Retailer bond batlle

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Retailer bond battle - Business Spectator

Australia’s top retailers are not only squaring up to do battle on in the hardware front. Woolworths and Wesfarmers may be due for a face off in the corporate bond market.

The global financial crisis wiped some of the world's pre-eminent financial institutions off the planet and decimated the savings of millions. Some things however changed for the better, especially if you’re involved in buying, selling or arranging Aussie corporate bond deals (or writing about them for that matter).

Two years ago, bankers pitching the merits of the corporate bond market were politely ushered out of the offices of various corporate treasuries. Now, as this week has shown, even the highest and mightiest of our corporates are rolling out the red carpet.

“What has happened is that treasurers have said ‘We need an alternative source of funding. We can no longer just rely on the bank’. In the future, any company that is big enough to get a rating and has a borrowing requirement is going to have some sort of strategy that involves access to the capital markets,” says Gary Jenkins, head of fixed income research Evolution Securities in London.

“I’m not saying they all will access capital markets but they will have to at least consider it, and that’s very different to where we were even five years ago,” he adds.

While an appreciation of the corporate bond market was immediate for European and the US treasurers, Australian companies have dragged their heels to some extent.

With relatively strong balance sheets and attractive loan options being offered up by Asian banks, Australian corporates did not feel the same urgency as their offshore peers to issue bonds. There was some take up with a trickle of moderately sized deals from Tabcorp, CFS, Dexus and Leighton before Swiss cement maker Holcim’s $500 million bond issue showed the keenness of investors to support AUD corporate bond issues.

This week has seen a new phase in the local market’s growth spurt. For the first time in years, Australian bond investors are seeing the names that they desire, rather than the ones they merely tolerate, show an interest in the corporate bond market.

In the coming weeks, investment grade firms Wesfarmers and Woolworths plan to update debt investors. The meetings are not officially deal related but they are likely to be a signal of intention to issue notes at some stage in the future.

Wesfarmers recent experiences in the local bond market have been colourful. An unpopular decision not to redeem the Coles bonds in 2007 following the takeover got a number of large fund managers offside. The company however has since maintained a regular dialogue with investors and once the apologies were made, talk shifted to its diversified revenue sources, the progress of the Coles turnaround, and of course bond pricing.

Woolworths has always been at the top of bond fund managers’ shopping lists. A well managed, defensive and dominant household name, it meets all the criteria for a good fixed income investment. Unfortunately, a local bond issue hasn’t always been top of Woolworths’ priority list. Rumours are that the retailer was all set to go on a domestic bond issue earlier in the year but the terms of an Asian syndicated loan proved too attractive.

Flush with cash from the pockets of Australian consumers, in addition to its drawn funds from Asian lenders, Woolworths appeared uninterested in a bond deal, until now. The ‘A-‘ rated company, which has again reaffirmed a commitment to its credit rating, should see its bonds fly off the shelf should it choose to issue.

Other companies are also showing interest. With the stress of earnings season out the way, arranging banks are said to be inundated with requests from treasurers eager to either establish or consolidate their presence in the bond market. Mirvac and CFS have already held bondholder presentations while Stockland has explicitly stated its intentions to access the local bond market.

For all its potential however, the Australian corporate bond market does have its limitations.

Westfield is another name, whose paper local fundies would love to own. The property trust has always favoured offshore bond deals and this week’s dual tranche USD issue vindicated their faith in the depth of the US 144a market. Within 24 hours of releasing its annual earnings, it was able to launch and execute a $US2 billion bond offer of six and 10 year duration, inside of price guidance. Such a quick fire debt raising is unlikely to have been achievable in the local format.

The domestic corporate bond market might be some way off supporting Westfield’s high expectations, but the new found confidence in the local market, coupled with a desire from corporations to demonstrate access to alternative debt funding, bodes well for Australia’s corporate bond industry.