Australasia's premier brewing company recently raised $300 million in seven- and 12-year bonds at a touch above its three-year bank debt benchmark. FinanceAsia talks to Lion Nathan's treasurer Alison Gerry about the deal and the company's bond strategy.
At the end of May you raised $300 million in the US private placement market. Was this more than you expected and why was the deal so successful?
We went out expecting to raise $150 million but we increased it when the demand was so strong. It was an opportunistic deal built on the hunger for Australasian credits, particularly credits that are easy to understand. It was a great way for us to extend the maturity of our debt profile and increase our investor base. We had no specific requirements for the cash but when we heard that we could move our average maturity from three years to five years without increasing our interest rate costs it was a no brainer.
How did the two tranches price?
There was a seven-year tranche and a 12-year tranche and both came in around our existing benchmark for three-year bank debt which is 50 basis points. The 12-year money totalled $200 million and was issued by our Australian financing vehicle. It was issued at 115bp over US treasuries and swapped back into Aussie dollars at 57bp. The seven-year tranche totalled $100 million and was issued by our New Zealand finance company. It priced at 95bp over treasuries and swapped back into NZ dollars at 56.5bp. To get this sort of pricing on funds with no refinancing risk for 12 years was just extraordinary.
Your pricing was obviously enhanced by the swap rates?
Definitely. The yield curves are certainly working in our favour. We have a delayed start and don't need the funds until August and this gives us a further 10bp pick up because of where the Aussie swap spreads are trading.
How important was it for you to increase your maturity profile and how does this affect your credit rating?
To increase from a three-year average to five years for no additional cost was obviously very attractive. This has strengthened our short-term rating but has had little impact on our longer-term ratings. We are rated Baa2 by Moody's and BBB- by Standard and Poor's. The outlook is stable because of our strong brewing earnings in Australia and New Zealand. There has been a lot more volatility in wine company earnings so the rating agencies place a lot of importance on the fact that only 10% of our assets are in the wine industry.
Will you come back to the bond markets in the near future?
You will see us there again but maybe not for a while. The last placement we did was February 2000 and that deal helped us to build a presence in the offshore market when we had a good story to tell. The next time we come to market will be when we have a specific requirement. We don't have any major acquisitions on the horizon but if they do appear we will look at the debt markets as a funding option. The other reason that might see us return is if the pricing remains too good to resist.
Do you have any plans for the Australian bond markets?
This market is inaccessible to us. As a triple-B credit it is hard to get the same volume and pricing that can be achieved offshore. In the domestic markets we could probably issue a maximum of $100 million and it would be priced higher. In the May deal we had one bidder in Australia interested in the seven-year tranche but they were offering a price of 110bp when US investors were offering 57bp. Locally price talk never goes lower than your bottom range regardless of the demand. But in the US investors are willing to go lower if the demand is there. They tend to be a lot more flexible and have a much stronger need to find a home for their funds which is why we eventually got orders for $605 million. Each investor in our program told us that they had billions to place this year and were looking for quality credits.
Has there been any secondary trading of your paper?
No because it was bought by buy and hold investors. My guess is that there won't be any secondary market for the first six to 12 months.
How did the May 2003 deal compare to your February 2000 placement?
The 2000 paper had an average life of 10-years with a spread of 190bp over 10-year treasuries. That compares to the 115bp pricing against 10-year treasuries that we achieved on the 12-year paper in the most recent transaction. Our spreads have obviously tightened. When we did the placement in 2000 we were rated BB+ by S&P so our rating has improved since.
How has the deal changed the make-up of your balance sheet?
We now have 50% of our debt funded through the banks and 50% through the private placement market. We probably won't increase it from this level because private placements are fully drawn facilities and don't offer the same flexibility as bank debt. Bank facilities can be left undrawn or cancelled with two days notice - they are a much more flexible instrument.
What cost of funding do you typically aim for and is this a motivating factor when tapping the markets?
Cost of funding is not our main motivation because there is always a trade off between tenor and the cost of buying that tenor - even though our recent raising contradicts this truism. We aim to get 50bp for three-year money and that is why the private placement fitted nicely with our benchmark target rate. We admit that our bank debt comes cheaper than our rating would suggest. We should probably be paying more than 50bp.
Where do you think interest rates are going and what will happen in the bond markets in coming months?
The low interest rate environment in Australia is great for us and helps us to achieve double-digit earnings growth. But rates have been so low for so long that we are now starting to look at our risks more closely and take out some additional hedges and some option protection. Globally there has been a big bond sell off in the last few days so it will be interesting to see if the bond curve steepens dramatically from here on in.
