Cover
Story
1
The giant
returns
No company encapsulates the modern Australian economic story more than
BHP Billiton. For many years the mining giant’s position as a primarily US
dollar funder precluded its presence in an Australian dollar bond market that
seemed too small and unreliable for its needs. In early October, that situation
changed with a bang.
B y
B
t h e
K a n g a N e w s
HP Billiton Finance, a funding entity
guaranteed by BHP Billiton, launched and
priced the largest-ever non-credit wrapped
corporate bond deal in the Australian
market on October 9. The firm placed A$1
billion (US$1.04 billion) of new five-year
notes in a deal market participants say was
oversubscribed by nearly double.
According to KangaNews data, the transaction is the largest
single-tranche non-financial corporate bond ever to price in
the Australian market, surpassing the A$800 million of fixed
rate notes priced as part of Westfield Retail Trust’s A$900
million five-year issue in April 2011. It is also the largest noncredit wrapped corporate transaction ever to price in Australia
even when multi-tranche deals are included.
Leads and investors involved in the BHP Billiton
transaction say the firm had sufficient demand to print an
even larger transaction, with lead manager sources revealing
the final book size reached approximately A$1.8 billion. And
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while the Australian dollar deal makes up just a tiny part of
BHP Billiton’s outstanding bond book – which aggregates
to the equivalent of nearly US$30 billion (see chart on facing
page) – intermediary and investor sources say the miner’s
return to what is technically its home market marks a seismic
move for the Australian dollar corporate landscape.
Fast bookb ui l d
N
ot only was the BHP Billiton transaction heavily
oversubscribed but it also saw demand build
extremely rapidly. Investor sources say they
understand the book grew past A$500 million within an hour
of its launch at 8.30am AEST, growing to its final size by
around 1pm AEST. Fund managers also confirm there was
substantial scaling, with buy-side sources telling KangaNews
allocations of 50-75 per cent of bids were par for the course.
Intra-day execution was always part of BHP Billiton’s
planning according to both the issuer (see box on p24)
and Tabitha Potts, Sydney-based senior manager, debt
capital markets at
Commonwealth Bank of
Australia – joint lead on
“We allowed for a slightly longer process the deal with ANZ.
but it became clear very early that there
Potts tells KangaNews:
“Before
it accesses any
would be a substantial oversubscription,
capital market BHP
which resulted in the book closing at an
Billiton wants to be sure
earlier stage than originally planned.”
of a comparable outcome
to its benchmark funding
T a b i t h a P o tt s C o m m o n w e a lt h B a n k o f Au s t r a l i a
n o v e m b e r
2 0 1 2
P ricing and strat egy
A
bhp billiton’s outstanding bonds
GBP
vo lum e (us $ M app rox. eq ui v. )
options – and that includes single-day execution. In this case
we allowed for a slightly longer process but it became clear
very early that there would be a substantial oversubscription,
which resulted in the book closing at an earlier stage than
originally planned.”
An accelerated deal process also matched BHP Billiton’s
desire to achieve genuine investor diversification through its
return to the Australian dollar market. Ron Ross, head of
capital markets Australia at ANZ in Sydney, says the firm
wanted to maximise participation from domestic investors.
Data from the leads suggest the issuer achieved this goal,
with 80 per cent of the bonds placed into Australia and the
balance sold to Asian investors.
Over 70 accounts participated in total. Around 75 per
cent of the bonds was sold to asset managers, 13 per cent
to insurance investors and 10 per cent to banks. Potts says
there was interest from the Asian private bank sector but
many of those investors were not able to finalise firm bids
in the narrow window available to them. She says it is likely
these buyers would have been more prominent had a longer
bookbuild been available.
One domestic fund manager comments in particular
on the pace of the bookbuild as a positive sign for the
market, saying: “A typical criticism the Australian market
has received is that it is difficult to bring a good-sized deal,
with a reasonable price, in a quick time frame. BHP Billiton
launched and priced within half a day, which shows the
market can take size at a level that’s attractive to both the
issuer and investor communities.”
EUR
AUD
USD
6,000
5,000
4,000
3,000
2,000
1,000
0
13
15
17
19
21
23
25
27
29
31
33
35
37
39
41
year
Source: BHP Billiton, KangaNews October 17 2012
head of investments and Australia operations, Anthony
Kirkham, also highlights the strong credit of the issuer. He
says his firm was keen to participate from a diversification
perspective, especially given what he perceives as a fair
issue price.
At 90 basis points over swap, Australian investors appear
to be generally comfortable with BHP Billiton’s AUD issue
margin – even though that price makes it Australia’s tightest
domestic five-year deal of 2012 (see chart on p25). While
views are to some extent contradictory on whether the
margin was slightly wider or tighter than the issuer’s US dollar
curve, there is general agreement that the deal was priced
appropriately for a top-quality global credit.
According to Greg Stock, Sydney-based senior portfolio
manager at Perpetual Investments: “The deal offered fair
value compared to credit default swaps [CDS] and offshore
bond comps. We don’t typically invest in debt in the more
cyclical resources sector. However, BHP Billiton has shown
a long-term commitment to sound funding, a solid A-band
rating, and sound balance sheet metrics.”
John Sorrell, head of credit at Tyndall Investment
Management in Sydney, says his firm appreciates the
diversity offered by a strong name like BHP Billiton at a
price comparable to the issuer’s physical bond curve. He
explains: “The margin was in line with how the issuer priced
offshore and how other similarly-rated entities have priced.
lthough some Australian fund managers contacted
by KangaNews decline to comment on the record
about the transaction, every one also confirms they
participated. Most say the quality of BHP Billiton’s credit was
a key factor, with the borrower being a standout in its sector.
George Bishay, portfolio manager and credit analyst at
BT investment Management in Sydney, says his firm bought
a “reasonable size”. He tells KangaNews commodity revenue
streams, solid earnings and balance sheet were the main
factors behind the investment. “BHP Billiton is diversified
in terms of the commodities it produces: petroleum prices
don’t necessarily move similarly to iron ore, for example.
Compared with its main domestic competitor, where iron ore
represents 70-80
per cent of total
earnings, BHP
Billiton is closer to “I think an issuer of BHP Billiton’s quality
would have been able to achieve an outcome
30 per cent over
a medium-term
like this at times over the past couple of
basis.”
years, but right now the market is as robust
Western Asset
as it has been since the financial crisis.”
Management’s
Melbourne-based
R o n R o s s AN Z
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Cover
Story
1
BHP Billiton expects to mine
Australian market again
Following its return to the Australian market with the country’s largest-ever non-credit
wrapped corporate bond deal, BHP Billiton says it expects to issue more AUD-denominated
paper in future. The issuer also reveals that the size of its new deal significantly exceeded
the volume threshold it targeted as a minimum for its return to the domestic market.
“Having taken such a long time to
access the market, BHP Billiton has
an expectation and a desire that it
will, over time, be able to build a yield
curve in the Australian market.”
G r a h a m K e r r B H P Bi l l i t o n
The Australian dollar deal
issued in October continued
the bond funding diversity
BHP Billiton had embarked
upon the previous month. In
September it sold £1.75 billion
(US$2.82 billion) in a twotranche deal which, according
to company data, becomes
its only outstanding sterling
bonds. At the same time, BHP
Billiton also priced a €2 billion
(US$2.6 billion) dual-tranche
deal, adding over a third to
its euro-denominated bonds
outstanding.
Prior to the October 9 pricing
of its AUD transaction, BHP
Billiton had not issued in
Australia since 2001. But
Graham Kerr, the group’s
Melbourne-based CFO, now
says: “Having taken such
a long time to access the
market, BHP Billiton has an
expectation and a desire that it
will, over time, be able to build
a yield curve in Australia.”
Indeed, the potential to be
a repeat borrower appears
to have been a key plank of
BHP Billiton’s strategy when
planning its AUD issuance
return. “Investor diversification
is a primary objective and is
not an opportunistic strategy,”
Kerr adds. “If the group can
see that it can build, over time,
a maturity curve in a market,
it will access such markets at
the opportune time.”
The prospects of a BHP
Billiton return have been
We are less interested in what the CDS level does because
we find CDS levels tend to have different pricing parameters
than the physical market.” In fact, at least one investor
compliments the issuer on not pushing harder on price.
“There’s no question the deal was well received in the market:
assisted by the performance
of its five-year Australian dollar
bonds since issue. Investor
sources told KangaNews the
deal – which priced at a margin
of 90 basis points over midswaps – tightened by 9 basis
points on the break. According
to Yieldbroker ratesheets, the
deal’s margin was 17 points
tighter than its primary level by
the close on October 15.
minimum volume it wanted
to be certain of achieving in
advance of the new deal’s
launch was A$500 million.
Kerr also confirms information
provided by BHP Billiton’s
lead managers in terms of the
range of factors the company
expected to achieve in its
Australian market return. As
well as volume minimum, BHP
Billiton wanted to be confident
the Australian market could
deliver intra-day execution,
competitive pricing and support
for a deal from the local investor
base before pulling the trigger
on a new issue.
Another positive outcome
for the global credibility of
the Australian market is the
fact that BHP Billiton appears
The fact that demand for
to see it as a genuine global
the BHP Billiton bond line
funding option. Some market
continues to outstrip supply
sources have speculated that
is unsurprising, following the
pricing of A$1 billion from a book the firm could be using at
least a portion of its domestic
which lead manager sources
deal proceeds to fund local
say reached A$1.8 billion. The
operations in Australian dollars,
issuer took a relatively more
but Kerr reveals that, in fact,
conservative approach on
they will be swapped into USD.
volume, as Kerr reveals the
the borrower could have done more in terms of volume
and probably brought the pricing in even more,” says Phillip
Strano, portfolio manager and credit analyst at Victorian
Funds Management Corporation in Melbourne.
Follow-on performance was immediately visible,
according to Kirkham.
He says: “On the break
we have already seen the
“There’s no question the deal was well
margin tighten by about
received in the market: the borrower
9 basis points, so we are
pleased. BHP Billiton has
could have done more in terms of
been well talked about
volume and probably brought the
over the years so it’s
pricing in even more.”
great to actually see the
company here again.”
p h i l l i p s t r a n o v ic t o r i a n fu n d s m a n a g e m e n t c o r p o r a t i o n
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“The margin was in line with how the issuer priced
offshore...The success of the book suggests more than
anything else that the Australian market can be open to
quality issuers and be very receptive .”
john sorrell tyndall investment management
R
oss says that although a benchmark deal of the scale
completed by BHP Billiton is a new phenomenon in
Australia, it should not necessarily be assumed that the
market’s potential to offer major borrowers such execution
is itself a new development. He tells KangaNews: “I think
an issuer of BHP Billiton’s quality would have been able to
achieve an outcome like this at times over the past couple
of years, but right now the market is as robust as it has been
since the financial crisis. That enabled us to launch the deal
with a high degree of confidence and conviction.”
Paul White, ANZ’s Sydney-based global head of debt
syndicate, says the result of the BHP Billiton deal underlines
the increasing relevance of the Australian dollar market as
a genuinely reliable source of debt funding for corporate
credits. “It sets a benchmark for corporate issuance in
Australia, whether for multinational or domestic names,”
White comments. “In a post-Basel III world domestic
corporate issuance will increase, and the good news is that
there is very strong global demand for good-quality corporate
paper in Australia.”
While a name like BHP Billiton clearly benefits from its
position at the heart of the inner circle of global corporate
names, White says Australia can offer debt funding
opportunities to a wide range of borrowers. “The level
of demand will of course depend on the name and sector
but Australia is becoming increasingly attractive, as well as
competitive with global markets as a funding alternative.
Corporate issuers should definitely view this market as
something to be considered when assessing funding
opportunities,” he suggests.
On the buy side, there is general agreement that BHP
Billiton’s success builds on the positive signals given by BP
Capital Markets’ debut Kangaroo issue in August. “It is very
five-year primary aud deal pricing, 2012
Single-A bank
Single-A corporate
Triple-B corporate
Double-A bank
Triple-A covered bond
BHP Billiton
350
m a rgi n (b p/swa p o r b bsw )
AUD m arket develo p ment
300
250
200
150
100
50
0
Jan 1
2012
Apr 4
2012
Jul 20
2012
Oct 28
2012
Source: KangaNews October 17 2012
positive to see a quality issuer coming back to the market,”
Sorrell confirms. “I don’t want to draw the conclusion that
this means [there will be] massive supply from other issuers,
but the success of the book suggests more than anything else
that the Australian market can be open to quality issuers and
be very receptive.”
While BHP Billiton’s leads are bullish on the implications
of the transaction for the health of the Australian credit
market, Ross emphasises the fact that further development
remains a steady process. “This deal is certainly encouraging,
but I wouldn’t go so far as to say there will be a deluge of
offshore corporates coming to Australia in the near future,”
he comments. “What is important is that the corporate
market here has grown from full-year issuance of around A$6
billion in each of 2010 and 2011 to more like A$8 billion this
year – with nearly a quarter still to go.” •
“On the break we have already seen the margin tighten
by about 9 basis points, so we are pleased. BHP Billiton
has been well talked about over the years so it’s great to
actually see the company down here again.”
anthony kirkham western asset management
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