Goldman Says Euro Rivaling Dollar for Issuers: Australia Credit

Jun 15, 2014 9:47 pm ET

June 16 (Bloomberg) -- Goldman Sachs Group Inc. says selling debt in euros is attractive for Australian borrowers, who are flocking to Europe’s bond market at the second-fastest pace on record amid the cheapest swap costs in six years.

Companies including Macquarie Group Ltd., Brambles Ltd. and the four biggest mortgage lenders have issued 8.85 billion euros ($12 billion) of unsecuritized bonds in Europe so far in 2014, the most for any comparable period apart from 2012, data compiled by Bloomberg show. Euro borrowings are climbing toward 40 percent of offshore offerings by Australian issuers, having dropped to less than 20 percent in the previous five years, Goldman Sachs said.

“The current demand in Europe shows an ongoing development of the depth and sophistication of the European markets to rival the U.S. markets,” Andrew Edwards-Parton, a Sydney-based executive director in the financing group at Goldman Sachs, said in an e-mail interview. “We’re currently seeing the market in Europe offer amongst the most attractive pricing for a majority of investment grade rated borrowers.”

Europe has gained market share at the expense of the U.S. with Australian sales in the world’s biggest economy climbing 2 percent to $23 billion as those in euros gained 20 percent, data compiled by Bloomberg show. A wave of liquidity from central banks in Europe, the U.S. and Japan has helped narrow credit spreads while the five-year Australian dollar-euro basis swap, a measure of the cost of shifting funds, dropped as low as 24 basis points on April 22, the least since October 2008.

Largest Seller

The euro market is particularly enticing for borrowers with credit ratings in the A and BBB categories, according to Edwards-Parton, referring to the six lowest investment grades. While European private placement is still a fraction of public sales, interest is growing and the area will develop as a viable option for Australian borrowers, he said.

Commonwealth Bank of Australia has been the largest public seller this year with 1.99 billion euros of paper, followed by National Australia Bank Ltd., Westpac Banking Corp. and Australia & New Zealand Banking Group Ltd. Macquarie, the nation’s largest investment bank, priced 500 million euros of notes in April, while Sydney-based Brambles, the world’s biggest supplier of wooden pallets, was the most recent to come to market, raising 500 million euros this month.

Brambles, which previously sold euro-denominated bonds in 2011, has funding requirements in both the European and U.S. currencies, according to Chief Financial Officer Zlatko Todorcevski. The company plans to use the proceeds from this month’s issuance to pay back both existing debt in euros and to fund maturing debt from a U.S. private placement, he said in an interview in Sydney on June 13.

Strong Demand

“We do look at the Aussie market and we looked at the U.S. market, but the European overall was the better one for us,” Todorcevski said. “There’s a hell of a lot of demand there as well at the moment, so I think timing-wise it worked out extremely well for us.”

Sydney Airport and SPI Electricity & Gas Australia Holdings Pty Ltd. have also raised funding in euros this year.

Increased issuance of Kangaroo bonds, notes sold in Australia by foreign borrowers, has helped to drive down swap costs for Australian issuers looking to move funds in the opposite direction. Borrowers based in the euro area have sold A$9 billion ($8.5 billion) of Kangaroo bonds since Dec. 31, up 77 percent from the first half of last year and poised for the largest January to June volume since 2011.

Yield Premium

The five-year euro-Australian dollar basis swap was at 32.4 as of 5 p.m. June 13 in Sydney, compared with 37.4 on Dec. 31 and 59.4 at the end of 2012. The Aussie dollar bought 69.38 euro cents.

The average yield premium over the swap rate for company bonds sold in Europe fell to 77 basis points on June 12, near the 6 1/2-year low of 74 basis points reached in May, according to Bank of America Merrill Lynch data. The gauge has fallen 17 basis points this year compared to a decline of 11 for a comparable Australian measure and 17 for a U.S. index.

Europe is also proving a welcoming market for Australian asset-backed securities, with Macquarie this month selling euro- denominated bonds supported by automotive and equipment leases for the first time since 2008. It priced 225 million euros of notes at a yield 43 basis points above the European interbank offered rate as part of a dual-currency transaction that also included Australian-dollar securities.

“There’s a lot of cash in the system in the euro market and there’s a lot of demand for paper,” Kevin Lee, the Sydney- based division director in debt origination and structuring at Macquarie, which helped arrange the transaction, said by phone June 6. “Investors in Europe are keen for diversification.”