Wednesday 19 September 2012 by FIIG Research Legacy

Silver Chef 8.5% Senior Notes - Case study for investors

FIIG Securities successfully arranged a $30m senior unsecured notes offering for Silver Chef Limited (ASX:SIV)

The issue was launched on 30 August 2012 to professional and sophisticated investors only, with the order book oversubscribed and closed within 24 hours of launch. The notes first traded last Friday 14 September, settling yesterday at around 101 (a spread of 465bps to the 6-year swap curve) with a little over 4.5% of the issue changing hands in the secondary market. This article provides some background on the why Silver Chef issued the notes and benefits for investors in participating in the transaction.


Silver Chef is one of many small to medium sized ASX listed corporates working with FIIG Securities seeking alternative debt funding sources, but was the first one to undertake this type of debt raising. So why are companies looking for alternative funding sources away from the traditional bank lenders? The answer lies in what is happening in the global banking landscape.

Historically, Australian companies sourced their debt funding from banks, either through sole lending arrangements with an individual bank or larger syndicated facilities with multiple bank participants. However the historical paradigm is shifting. Why? The new international regulatory framework for banks, known as Basel III, has put in place a comprehensive set of reform measures to strengthen the regulation and risk management of the global banking sector. The aim of Basel III is to improve the sector's ability to absorb future shocks arising from financial and/or economic stress – in short, to help try and avoid a subsequent GFC. As a result, the way banks have operated in the past will need to change and adapt to the new framework.

There are many elements to Basel III, but one important change is the way regulations have changed the economics of bank debt facilities, especially for ones with longer tenors. The new rules prescribe that more capital is required to be set aside by the lending banks against loans to increase the level of shock absorption within each loan and better match assets and liabilities on a banks’ balance sheet. The impact of banks having to set aside more capital is being felt in multiple ways by Australian borrowers. As a general rule, bank loans are becoming more expensive, debt maturities are being reduced and the quantum of debt that any one bank is prepared to lend is declining. These actions are all designed to compensate banks for the additional capital requirements of Basel III. However the resultant short term nature of debt facilities is a real concern for local management teams. The inability to secure longer term funding, means that corporate borrowers are exposed to significantly more market risk by having to constantly refinance bank loans.

Silver Chef was not immune to these forces and accessed the wholesale $A debt markets to:

  • Mitigate the inherent risk of short term debt funding within its capital structure
  • Diversify funding sources and lengthen its debt maturity profile

Silver Chef CEO Charles Gregory stated that while maintaining a very strong relationship with its bank lender, it was prudent and diligent for Silver Chef to pursue other options when considering its capital requirements. “This offering should send a signal to banks that small corporations are not beholden to them for debt funding”, said Gregory in a recent article in the Weekend Australian, “as the 6-year maturity provided by the notes issue is not readily available in the bank market”.

The issue structure – more detail

In response to the inability to secure longer term funding, FIIG Securities has developed a wholesale-only $A senior unsecured bond offering as an alternative funding source for small to medium ASX listed corporations. The senior unsecured bond offering, which is traded in the OTC market and is similar in structure to those issued by larger corporates in offshore markets, has helped Silver Chef establish a debt capital markets presence and provided investors the ability to become a primary lender to the company. 

The structure of the senior unsecured note offering was also a differentiating factor in the context of recent new issues to market and was well received by investors. In his weekly article in the Australian Financial Review, Aquasia’s credit strategist Mark Bayley noted that “This deal is a first for the Australian market and hopefully we’ll see more of this good, old-fashioned, plain vanilla bond issuance, with proper bondholder protection”.

Despite not having a formal credit rating, bondholders benefit from an incurrence based covenant package that is common for senior unsecured bonds in offshore credit markets. The covenants offer investor protections in three primary areas:

  1. Negative Pledge – bondholders enjoy the benefit of a negative pledge limiting Silver Chef’s ability to pledge its assets as security
  2. Limitation on Debt Incurrence – the covenant limits the total amount of secured, unsecured and subordinated debt that the company may incur over the life of the bond
  3. Restricted Payments to Equity – the covenant limits prohibits any share buyback or capital management actions and limits the level of dividends that the company is allowed to pay shareholders

Bondholders also benefit from a change of control clause and a cross default to existing senior debt covenants. The Information Memorandum (click here to access the document) contains the full terms and conditions.

There is inherent value in the senior nature and guarantee structure in place for the bonds, as it means bondholders rank alongside regular creditors versus being structurally subordinated in a wind-up. The senior bank lender receives a priority payment only in the event of a wind-up, but all ongoing obligations for payment of coupons and principal are pari passu with bondholders and will be an Event of Default if not paid. These structural benefits for investors contrast some of the “issuer-friendly” structures that are currently being sold in the ASX listed hybrid market.

Why are corporate borrowers crucial in every fixed income portfolio?

Diversification, diversification, diversification.

The Australian fixed income market is dominated by debt issued by financial institutions. Diversification by product structure and industry type is a key premise for constructing your fixed income portfolio. New senior debt corporate issues provide investors with excellent structural and sector diversification benefits.

The Silver Chef wholesale bond offering is a DirectBond, paying a fixed rate of return of 8.5% for six years semi-annually and available in minimum parcel sizes of $50,000. Investors reviewing the current balance of their fixed income portfolio should consider the Silver Chef senior bond, providing a high rate of return and diversity away from the financial sector.

For more information on Silver Chef, please see the 2012 Annual Report or access their website at

A full FIIG Research report on the Silver Chef senior unsecured notes offering is available to wholesale investors on request.

To see if you qualify as a wholesale investor, please read "Are you a retail or a wholesale client?"