Infrastructure projects in Australia are back in vogue for investors thanks to their probability of stable and long-term returns. Moreover, infrastructure companies have the best access to cheap debt in years, rating agency Standard & Poor’s said in a note.
The rise in investor appetite has allowed many infrastructure companies to tap a wider range of sources for long-term debt at cheaper rates over the past year, such as the US and Canadian debt markets, although they find it frustratingly difficult to do the same in the domestic bond market, the ratings agency added.
“Over the past few months, many bond offerings have been heavily oversubscribed, far exceeding borrower expectations,” it said, adding that Sydney Airport has been able to tap the European debt capital markets for the first time.
The diversification in debt raising is due to companies’ desire to avoid “an over-reliance on bank loan funding,” S&P said.
Australian banks have dominated funding in this sector, and are very likely to remain the main funding source for infrastructure businesses, “at least for the time being,” according to S&P.
This is largely because it is still difficult for companies with large infrastructure projects and utilities to tap into the local bond market when they want to issue long-term debt due to a “lack of liquidity and depth within Australia’s underdeveloped bond market,” it said.
“Some borrowers, many of which are seeking longer tenors of 7-10 years, describe the local bond market as unreliable and unpredictable for term investing.”
By comparison, Australian companies find it especially attractive to source funds from offshore markets because of the longer-dated debt instruments available and ability for repeat issuance, as well as exposures to a much bigger pool of investors.
Borrowers are unlikely to change their financing patterns overnight because bank loans remain compelling from a cost perspective, despite the typically shorter debt maturities of between three and five years.
Bank loans have become more price-competitive recently, partly because of slower credit growth, the return to Australia of European banks keen to win back business, and more aggressive Japanese banks, according to S&P.
Another appeal is that the documentation of bank loans is largely standardised, which makes transactions easy to conduct, it said.
Nonetheless, banks won’t have the capacity to provide all the funding for Australian infrastructure in the coming years given its size, the agency said in the note.
But for institutional investors to put money into the domestic bond market, widely available and sizable bond offerings by well-regarded companies with strong credit profiles are needed.
Local investors will also need to have some knowledge of investing in bonds – Australian allocation to fixed-interest debt is a very low 10 percent, according to S&P.