Missed Opportunities in the Australian Corporate Bond Middle Market
Generally, primary issuance in the bond market is significantly larger than the equities market, but in Australia it is the reverse. This is especially so for the middle market in Australia which underutilises corporate and project bonds in funding their capital stack.
The graphs below show the comparative global primary issuance of bonds and equity. The bond issuance of US$27.3 trillion in 2020 dwarfs the US$827 billion in equity raised in the same year.
Source:World Federation of Exchanges, SIFMA Estimates Source: Bank of International Settlements (BIS), SIFMA Estimates.
This is an opportunity lost for Australian issuers to access funding from this market.
Some of the reasons for the lack of utilisation of funding via bond issuance include a lack of knowledge or experience by middle market companies, familiarity with and preference for mezzanine debt, the paucity of demand by institutional investors for high-yield bonds and the unfamiliarity of the middle market with the costs and benefits of credit ratings from tier one agencies.
Some of the reasons for the lack of utilisation of funding via bond issuance include a lack of knowledge or experience by middle market companies, familiarity with and preference for mezzanine debt, the paucity of demand by institutional investors for high-yield bonds and the unfamiliarity of the middle market with the costs and benefits of credit ratings from tier one agencies.
BlueMount’s Value Proposition
BlueMount Capital provides corporate clients with a seamless bond issuance service, bringing together and managing all the service providers required to make the process smooth and efficient. Our clients are assigned a designated Account Manager who liaises closely with them and a designated Project Manager who coordinates and manages the process.
We work closely with fellow professional firms, including structuring agents, issuance platform, trustees, custodians, listing agents, paying agents, lawyers, and other professional service providers. We can also arrange a green second opinion, sometimes referred to as a green bond rating, where a green bond is being issued.
We arrange bonds for small issuers (US$20m to US$100m) and for larger issuance of US$100m to US$500m, the latter in international markets from our London and Australian offices.
Bonds as a Financial Instrument
A bond is a debt instrument used by companies and governments to raise money for defined purposes. In essence, the issuer of the bond, whether a corporation or a government is borrowing money from investors to fund operations or specific projects. The lenders are paid interest on the bonds.
Generally, bonds are a subordinated debt and rank behind senior debt provided by banks but rank ahead of shareholders. Bonds may be secured or unsecured, rated by a credit rating agency, or not rated.
Globally, the bond market is significantly larger that the equity markets (i.e. stock exchanges) in terms of funds raised by primary issuance.
Why and when would a company choose a Bond?
A company may choose to raise a funds by way of a bond issuance as part of its overall corporate financing strategy, for example when its traditional bankers will not lend them any more funds, and/or as an alternative to issuing new shares in an equity raising to avoid dilution. In cases where a company wants to finance a new project, it can choose to raise funds by way of a corporate bond or project bond where the bond can be structured to ‘ring fence’ the funding and the risk through a special purpose vehicle issuing the bond, i.e., being the borrower. In such a case, the project’s assets may be suitable as security for the fund raising. In both cases the bond, if suitable, may be arranged as a green bond.
CASE STUDIES
US$200m Green Bond Australia
- Green bond US$200m (revised up from $144m due to demand) for a Project Bond for a natural resources company listed on the Australian Securities Exchange (ASX).
- The Green Bond is part of a capital stack (Senior Debt $190m and Subordinated Senior Debt $50m – $100m). US$ Coupon is 11.65% per annum.
- The funds are to build and commission an alumina processing plant to produce products for LED lighting, and materials for EV batteries. There is a 100% off-take from a large global company.
US $100m Social Housing Bond Australia
- A series of social bond issuance ranging from US$100m to US $200m each for our Australian client.
- It is planned to involve government as a cornerstone through national and state affordable housing institutions to enhance the credit rating of these bonds to investment grade.
- A Medium Term Note Program for up to US $3Billion for Social Housing is planned. As such, each of the series for clients will be through this Social Housing MTN Program.
ABOUT BLUEMOUNT CAPITAL
BlueMount Capital® is a leading capital markets and investment banking group with offices in Sydney, Brisbane, Melbourne, Perth, London, Los Angeles and Beijing.
We are a capital markets and investment banking group with a global network of highly skilled professionals covering every continent.
Our valuable relationships give us the capacity to deliver comprehensive solutions for the most sophisticated business requirements and across all asset classes.
Our directors have extensive experience assisting private and public companies, and sophisticated investors.
Our London and Australian offices originate and manage bond issuance for corporate, green, project and sukuk bonds and other fixed income products.
Our Capital Solutions include:
- Mergers, Acquisitions and Divestments
- Equity and Debt Capital Raisings
- Private Placements for Pre-IPO, Listed and Unlisted Companies
- ASX and overseas Stock Exchange Listings
- Fund Management
For more information on bonds or any of our other products, please contact Len McDowall