NBN Co’s group treasurer Fiona Trigona was in London this month as she closed out what is likely to be Europe’s biggest corporate bond issues for some time.
Just days out from a banking crisis that sent shockwaves through global markets, Trigona and her banking team managed to scoop $2.1bn from investors across two bonds. But she admits it would have been a very different story had they waited a few more days given problems at California’s Silicon Valley Bank quickly bubbling to the surface. By the end of the week starting March 6 funding markets were starting to choke up.
“If we didn’t go that week – on that Monday – we wouldn’t have been able to go from that point on,” recalls NBN’s Trigona.
“We were in London to close out the (bond) transaction. And we obviously looked at markets on Friday and were confident that we could go ahead,” she tells The Australian.
“A couple of days later, everything started to rumble through the banking sector in the US and then Credit Suisse,” she says.
As the US bank crisis started to cause stresses in money markets it marked the first week since June where there was no corporate bond issuance in US markets and barely any deals in Europe.
“If we were to go to market now, we wouldn’t be able to get two bonds done,” she says. Or even if they tried NBN would be paying a substantial premium to get the bond away.
“Markets can turn very quickly. The key point is always to be ready and take advantage of opportunities when they’re there because they close so quickly,” she says.
After Credit Suisse was bailed out through an emergency $US3.25bn takeover from rival UBS in recent days central banks around the world including the US Federal Reserve and the European Central Bank banded together to make sure US dollar funding lines were still open.
Trigona was speaking as NBN this week reached financial close of its monster green bond that it sold to European investors this month. That means investors still followed through with their funding commitment in recent days even as money markets were in turmoil.
The bond marks the first issue for NBN in Europe and marks one of Australia’s biggest corporate green bond issues. There were four investment banks on the transaction. BNP Paribas, Deutsche Bank, Citi and HSBC. NBN has previously launched several bonds in the US market and has undertaken a $800m Australian green bond.
In the lead up to this month’s issue NBN launched a roadshow to build out its name by meeting more than 100 prospective investors in Paris, across Germany and Amsterdam, and culminating at an event at Australia House in London where some of the UK’s biggest pension funds attended.
Trigona says markets were functioning well at the time. It was also a period when Australian and other global banks were busy refinancing their own lending books. That actually worked in NBN’s favour as it meant investors were overweight with global banking debt right through February and into March and were desperate to diversify their bond exposure.
Going into the week of March 6, Trigona was unsure how the bond was going to be structured or even if it was going to push ahead at all but the feedback from investors was there was certainly enough support for two. And so with markets relatively stable on Friday (March 3), that gave NBN confidence to roll the dice and launch a six year and 10 year bond the next week. NBN was rushed with support meaning that it could deliver sharper pricing into the market. Ultimately the offer was more than two-and-a-half times oversubscribed.
“Some investors said ‘we just want the bonds’. They told us that the story was great. They loved the fact that it was a green bond; and they liked how NBN spread across the whole continent; and they really understood what we do,” she says.
Demand from French and UK investors was strongest. Interestingly the French rushed the six year bond while the London-based buyers wanted the longer-term note.
The green bond delivers a pricing discount tied to the broadband operator improving its energy to his net zero targets by 2050. It is also tied to social obligations around delivery of fixed wireless and satellite in regional areas. NBN is rated “AA” from Fitch and A-1 from Moody’s. It gets a significant benefit from being owned by Canberra, given its losses are running at more than $1bn annually and its debt to assets ratio is pushing 66 per cent.
While it is hard to quantify if green bonds really provide better pricing for issuers, Trigona says by having a green bond offer this was able to bring in a new investor base to NBN – Particularly in Europe where the green bond market is more sophisticated. In this deal NBN saw new fund managers, insurers and even central banks join its registry.
Loco Coco’s
The usually sleepy Australian bank hybrid market got swept up in the selling as investors around the world linked them to the $17bn wipe-out of Credit Suisse’s AT1 bonds as part of its shotgun sale to rival bank UBS.
The Credit Suisse bonds – Additional Tier One – bonds are layered on top of the balance sheet and are designed for bond investors to take the losses and reduce the need for taxpayer funded bailouts. That’s what happened, although equity investors still received some 82 US cents a share.
The wipe-out on the AT1 bonds represents the biggest loss yet for the Europe’s $US275bn
AT1 market, and eclipses the €1.35bn loss suffered by junior bondholders of Spanish lender
Banco Popular nearly six years ago as it was folded into Banco Santander.
Attention moved to Australian bank hybrids, which depending on the issue can qualify for both tier one and tier two capital on a bank balance sheet. Hybrids, as their name suggest are a combination of equity and bonds. They are paid as a yield; have terms to maturity; and rank differently in the case of a bank collapse. By comparison equity investors rank right at the back of the queue behind bondholders and creditors.
Hybrids are extremely popular among Australian investors and self-managed super funds in particular for their predicable income stream regardless of earnings performance.
One of the biggest brokerages specialising in hybrids, Bell Potter sent a reminder to clients on Tuesday that Australian bank regulator APRA “has a far more stringent rules” regarding a bank’s capital requirements than possibly anywhere else globally. With a myriad of differences in their structure.
Since Credit Suisse’s demise “it’s been guilt by association with holders selling into the market without looking at the structure of Australian capital notes (hybrids),” Bell Potter’s head of fixed income Barry Ziegler says.
He points out in contrast to many other bank hybrids, including those issued by Australian banks, Credit Suisse bank hybrids cannot, and do not, convert into equity under the current scenario.
“Australian hybrids are converted into equity before a write-off; unlike the Credit Suisse hybrids that must legally go directly to write-off,” he says. In addition Credit Suisse’s bonds do not permit any partial write-off, which means the only option is for the regulator to fully write-off these securities.
johnstone@theaustralian.com.au
More Coverage
Bigger the better: Batteries giving Origin life after coal
With a brutal bidding war now a distant memory, Origin Energy boss Frank Calabria is opting for an unconventional path in the race to build out clean energy.
ASX faces rising regulatory bill over CHESS woes
The market operator is hoping continued volatility drives revenues in the coming year amid mixed interim earnings results.