Corporate bond market witnesses string of new issues in Australia

Australia's corporate bond market for non-financial firms has suddenly taken off with a string of new issues, reviving a market dormant since 2007 as the global squeeze on funding turns once generous banks into misers.

Non-financial firms could raise as much as A$2 billion (Dh5.87bn) in bonds this year, up from zero in 2008, led by property, utilities and resource firms, said analysts.

Three local borrowers have sold A$640 million in just two days and two more are thinking of raising up to about A$400m in bonds in the near future to refinance debt.

"There will be more coming because the domestic bond market does look more attractive compared with alternatives," said Michael Bush, head of credit research at National Australia Bank (NAB).

In real estate alone, a sector particularly out of favour with lenders since the financial crisis began, just under A$2bn of bonds are maturing between now and November 2010, shows National Australia Bank data.

Australia's corporate debt market has only seen five new issues from non-financial firms since 2007, all of which took place this year.

Indeed, bond issues from Australian non-financial borrowers are rare anyhow. They make up just 12 per cent of total outstanding bond issuance, data from the central bank shows.

Such bond issuance was modest in the past because banks were aggressive lenders, analysts say. That is no longer the case.

Banks are now reluctant to lend while they clean up balance sheets shredded by the global credit crisis.

At the same time, investors are more confident of putting their capital at risk now that the worst of the global crisis appears to be over.

An added driver of the new issuance is that banks are putting pressure on corporate clients to refinance their loans elsewhere.

"Capital rationing (by lenders) is forcing companies to seek alternative funding sources," said NAB's Bush.

Construction firm Leighton Holdings, one of the borrowers that raised A$230 million in bonds this week, opted to return to the local market after an absence of more than 10 years to replace loans.

"Our rationale is to diversify away from our existing funding reliance on bank debt," said Leighton spokesman Justin Grogan.

As of December, Leighton had A$1.6bn of debt of which A$825m was in bank loans.

Real estate firms Dexus Property Trust and Australian Prime Property Fund Retail, a fund managed by constructor Lend Lease, have also sold bonds this week.

Stock market operator ASX Ltd said in June it was planning a debt issue and the Australian unit of Swiss cement maker Holcim met with bond investors this month, leading to speculation it wanted to refinance debt maturing in August.

Some analysts say the shift to bond issuance reflects a trend seen in Japan after land prices there slumped in the early 1990s leaving huge piles of bad loans on bank balance sheets.

"Australian corporates are now finding themselves in a situation that is similar to that faced by Japanese corporates for a decade or more now," said Phil Bayley, Principal at consultancy firm ADCM Services.

During that time, Japanese firms were forced to source funding in the local bond market as banks rationed their capital to tackle a mountain of impaired loans on their balance sheets.

As a result, many learned not to rely on banks.

"A revival of true corporate bond issuance in the domestic market is indeed likely as our banks deal with rising bad debts and increasing funding costs and capital requirements," said Bayley.

As credit and equity markets stabilise around the world, some anticipate local companies will take advantage of a natural home bias to make their debut or return to the local bond market instead of selling bonds in Europe or the United States.

"There is a clear appetite for domestic non-bank paper," said Paul Dowling, Principal Analyst at Sydney-based banking research firm East & Partners.

"Investors here are now starting to open up their wallets."

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