Stockland goes green for latest bond issue from Oz

Developer’s €300m deal joins wave of Australian issues abroad, reports Florence Chong  

Stockland Group, Australia’s largest listed residential developer, stamped its green credentials  globally this October with the successful European issuance of its “green bond” – the first by an Australian company.

About two dozen global institutional investors subscribed to the €300m issue.

Tiernan O'Rourke, Stockland
Tiernan O’Rourke, Stockland

“We did a non-deal roadshow in Europe to meet a range of debt investors last June and found that there is interest in green bonds among European investors,” says Tiernan O’Rourke, Stockland’s chief financial officer. “We have practised sustainability for the past 10 years and we are on the Dow Jones Sustainability Index.”

As Australia’s fourth largest property trust by market capitalisation, Stockland is no stranger to the debt capital markets. Before the green bond, it issued a sterling bond in Europe and it is a frequent user of the US private placement market.

The group is one of several Australian companies tapping the US and European debt capital markets, motivated by a desire to diversify their funding sources and reduce reliance on Australian bank finance.

Hit by the financial crisis

Australian property groups were badly caught short in the global financial crisis because their bank loans had three-year maturities. Even today, most Australian bank loans do not extend beyond five years.

So far this year, Australian REITs have issued bonds totalling US$9.3bn in US private and public placements and Euro Medium Term Notes (EMTNs). But 2014 has been an exceptional year (see table), with an unusually large amount of corporate activity in this sector and the need to replace short-term financing with long-dated debt.

Two related companies, Westfield Corporation and the newly-renamed Scentre Group (previously Westfield Retail Trust) accounted for 80% of Australian issuance this year by value.

Westfield Corporation raised $3.5bn in the US capital markets, while Scentre – now Australia’s largest REIT – entered the bond market for the first time with an EMTN issue worth £400m and €1.6bn this year. In recent weeks, Scentre also closed two issues in the US private and public markets for a total of $1.3bn.

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Westfield restructures

In a massive restructuring, Westfield sold its half share in more than 40 jointly owned shopping centres in Australia and New Zealand to Scentre, which it had spun off from its global empire in 2010.

Following the restructuring, both companies, which have combined assets under management of more than A$67bn, turned to the global capital markets to replace bridging finance and to fund future development pipelines.

Meanwhile, DEXUS Property Group, Australia’s leading office REIT, which bought an A$4bn office trust this year with Canada Pension Plan Investment Board, also turned to the US to source long-term debt.

Craig Mitchell, DEXUS
Craig Mitchell, DEXUS

“We use short-term debt from banks for speed of execution and flexibility in acquisitions, then replace those facilities with long-dated debt,” says Craig Mitchell, DEXUS’s executive director, finance and chief operating officer.

“Debt access and duration is hugely important because of our requirements for debt volume and liability to match our long-
term assets,” he adds. DEXUS manages A$4.5bn in debt on its balance sheet and in its third-party funds management business.

In the past 12 months, DEXUS has placed two issues in the US private placement market, raising a total of $450m. “We are fortunate, because we have dual credit ratings (from Moody’s and Standard & Poor’s) to be able to use in various global debt markets,” says Mitchell.

He says half of DEXUS’s debt is raised from debt capital markets, giving the group an overall debt expiry profile of 5.8 years. “The advantage of the US private placement market is that we have flexibility on volume. Issuers can do from $100m up to $500m in one trade,” he says.

Brad Scott, head of corporate bond origination at National Australia Bank, the largest arranger of US issuance on behalf of Australian companies, adds: “It was the only market that stayed consistently open for issuance in 2009,” (around the peak of the global financial crisis).

Scott says that at the peak in 2011, Australian issues represented 18% of total bond issues in the US private placement market, but that has now eased to around 11% in the 12 months to this July. “This has been a function of other markets such as the Australian corporate bond market becoming a more reliable source of competitively priced volume and tenor,” he says.

Australian companies are most impressed with the cost-effectiveness of these deals.  Mitchell says that in the latest placement, the all-in-cost was 120 basis points over US 10-year Treasury bills.

Scott says that, increasingly, EMTNs are also becoming equally as attractive as the US private placement market, but are more applicable for issuers who can handle amounts above $700m in a single tranche.

“One of the emerging trends of recent times has been that in some instances, it may be cheaper for Australian corporations to fund in Euros than in US dollars,” he says.

GPT cuts bank finance

Although it is Australia’s oldest listed property trust, GPT has only recently started to access the offshore debt capital markets – by default. Until two years ago, 100% of its debt was in bank finance, but the level has now fallen to 40%.

Mark Fookes, GPT’s chief financial officer, says: “We went to Hong Kong last year as a result of reverse inquiries from Hong Kong and other Asian investors who like our credit rating.”

GPT’s Australian-dollar, medium-term note issues have attracted strong interest from Asian investors, who on average take 25-35% of most Australian corporate bond issuance, according to Scott.

GPT raised HK$800m (A$100m) in its inaugural Hong Kong 15-year bond issue. Since then, the company has twice raised capital in the US private placement market for up to 15 years. Its first US placement, for $150m, was five times oversubscribed.

NAB’s Scott says there is more demand than supply for Australian-issued notes. In October, CFS Retail Property Trust (later renamed Novion Property Group) attracted $700m in bids for a $200m placement.

In June, when Goodman Group, developer, owner and manager of a A$27.7bn global logistics portfolio, marketed its inaugural $400m EMTN issue for the Goodman Hong Kong Logistics Fund, it was over 4.5 times oversubscribed. Today, bonds make up two thirds of the group’s total A$3.8bn of debt.

Scott says investors are after strong yield and diversification. Australian corporate bonds issued by property and infrastructure companies are popular because of inherent interest in assets that have stable and steady cashflows. Investors are also attracted to the transparency of the Australian market, its legal system and economic stability relative to other parts of the globe.

“When you are investing [in a company] for 15 years, it is a long time and those investors need to be comfortable with the risk,” says Fookes.


Banks attempt to nail down green principles 

Stockland’s decision to issue a green bond was influenced by a development early this year when 12 global banks got together to establish “green bond principles”, in an attempt to create a benchmark for issuers.

However, despite this initiative, Stockland chief financial officer Tiernan O’Rourke says there are still differences in the standards used to rate green bonds issued by Australian, US or UK-based companies.

The pricing of the green bond is the same as for a vanilla Euro bond, O’Rourke says. But in time, as green bonds take off, they may be priced lower than ordinary bonds.

The notes were priced at a Euro fixed rate coupon of 1.5%, which Stockland swapped into Australian dollars at a cost of Australian bank bill swap rate plus 153 basis points.