Sydney Airport the latest domino to fall as Australia’s corporate market proves its mettle

Source: KangaNews 19 April 2024

The issuer had only issued domestically on two previous occasions since the financial crisis, printing A$175 million of five-year bonds in 2010 and a A$100 million seven-year deal the following year. As recently as April last year – in the wake of a €1 billion (US$1.1 billion) 10-year print in the euro market – Michael Momdjian, Sydney Airport’s general manager, treasury, tax and insurance, reaffirmed the issuer’s doubts about the availability of reliable volume at tenor domestically.

He told KangaNews: “While a domestic bond is always in the mix, we had greater confidence about execution risk in printing sizeable – the equivalent of €500 million or more – 10-plus year tenor bonds in offshore markets, particularly noting conditions across all bond markets have been somewhat volatile over the past 6-12 months.”

Demand for Australian dollar corporate paper has been at an all-time high in 2024, and while Momdjian is cautious about predicting an ongoing higher baseline bid he now says the Australian dollar option is likely to play a bigger role in Sydney Airport’s funding strategy.

With the minimisation of execution risk being one of our funding objectives, we have been sitting on the sidelines waiting for the local corporate market to function effectively at our preferred tenors.

Less positive conditions domestically would have seen us tilt towards the deeper and more liquid bond markets, such as the euro and US 144A bond markets, or those typically better insulated from periods of heightened market volatility such as the US private placement market. This being said, the relative quantum of our funding needs allows us to consider benchmark-sized issuance across multiple markets in any given year.

I don’t want to predict domestic market dynamics or reliability. But as the relative size of our balance sheet requires us to establish and maintain a presence across a number of debt capital markets, the local market will naturally play a bigger role in our funding strategy going forward.

While our funding mix is relatively balanced across offshore markets, the local market also offers significant opportunity for diversification while preserving counterparty risk, with no cross-currency or interest-rate swaps required.

The lack of sizable 10-year tenor deals from triple-B issuers in recent years has held us back from our domestic market return. While 10-year tenor was certainly not a non-negotiable, especially as we also have a gap in our debt maturity profile seven years from now, it is worth noting that all of our bonds issued over the last decade were 10 years or greater in tenor given our focus on lengthening our average maturity where it is cost effective to do so.

Four 10-year tenor triple-B band or airport transactions over the last year provided us with sufficient confidence to announce a benchmark-sized deal with a view to upsize subject to investor demand.

We, and our investors, had Brisbane Airport, Perth Airport and Adelaide Airport transactions to comp against – all relatively fresh – and even Auckland Airport’s trade from late 2023.

We were pleased with where we landed in pricing, which not only reflected a difference in credit rating and relative credit strength as the gateway airport to Australia, but a possible scarcity element having not issued in the domestic bond market for over a decade.

We were keen to create a wave of momentum leading up to launch, particularly following our experience in Europe last year where we secured more than €900 million of IOIs. This approach again worked to our advantage, with more than A$1.7 billion of IOIs received for our recent deal. As this was our first domestic benchmark for more than a decade, the IOI process provided additional comfort about achievable volume and execution more broadly.

In more challenging conditions, it may be more prudent to shorten the execution timeline and skip straight to launch, particularly for smaller transactions at more digestible deal sizes. This is something we observed as we monitored Adelaide Airport’s return to the domestic market only a few days prior.

We were explicit in our IOI announcement that we would consider early support and price leadership in the allocation process, with this generating additional momentum.

This not only saw Asian investors carry the torch in the early stages of our deal, but also some domestic accounts that have been monitoring our credit for quite some time and were eagerly awaiting our return. True to our word, we allocated a relatively sizable 27 per cent to Asian accounts while also skewing allocations to the domestic accounts that distinguished themselves from those that followed.

We currently have A$1.7 billion of undrawn bank debt maturing in 2027, sufficient to cover an A$1 billion equivalent euro bond maturity and investment planned over 2024. While this provides significant funding flexibility, we remain focused on maintaining a well spread and well diversified debt maturity profile while constantly seeking out ways to lengthen our average maturity where cost effective.

While noting that our Australian dollar deal addressed a portion of our funding needs over 2024, we have the opportunity to consider further long-dated bond issuance to address any residual funding needs. This would likely be in offshore markets, having just made our domestic market return.