Market reopening corporate hybrid welcomed by diversity-hungry investors
- Thursday, 26 March 2015
Deal sources insist the latest issuer to place a corporate hybrid transaction in the Australian market attracted a groundswell of support to the deal from both retail and wholesale investors. The manner of deal execution lends some support to this claim – including the volume of bids and the speed at which they emerged.
Crown Resorts (Crown) announced on March 20 that it had closed the bookbuild for its subordinated notes II issue – four days ahead of schedule. The transaction is Crown's second corporate hybrid issued in the local market following a A$532 million (US$415.1 million) deal launched in September 2012. It is also the first corporate hybrid priced in Australia since March 2013.
Interest capped
Even in a relatively short time frame, demand exceeded A$875 million, Joe Hunt, director, debt capital markets at UBS in Sydney – a joint structuring adviser on the transaction with Deutsche Bank – tells KangaNews. This enabled Crown to increase volume to A$600 million from an indicative A$400 million.
Official deal distribution data is not being made available but Hunt reveals placement includes a wholesale element. He says: "The book was predominantly comprised of domestic retail brokers, but as the security was gross pay we also saw incremental demand from domestic institutional and Asian investors."
Ken Barton, Crown's Melbourne-based chief financial officer, adds that it was important for Asian accounts to be given sufficient time to look at the transaction during the bookbuild, particularly given Crown's recent roadshow in the region. But this demand had to be balanced with managing expectations around final deal size. "We felt it was important to send a message to the market that we had received very robust demand – more than we were able to take," Barton tells KangaNews.
As a market reopening deal, Crown's hybrid stood a good chance of attracting solid support from investors, argues UBS's Sydney-based managing director and co-head of capital markets, Barry Sharkey. "For us it was important to design the process in such a way that the deal could be closed early if it had the right amount of momentum. As it turned out, that's exactly what happened."
Sharkey points out that corporate capacity for hybrid capital tends to be much lower than that of banks. And he adds: "There is no question that this transaction could have been larger. However, Crown showed very good discipline in sizing the deal to meet its specific capital-management objectives."
Domestic hybrid selection
In addition to its outstanding corporate hybrid, Crown has a total of A$725 million of wholesale senior debt outstanding. Owing to a large development pipeline its balance sheet has recently increased to A$2.7 billion of gross debt, suggesting that the more favourable treatment of equity credit via hybrid issuance was the most appropriate market for Crown on this occasion.
Barton says the path to execution was straightforward and that regular engagement with investors across markets over time is paying dividends. "It is helpful, for instance in documentation terms, that Crown has previously gone through the process of executing a hybrid transaction. We have also tapped the domestic market in wholesale format. Regular visits to debt markets help investors to better understand our business direction and funding strategy."
Australia is not the only potential source of hybrid capital for local corporates. For instance, Origin Energy placed a €1 billion (US$1.1 billion) deal in September last year. However, the nature of the projects for which Crown's deal proceeds are being used drove the issuer to tap the local market.
Barton explains: "We have been focusing on our development pipeline, which is predominantly around our Australian portfolio, as part of this process. With major development projects in Sydney, Melbourne and Perth we have a reasonable amount of funding need and this is more naturally suited to the Australian dollar market."
Pricing favourable
Crown set its hybrid margin at 400 basis points over bank bills – the tight end of an indicative 400-420 basis point range. It has been more than two years since a wave of corporate hybrid supply into the domestic market broke, and therefore direct pricing comps all have only a relatively short period remaining to first call date.
Hunt explains: "Given a lack of supply and resulting rarity value we saw the corporate hybrid deals that were launched in 2012 trading in the high 200s to low 300s over bank bills. It is important to note, though, that these deals have three or four years less to run than the new Crown security."
There was also a consideration of recent bank supply, particularly the last data point for the market, Hunt continues. "National Australia Bank priced its seven-year non-call five tier-one transaction at 350 basis points over bank bills. Crown is a different type of security but for an extra year of tenor and an implied triple-B issuer rating we saw a margin of 400 basis points over bank bills as offering an adequate premium."
The market tends to price corporates more tightly than bank issuance, Sharkey explains. "The corporate hybrid asset class has traded tighter, partly because of scarcity value but also because the security structures are slightly more debt-like in the sense that they are cumulative and don't contain non-viability clauses."
