Bloomberg News

Bond Hunger Drives Fonterra Costs Below Banks: Australia Credit

July 06, 2011

July 6 (Bloomberg) -- Australia’s “hunger” for bonds outside the financial industry is rewarding companies with lower borrowing costs than the nation’s highest-rated banks.

Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter, paid 100 basis points more than the swap rate on July 4 when it sold A$300 million ($322 million) of five-year notes to be rated A+ by Standard & Poor’s, according to data compiled by Bloomberg. National Australia Bank Ltd., ranked two steps higher at AA, priced A$2.8 billion of similar-maturity bonds at a 117 basis-point spread last month.

Companies outside the finance industry accounted for 6 percent of a record A$64.3 billion of bonds sold in Australia in the first half, compared with about 50 percent of $529.9 billion of investment-grade U.S. offerings, Bloomberg data show. Australia, a nation with a smaller population than Shanghai, has the fourth-largest pension savings pool in the world, with a forecast A$6.1 trillion in assets by 2035, boosting demand for fixed-income investments.

“Fonterra emphasized the hunger for non-financial issuers in the Australian market,” said John Sorrell, head of credit at Tyndall Investment Management Australia Ltd. in Sydney, which manages about A$14 billion of fixed-income assets. Company debt “tends to be less geared and less affected by the regulatory uncertainties that are currently impacting the financials.”

Bond Returns

Notes issued by Australian companies returned 5.3 percent in the six months to June 30, compared with 2.6 percent on similar bonds globally, Bank of America Merrill Lynch indexes show. Australian dollar bank bonds returned 4.8 percent, according to the indexes.

Led by Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, Westpac Banking Corp. and National Australia Bank, the nation’s lenders need to refinance A$412 billion of debt between 2011 and 2015, compared with A$40 billion of corporate securities coming due, according to Deutsche Bank AG analysts Gus Medeiros and Colin Tan in Sydney.

Fonterra, based in Auckland, marketed its notes at an initial spread of 105 basis points and investors placed orders for more than A$500 million, ANZ Bank said in an e-mailed statement on July 4. The relative yield on the 6.25 percent securities, the company’s first Australian dollar offering, was quoted at 91 basis points today, according to ANZ prices.

Diversification

“We benefit from the fact that our name brings quite a lot of diversification to investors,” Stephan Deschamps, general manager of treasury at Fonterra, said in a phone interview. “We’re not a financial, we’re in the agriculture sector, which is quite rare.”

None of the 171 bonds in Merrill Lynch’s Australian Corporate and Collateralized Index were issued by agricultural companies.

Dairy export volumes rose to a record in March amid surging demand from Asia and increased milk output, Fonterra said on April 27. Prices of New Zealand’s commodity exports climbed for a ninth month to an all-time high in May, according to an index calculated by ANZ National Bank Ltd.

While demand for soft commodities bolsters New Zealand’s economy, Australia is experiencing the biggest mining boom in a century as China and India buy iron ore, copper and coal.

Australia, whose population of 22.6 million is behind Shanghai’s 23 million, had a record trade surplus last year. Total trade with China surged 24 percent to surpass A$100 billion for the first time, according to the government.

The Reserve Bank of Australia left its benchmark interest rate unchanged at 4.75 percent yesterday for the seventh straight meeting, saying the European debt crisis had “added to uncertainty” about the outlook for the world economy.

Economic Growth

“Growth through 2011 is now unlikely to be as strong as earlier forecast,” Governor Glenn Stevens said in yesterday’s statement, retreating from the RBA’s May 6 prediction that the economy will expand 4.25 percent this year, the fastest pace since 1999.

The so-called Aussie, the world’s fifth-most traded currency, dropped the most in about three weeks against the U.S. dollar after the announcement. It rose to $1.0725 as of 2:39 p.m. in Sydney today.

Yields on Australia’s benchmark 10-year bond dropped one basis point to 5.21 percent today, or 207 basis points more than similar-maturity Treasuries. Consumer prices in Australia may rise an annual 2.87 percent in the next 10 years, based on the gap between yields on government bonds and inflation-indexed notes.

Bond sales in Australia totaled A$26.4 billion in the second quarter after offerings of A$37.9 billion in the first three months of 2011, according to Bloomberg data.

Woolworths Sale

Woolworths Ltd., the nation’s biggest retailer, sold A$500 million of five-year notes at 105 basis points more than the swap rate in March, lower than relative yields paid by banks and General Electric Co., Bloomberg data show. The Sydney-based company’s 6.75 percent bonds, rated A- by S&P, were quoted at an 85 basis-point spread today, ANZ prices show.

The government is seeking to expand the corporate bond market by making it simpler for companies to market debt to individual investors, according to proposals announced in December.

Listing government bonds on a securities exchange will also stoke demand for corporate debt by providing a more visible pricing benchmark, according to a Treasury briefing note.

“A vibrant corporate bond market is critical to putting competitive pressure on bank lending rates to business, and to harnessing our national superannuation savings so we can domestically fund more productive investment in our economy,” the Treasury said.

Pension Funds

Australian investors favor shares over fixed-income, with the nation’s A$1.3 trillion pension fund industry holding more than half its funds in stock investments in 2009, according to the Organization for Economic Cooperation and Development.

Australia’s benchmark stock index fell 41 percent in 2008 as the collapse of Lehman Brothers Holdings Inc. sparked a global credit freeze. Regulators are clamping down on banks in the wake of the crisis, seeking to bolster their liquidity and capital to prevent a repeat of the worst global recession since World War II.

Fonterra’s sale was the biggest by a non-financial company in Australia in almost three months, Bloomberg data show. Banks including Commonwealth Bank, Lloyds Banking Group Plc and BNP Paribas have sold A$30.9 billion of notes in the nation this year.

“We have seen a lot of financials in this market and that creates an extra demand for very strong corporates,” said Edwin Waters, a debt capital markets director at ANZ, which helped manage the transaction. “The popularity of the Fonterra trade is reflective of the strong credit quality and the diversity that Fonterra adds.”

--Editors: Ed Johnson, Garfield Reynolds

To contact the reporter on this story: Sarah McDonald in Sydney at smcdonald23@bloomberg.net.

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net.


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