FIIG Securities has originated more than $1 billion in bonds for Australian and New Zealand companies since 2012 and over that time we have learned a lot about why corporates issue a bond instead of borrowing more from the bank market
In our experience, the top reason that companies go down this path is their strong desire to cut their financing risk caused by dependence on one lender, one debt market and to increase their funding flexibility.
These issuers are not desperate for capital, far from it they have strong businesses that are attractive to any lender or investor.
But for them, the bond market is simply the best option for debt diversification and risk mitigation. Ultimately, this approach puts management teams with the operating flexibility to manage economic volatility and the business cycle.
We are always up against strong competition when we get involved in the financing process for a company because inevitably we are being compared with banks and, often, other debt capital markets funding as well.
But FIIG is uniquely able to provide an additional tranche of long-term capital that is complementary to both bank debt and equity, providing greater operating flexibility and stability to the capital structure.
FIIG has arranged debt funding from $30m up to $100m, with a range of funding structures enabling corporates to optimise their capital structure, including fixed and floating rate debt and dual tranche offerings i.e. 4 year and 6 year maturities.
When you consider the pressure that companies that only borrow from the bank market can find themselves under during a credit crunch, it is not surprising that prudent managers are seeking to plan ahead and diversify their debt.
Throughout my working life, financial crises have been a regular event not an anomaly. You had the 1987 stockmarket crash, the early 1990s recession, the Asian crisis, the Dot-com bubble, and of course, the GFC, among others.
So when is the next one coming? Hard to predict but volatility is normal part of the business cycle. That’s why it is gratifying that mid-cap corporations are now seeking to prepare for crises and looking to the capital funding strategies of larger companies for guidance.
If you want to see best practice in funding the best place to look is to rated corporations that have all options open to them.
They have diversified sources of funding from banks, diversified sources of funding from debt capital markets and diversified funding from equity markets.
Companies that ignore the bond markets and just rely on short-term bank funding are going to be left funding their long-term operations with very short term debt which is a dangerous mix.
For larger corporations long-term funding is typically undertaken by bond markets, which offer significantly longer tenor than banks, generally for greater than five years compared to less than three years for the banks. A spread of debt maturities delivers the operating flexibility that enables corporates to manage through the business cycle.
Most of the issuers who have diversified their funding through FIIG have done so without having a credit rating.
The exceptions have been Adani Abbott Point Terminal (Adani) and New Zealand-based insurer, CBL Insurance Group, which both carry investment-grade ratings.
This is a major change given that until 2012 when we originated our first issue for equipment financier Silver Chef, the bond market was only open to large rated corporates.
One thing that our issuers have had in common is that despite not being rated, they are all quality companies with proven business models.
I describe the general credit profile of our borrower base as ‘near prime’.
We are not in the business of assigning ratings, but what we look for are middle-market issuers – with proven earnings track records, strong credit metrics, a degree of scale and diversity.
Rather than feeling threatened, the banks have been receptive to their middle market clients diversifying their funding with the addition of an unrated bond because it often works in the bank’s interest.
As a result, all the majors and a number of regional banks have provided credit approval for companies to issue bonds.
We see growing recognition by the banks that they can retain capacity to fund liquidity and transactional services, while capturing the bulk of the ‘relationship wallet’ through not having to introduce additional banks.
Meanwhile, the company gets to significantly reduce its borrowing risk so everybody wins.
To learn more please visit www.fiig.com.au/DCM.