As tipped by interest.co.nz earlier this month, national grid operator Transpower has become the latest New Zealand company to tap the United States private placement debt market, raising US$380 million (NZ$466 million) overnight.
Transpower says it has made the placement of senior unsecured notes to 15 US-based institutions comprising the likes of life insurers and pension funds. The money raised is in three tranches with US$232 million having a 10-year maturity, US$78 million a 12-year maturity, and US$70 million a 15-year maturity. They carry coupons, respectively, of 3.43% (1.50% above US 10 year Treasury bonds), 3.58% (1.65% above US 12 year Treasury bonds), and 3.83% (1.90% above US 15 year Treasury bonds).
The deal, arranged by ANZ and JP Morgan, is due to settle on October 14 and Transpower says all proceeds have been swapped back into New Zealand dollars. Transpower says it'll use a substantial chunk of the money raised in the US to fund capital works it has underway.
It's Transpower's second foray into the US private placement market in less than a year after it raised US$150 million, or NZ$203.5 million, through a 12 year placement to 10 US-based institutions last October. That issue is paying investors 3.6%, which was priced 1.1% above 10-year US Treasury bonds.
US debt investors are in an extended period of near zero official interest rates as the US economy continues to struggle amid speculation the US Federal Reserve will launch a third round of Quantitative Easing to devalue the US dollar. This is is encouraging investors to invest in corporate and government debt in non-US dollar currencies with higher interest rates. The US Federal Reserve said this morning it would 'twist' its portfolio of bonds to sell short-term bonds and buy US$400 billion of longer term bonds in an effort to lower long-term interest rates.
For New Zealand companies such as Transpower and Unison, which recently raised US$100 million in the US private placement market, the attraction is cheap, long-term funding.
Earlier this year SkyCity and Powerco raised a combined NZ$420 million in the US private placement market , following in the footsteps of Auckland International Airport, Vector, Transpower and Mighty River Power who raised a combined US$682 million in the market late last year. More major New Zealand companies are tipped to follow suit.
5 Comments
@ Gareth: the terms of the cross currency basis swap are pivotal in determining the real cost of capital as Transpower are the payer of the USD liquidity premiuim.
I hear from NZ institutional sources term liquidity in this swap is hard to come by. - so if you can extract the details it would be informative.
On behalf of Gareth, Stephen, you are right in one respect that trying to deal in that size in those tenors by just picking up the phone you would be hard pressed to get it done and if you did you would be paying through the nose. However these deals are done as a package (i.e. bond plus swap) and have lead times of a couple of months. So the leads, ANZ and JP Morgan, which have access to both sides of the liquidity needed, would have prepositioned themselves and the swap would have been done without needing to hit the market in one lump. These swaps use up a lot of credit - 30 to 50% of the size of the bond - and that is really what ANZ brings to the table, and would charge for. It would be nice to know what the market cross currency swap pricing (usually parcels of US$50m) so that we could estimate what Transpower's net NZ funding cost was, but that pricing is notoriously to get hold of, unless you subscribe to Bloomberg. Regards, Kevin
FYI from a reader via email:
I am wondering why you haven't reported on what to me and I'm sure many others is the most vital point of the whole deal:
WHO CARRIES THE CURRENCY RISK?
If it is the borrower, then what is the cost and how is that factored into the total cost of borrowing. It is fully or partly hedged, and will the entities show a mark to market line in their annual accounts.
Remember the kiwifruit foreign exchange loans in the late '80's?..........and what happened on maturity to the poor borrowers.
Regards,
In answer to Bernard's reader's email, there is no currency risk. The cross currency swap both buys and sells the currency so the net currency position is nil. Transpower has a contract that swaps US$ for NZ$ now and another one that swaps NZ$ for US$ at maturity that allows it to pay back the US$ bonds. The real risk is a credit one - if Transpower's counterparty (i.e. the bank providing the swap) goes under and the currency has moved the wrong way, then it is up the proverbial creek. Nowadays there are usually collaterlaistaion agreements where the counterparties to a deal like this will post collateral in the form of cash to allevaite the loss if a counterparty goes under. Kevin
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