Australian investors shun bond buy-backs as US investors snap them up

07 Jun, 2017 10:20 am

SYDNEY – Australian companies Goodman Group and Rio Tinto are near completing up to a combined $3.5 billion (2.7 billion pounds) in bond repurchases in the United States, a stark contrast to casino Crown Resort which is struggling to buy back A$532 million (310 million pounds) of debt from local investors.

Property developer Goodman Group easily bought back 96 percent of its $1 billion bonds from hundreds of US investors, while mining giant Rio Tinto took back $781 billion of its notes in an oversubscribed offer, the companies said on Wednesday.

While such offers are common in the United States and Europe, they are rare in Australia because there are not many corporate bonds on offer. Companies would rather borrow in the competitive bank loan market than issue bonds.

Less than 15 percent of Australia’s A$390 billion of non-government bonds are issued by corporate borrowers such as industrials, property companies and utilities. The vast bulk of that debt is issued by financial institutions and global organizations such as the World Bank.

Local investors are so starved of corporate bonds that they spurn any attempt to return their cash ahead of schedule.

“Bond buy-backs make balance sheets look better but if companies are not issuing more debt, portfolio diversity goes down and as we still have to re-invest the proceeds somewhere,” said Anthony Kirkham, head of fixed interest at Western Asset Management that has A$25 billion of assets.

Some companies borrow to avoid the risk of having too little or even no debt on issue.

“If investors loose sight of you, it could work against you,” said Nick Vrondas, chief financial officer of Goodman Group, which has around $1.7 billion of debt.

Unlike its peers, Goodman and Rio, Crown Resort is targetting Australian investors with an ongoing offer to buy back subordinated debt.

The offer is getting a lukewarm reception, having bought back a meagre A$126 million out of the proffered A$532 million since it opened in March.

Not helping is a global hunt for yield in a low interest rate environment, and the return on Crown’s debt is just too good to give up.

“Crown is struggling because the subordinated notes offer great value to investors, with an annualised yield of around 5 percent,” said Damien Williamson, research analyst at stockbroker Bell Potter Securities.

Last month, Crown could only buy back less than half of its A$450 million senior note issue. Western Asset Management’s Kirkham said he declined to participate in Crown’s bond buy-back because the price did not look attractive enough. Crown was not available to comment. -Reuters

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