18/08/2014 - 13:45

Bonds buoyed by stagnant rates

18/08/2014 - 13:45


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Tight equity markets have opened the door to WA companies raising funds in other ways.

Bonds buoyed by stagnant rates
DEALING: Peter Cumins used corporate bonds to fund the acquisition of a group of franchised outlets. Attila Csaszar

After the failure of negotiations with its bank about funding the purchase of a several franchised outlets, Cash Converters International chose a route rarely taken by Perth-based listed companies – a corporate bond.

“Traditional bank lending often has very heavy covenants attached to it, banks are looking for security over assets and a facility where the principal debt is repaid over the course of the loan period,” Cash Converters managing director Peter Cumins told Business News.

“We then started to go down the road of looking at the US bond market and, while the covenants were reasonably light, there was a need to get a credit rating ... and then you have the currency risk and it’s quite an expensive process.”

Mr Cumins said the bond offer it took up, from Australian specialist FIIG, did not have the currency risk because it was backed by Australian investors, and the bank liked it because it was unsecured debt.

The funds have been used to create a company-owned group of 64 Cash Converters stores in Australia, which Mr Cumins said had increased the company’s profit and helped it grow.

The Cash Converters experience is part of change taking place in Perth, where little-used corporate bonds are attracting interest and their equity-linked stable mate – the convertible bond – is being promoted as being more palatable to a risk-averse market.

Tight equity markets and low interest rates are highlighting these funding alternatives, but they still polarise the corporate finance sector, particularly as market conditions for equity raisings improve.

Despite local critics’ claims that many of these funding alternatives are heavily weighted in favour of the yield-hungry investor, industry players say a listed market has emerged for convertible notes in the non-resources space, and these have already been embraced on the east coast by a number of businesses, including NAB, CommBank and Macquarie.

With this structure, notes are issued on to a retail, ASX-traded instrument rather than having one, private counter-party as the note holder.

None of the resources companies has tapped into this so far, but the corporate finance sector is keeping a close eye on it.

“It will be interesting to see whether the more mature players start thinking about listed, tradable convertible notes but that hasn’t yet emerged,” one market watcher said.

“The market is growing strongly and it’s like buying equity, but instead of equity you get a yield.”

Peter Watson, who heads up Goldman Sachs’ Perth office, said there was demand from convertible bond investors looking for opportunities in the resource sector.

“It is not a product that has historically been used as much in Australia as it is overseas,” Mr Watson said.

“Resources sector clients have tended to favour equity, possibly due to the cyclical nature of the industry or where the asset is able to support it, straight debt, because they know they can repay the loan if things go well without having to issue equity.

“Convertible bonds have some very positive elements and in the right circumstances can be a very effective part of a company’s capital structure.”

Resource Capital Funds is cited as the dominant player in Perth’s resources sector funding space.

Relative newcomer FIIG Securities is carving its own niche, with bonds that don’t have a convertible element.

FIIG set up in Perth in 2011 offering corporate bonds backed by Australian institutional investors and high net-worth individuals as an alternative to bank finance.

In the past 18 months the group has raised more than $550 million for companies including Plenary Group, G8 Education and Cash Converters.

FIIG director Simon Lyons said there was a general assumption when you talked about bonds for listed companies that you were referring to convertible bonds that had the disadvantage of dilution.

“A lot of smaller companies, their experience with convertible bonds are that they have a gun against their head, they have no other alternatives ... and the convertible bonds come with claws,” Mr Lyons told Business News.

“That’s not typical of the space we play in, we are a viable alternative to banks ... our style of lending tends to be in a second line to banks which gives them some diversity to their banking business.”

FIIG has been providing commercial bonds for just over 18 months in Australia and done 11 issues in that time.

In Perth, Mr Lyons said he was in discussions with about half a dozen local parties.


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