didn t even consider looking at the Australian retail market. n Kopanidis The tenor of our debt book is very important because of the way our working capital and supply chain We anticipate the level of funding contribution from the USPP market to remain roughly at the current percentage of total funding sources, although our total funding requirement will grow over the short to medium term as we execute the capex programme. Michael Bradburn Brisbane Airport Corporation 45

5 Issuers Q+A works. Our investment in our working capital includes luxury wine that has an age of release of 3-5 years, plus related capital expenditure. n Tong I don t think the US private placement market is the only place to find longer tenors. Other markets offer this from time to time, but they might not be suitable in terms of volume, price or other terms. If an issuer is seeking a maturity longer than 10 years, the USPP market is certainly an obvious one to consider. Contact does not have a weighted-average tenor target for its debt book, only a limit on how much can mature in any specific period. This gives us a certain amount of flexibility, though we still need to maintain a smooth maturity onerous documentation requirements, unlike some of the other markets globally and in the US. If ALS wanted to lengthen its average debt profile further it would be possible to seek to extend tenor beyond 11 years in the USPP market. However, we have a relatively strong cash flow coming from the business, with ALS s capital-market funding needs largely driven by its acquisition plans. If the pace of this was to slow ALS would be looking to pay down its outstanding debt relatively quickly not to seek to further lengthen the final maturity of its debt. n Bradburn Infrastructure assets, such as Brisbane Airport, usually prefer longer tenors, although margins and swap costs need to be factored into the equation. We have a range of We have certainly seen the Australian market progress in a positive manner with investors recently having more appetite for triple-b names and for tenors greater than five years. However, we re still not seeing material appetite for long-dated tenors. Michael Christensen DEXUS Property Group profile. Contact doesn t have to have 15-year debt but, to the extent that it does, it makes it easy to meet treasury policy requirements. n Christensen Tenor is important to DEXUS. Our average debt duration has increased to just over six years from around four years in the past few years as a result of accessing markets with longer tenors, including the USPP market. For example, our 2013 transactions had an average tenor of almost 13 years. Long debt duration matches the long-dated nature of our assets, but it also gives us flexibility to respond to opportunities in the market at different times or not to be forced to issue when market conditions are poor. However, USPP is not the only option which offers longdated tenor, which is why we ve also accessed US dollar public bond markets. There are also other markets offering long tenor we haven t yet accessed, such as the euro market. n Dunton Reducing refinancing risk is important and a good spread of maturities supports this. As I mentioned earlier, though, longer-dated maturities are only economic for ABP if offered in sterling. n Stephens ALS seeks long-term debt to provide stability and a funding base. For tenors in excess of 10 years, where the public bond market caps out, we currently see the USPP market as providing the most opportunities. USPP is not the only market from which longer tenors are achievable but it is attractive for us in the sense that it is a relatively easy and a low-cost market to access. Further, there is no requirement to seek a credit rating nor does USPP have tenors due to our diversified funding mix, although they are weighted towards longer-duration debt funding. Alternative markets such as the UK and Europe are becoming a key consideration. Many corporates, including Asciano and Melbourne Airport, have recently issued in Europe. Significant liquidity, tenor and competitive pricing are the key considerations when looking at these alternative markets. For example, Europe currently offers long-dated tenor and competitive pricing as cross-currency basis swaps have tightened, coupled with low credit spreads. What are your future funding expectations, and what role do you see USPPs filling within the overall task? Will the USPP contribution grow, shrink or remain at roughly the same level? n Tong We expect the USPP market to continue to form part of Contact s funding strategy going forward. We have had a relationship with USPP investors since 1998 and we see this continuing for a long time yet. There are no prescriptive requirements for funding avenues and we can consider any appropriate market as a potential source of funding. In this context, I expect the USPP market to be one of those we consider for any future funding requirements. Contact values the flexibility and diversity of its current funding portfolio, so I don t anticipate the USPP contribution will change significantly from its current proportion. But the make-up of the debt book can change over time depending on 46 kanganews march 2014

6 Contact s requirements and the relative attractiveness of each market, including USPP. n Bradburn Brisbane Airport has a sizeable capex programme over the next five years, and several refinancing events in Funding sources such as bank debt have been best suited to the capex requirement they generally have shorter tenor, but also cheaper pricing and the flexibility to repay when we have the capacity to do so. Markets which offer longer-duration debt are well suited for refinancing activities of shorter-dated debt facilities such as bank debt. We anticipate the level of funding contribution from the USPP market to remain roughly at the current percentage of total funding sources, although our total requirement will grow over the short to medium term as we execute the capital expenditure programme. n Kopanidis We would like to build a yield curve in the USPP market over time. We see this jurisdiction as a natural source of funding for our term debt. But we are currently in a good position in that there is no pressing need for TWE to go to this market with another deal in the short term. Like most corporates we will have a mix of debt funding, but we will be more active in the bank-debt market because it has a shorter term. n Dunton ABP sees USPP as an important part of its portfolio of funding from a diverse set of investors. Supply will be driven by growth plans, future refinancing and diversification requirements, as well as relative value. n Stephens If ALS was to undertake another acquisition we would likely tap the USPP market again, in addition to looking to our bank lenders and issuing some equity. However, we do not expect this to happen for at least the next 18 months. Therefore, in percentage terms our USPP contribution will likely remain at around the same level. n Christensen The USPP market, in our experience, has increased in terms of depth and liquidity. As a result we have more investors and stronger relationships than when we first came to market back in We have some investors who participated in all four of our issues, so it is a very important funding source for us. USPPs currently account for roughly per cent of our funding book but we also have US dollar 144As, Australian The expectation was always that our capital markets debut was going to be in the USPP market. We never planned to seek an external credit rating: there aren t any rated global wine-only peers so we didn t see any net benefit. Peter Kopanidis Treasury Wine Estates dollar MTNs, bank debt and commercial paper. So, while we value the USPP market, diversification is very important for us when considering our funding profile. With our long debt duration and spread of maturities we don t currently have a large funding requirement. We have around A$600 million maturing over the next two years. We have some acquisition funding with a three-year maturity that requires terming out, for which we will consider all markets and weigh up price, tenor, execution and diversification. Do you follow the KangaNews Twitter