Market participants say US appetite for Australian-origin high-yield and term loan B (TLB) debt product remains in evidence. In fact, they say the drop-off in issuance since 2012 has largely been caused by reduced debt requirement from the resources sector and the concurrent increase in availability of alternative funding sources.
Participants at a seminar hosted in Sydney by Ashurst on October 7 also heard that updated lending guidance in the US market means nonbank lenders are capturing a greater share of the leveraged-loans space.
Data reveal that more than US$15 billion of TLB and close to US$5 billion of high-yield paper was issued by Australian-origin corporates into the US market in 2012 and 2013 (see chart below). However, volumes have fallen and in 2015 to date just Fortescue Metals Group, Opic Chemicals, DTZ and Leighton Services have accessed the high-yield or TLB markets.
Peter Graf, Australian head of US leveraged finance at Credit Suisse in Sydney, says 2012 to 2014 offered good windows for taking Australian-origin issuers to these markets, which is why this period saw more than 20 first-time issuers successfully execute transactions.
However, since this time other issuance avenues have begun to open. “The Australian capital market and Asian bank market have become increasingly competitive,” Graf explains. “Australian issuers still have the option to access the US market although they need to take careful account of windows where it may become either more or less attractive to issue.”
However, the current macroeconomic backdrop, which is making all high-yield investors in particular more risk-averse, may have an additional volume-supressing effect, acknowledges Anna-Marie Slot, partner at Ashurst in Hong Kong.
“The macroeconomic backdrop is expected to have a more significant impact on the US high-yield market than the leveraged-loan market,” she reveals. “The high-yield market will still be an option for Australian issuers, though. The most likely impact is that the number of issuance windows which will offer competitive pricing will reduce.”
Leveraged-market update
According to Ashurst data, after having been on an upward trajectory from 2009-2013, average new US leveraged-loan volume has progressively fallen since 2013 to just more than US$200 billion so far this year. This fall coincides with the implementation of leveraged-lending guidelines which were released in the US by the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation.
The lending guidelines focus on companies’ ability to reduce leverage. This is managed either by discouraging bank loans to companies with a debt-to-EBITDA ratio of more than six times or by requiring borrowers to establish a security to repay either their senior-secured or 50 per cent of their total debt within a period of 5-7 years.
Nonbank lenders
Kim Desmarais, partner at Ashurst in New York, notes the change in the lending landscape spurred by these regulations. “Nonbank institutions are not subject to the same regulatory constraints as banks, and the new guidelines have therefore opened up a window for nonbank institutions to gain an advantage, particularly in the TLB market,” she says. “In response, the banks may be concerned with losing market share.”
Indeed, according to information provided by Ashurst at the Sydney seminar, in the first quarter of 2015 three nonbank institutions – Macquarie Group, Nomura and Jefferies – featured in the top-10 lenders by deal volume in the leveraged buyout league tables. In the first quarter of 2014 there was only one nonbank in the top-10.
The regulatory backdrop is expected to continue to shape sub-investment-grade issuance activity through the rest of 2015 as borrowers and lenders seek to understand and adjust to the leveraged-lending guidance. “The optimistic expectation is that leveraged-loan activity will pick up as interest rates remain low by historical standards,” Desmarais concludes.
Meanwhile, the future in the unleveraged space may not be as sluggish as those with an eye to rising interest rates might foresee. “The default rate for high yield is not as high as people might expect,” comments Slot. “Default rates are naturally higher at the triple-C level but as you move up the ratings structure default rates are surprisingly low for something which is called ‘high-yield’”.
US high-yield investors have become increasingly comfortable with Australian issuance – despite its inextricable links to the resources sector – Graf concludes. But he adds a note of caution: “In tougher market conditions the credit story needs to be simple and well explained, compared with when market conditions were better and more challenging credits were able to access markets.”
This article was first published by KangaNews on 9 October 2015 on www.kanganews.com
