Australian firms tap US high-yield market for record sums

Simon Kelly, Nine's CFO, told Bloomberg that the 7.25% interest rate - including swap and hedging costs - was only one consideration. "There are some benefits of this type of financing including certainty of funding and financial flexibility," he said. "I'd have absolutely no hesitation tapping the market again and in fact I've been suggesting it to a number of other executives at other companies."

Strong liquidity in the US leveraged lending market has underpinned a number of large private equity buyouts in recent weeks, such as Michael Dell, Silver Lake and Microsoft's $24.4 billion bid for Dell and the $28 billion Heinz takeover by Warren Buffett's Berkshire Hathaway and 3G Capital.

These transactions tend to be supported by high-yield bonds and non-investment grade loans, and much of the debt will be covenant-lite, limiting creditors' rights in the event that borrowers struggle to make repayments. Thanks to near-zero benchmark interest rates, US leveraged loan volume is $121 billion since the start of the year, compared to $465 billion in 2012 as a whole and $373 billion in 2011.

The US market is institution-led - as opposed to a bank-led structure in Australia - and seen as slightly more aggressive. It offers higher levels of leverage on better terms and greater capacity in areas such as subordinated debt financing where Australia has traditionally been weak. Private equity investors are therefore keen to have the option of sourcing debt financing offshore.

"My sense is that domestic banks have increasing concern that they are being bypassed and folks are finding it more interesting to raise financing in the US where you can get seven-year tenor, bullet amortization, covenant-lite terms and post-foreign exchange hedged interest-rates that are competitive to that in the Australian market," Craig Boyce, a managing director at Bain Capital, told AVCJ last week.

There are two potential hurdles. First, the US high-yield market is only likely to be open to international sponsors engaged in large deals where the target companies have some relevance to US investors (for example, overseas cash flow). Second, there is a currency mismatch, which places a hedging burden on lenders with US dollar-denominated balance sheets supporting Australian dollar deals.

Russell Sinclair, director of leveraged and acquisition finance at Westpac, notes that a 5-7 year cross-currency interest rate swap between Australia and the US is difficult to swap back at competitive low interest rates. "It eats up a lot of credit capital and once that is factored in it might be better to raise the money in Australia," he said.

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• Topics
• Financing
• Australasia
• Structured finance
• Australia
• USA