Corporate bonds proving a capital idea
BHP Billiton has opted to issue corporate bonds – ahead of bank funding – for the first time in a decade. The move is a reflection of a growing national and international trend.
In the wake of the global financial crisis, banks around the globe have been subjected to greater restrictions and capital adequacy requirements. But for companies looking to raise capital from banks, using them as a source of funding has suddenly become much less attractive.
According to a recent analysis by Ernst and Young, in the six months to June 30 there was a 29 per cent increase in the amount raised by corporate bonds on a global level. In dollar terms, it jumped from $46 billion to $59 billion in the six-month period, and was the largest growth area of capital raising.
Meanwhile, government bonds the world over have lost their appeal since the global financial crisis. For now, blue chip bonds are seen as one of the best investments – providing a decent reward for moderate risk.
Mike Elliott, Ernst and Young's global mining and metals leader, believes that the rise in popularity of corporate bonds can be attributed in part to a growing need for long-term borrowing at better prices than the banks can provide.
"In the post-GFC environment it’s been difficult for the banks to actually lend longer term because of their capital adequacy requirements under Basel III. This means that more capital is required to be put away and therefore the cost of that debt is higher if it’s being provided by banks," he said.
"So when you compare that to mining companies being able to attract global bond investors, particularly rated companies, they’re getting it at a much better pricing and for much longer periods as well."
This global trend can also be seen on a national scale. In 2011, Australian corporate bonds came in at US$5 billion, or 6 per cent of the total global figure. In the first half of 2012, that had jumped to US$9.7 billion, or 16 per cent of the total global figure.
Looking to BHP, at first glance it seems curious that the miner has chosen to move ahead with a bond deal in Australian dollars that is aimed primarily at Australian investors. The majority of its issuances are in US dollars because that’s what most of its contracts are priced in. But it could be an indication that the miner is looking to diversify its funding base.
Mark Mitchell of Kapstream Capital thinks that investor pressure may have played a role in BHP’s decision to issue its first Australian bond deal in a decade.
"They’ve been under a lot of pressure though, investors have been asking for an [Australian] dollar deal for a long time. You could make the argument now that spreads have come in and pricing is probably competitive enough to be able to do a deal here," he said.
Mitchell also thinks that BHP may start building a curve – having multiple parts of the maturity spectrum on the market at any one time – in the Australian market if it believes it to be a worthwhile venture.
Others may soon follow suit. With bank debt becoming a more expensive means of funding, companies will be looking to other avenues of raising capital.
Corporate bonds have long been overlooked in the Australian market as a means of longer term debt at more attractive prices. This no longer looks to be the case.