The last 3 months of 2013 created a mega-quarter for Aussie corporates. Domestic debt market volumes in 2013 hit US$100 billion1
– a 25 percent increase on 2012. A phalanx of major deals right across the industry spectrum boosted the result, with 12 deals over $1 billion generating real heat right across the market. Strong funder demand, competitive pricing and the relief of the federal election conspired to unleash a torrent of financing activity across capital markets.
Plumbing the pipeline
The triumphs and tribulations of 2013 are old news now, but the good news is that the same positivity and optimism that fuelled Q4 has already defined the shape of Q1 2014. "We are seeing a very healthy pipeline of financing transactions already," notes David Heathcote, National Head of Transactions & Restructuring at KPMG.
In particular corporates are currently experiencing the lowest cost of funds since 2007. Australian cash rates are at their lowest level and global funding costs remain on a downward trajectory, reflecting a combination of excess money supply together with continuing low growth economies in developed countries.
The bank landscape will continue to evolve given the exit of some key funders, such as Lloyds. "While that will create change, it won’t necessarily diminish funding supply," says Heathcote.
"Asian banks are filling the gap, and some US banks are more proactively using their balance sheets, while Aussie banks remain particularly hungry."
National Head of Transactions & Restructuring
Taken together, this behaviour is indicative of ongoing tightening in pricing over 2014.
Capital markets emerge
But don't overlook capital markets opportunities, both domestically and offshore. "Despite the Australian exchange rate depreciating against major currencies there is still a high level of interest to tap offshore markets and explore local domestic capital markets for diversification purposes," says Heathcote. In 2014 to date US$1.1 billion2
has been priced in offshore capital markets.
The emergence of AUD-denominated tranches has tempted more corporates to look at the USPP market by eliminating the cost of the swap. And there are some interesting developments in Asia. The size and tenor of the second Dim Sum bond issued by Fonterra Co-operative Group (Fonterra) in January reflects the potential for this market to supply liquidity for global funding purposes. Even more interest is being shown in the much anticipated Panda market, where once developed, loan proceeds will be directly available for onshore use by the issuer. "Because it is more flexible than the Dim Sum market, it could potentially be as big as the USPP market," says Heathcote.
Heathcote anticipates that as legislated super continues to grow, more super funds will be investing in capital markets opportunities as a place to park surplus cash. ANZ is in the process of issuing its second subordinated note, while in 2013 Healthscope issued its second hybrid. "We’ll see more of these instruments in 2014," notes Heathcote.
As for the M&A market, rising asset prices and a renewed growth mentality are tempting corporates out of hibernation. "Deleveraging balance sheets, corporate growth and better asset pricing are bringing transactions into range," says Heathcote. The KPMG M&A Predictor
, which analyses appetite based on forward price to earnings ratios of the world’s 1,000 biggest listed companies has surged 16 percent over the last 12 months.
While refinancings remains the order of the day, it's very positive to see some new money deals emerging. "This is particularly the case in infrastructure – where we are seeing a raft of privatisations – and in the health and human service sector, where greenfields opportunities are creating real momentum," says Heathcote.
The closing months of 2013 delivered some major IPO transactions – from Dick Smith's A$344.5 million3
deal to Nine Entertainment Co’s A$636 million4
effort. "We expect a healthy level of issuance in 2014 as private equity groups and some family owned businesses look to take advantage of stronger market dynamics," comments Heathcote. The pipeline for the next 6 months looks strong, particularly as investors appear to be rebalancing investment portfolios back towards equities after years of cash conservatism.
Ultimately, as always, the reality of value will shape the corporate finance market in 2014 – let's hope it finishes as it started… on a high note.Read David's full analysis1. Thomson Reuters – LoanConnector
2. Bloomberg and Thomson Reuters – LoanConnector
3. AFR, Floats 2013: The ones that got away, 27 December 2013
4. AFR, Floats 2013: The ones that got away, 27 December 2013
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