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A REPORT ON THE BORROWING INTENTIONS OF AUSTRALIAN CORPORATES FOR 2015

CORPORATE BORROWERS’ INTENTIONS 2015

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Welcome to BNP Paribas and KangaNews’ Corporate Borrowers’ Intentions Survey for 2015

Welcome to a unique insight into how Australasia’s largest corporates are thinking about capital markets and their funding requirements.

Our study reveals the intentions of corporates – chief financial officers, treasurers and other senior decision makers in capital markets – as to their borrowing intentions for the year ahead.

Respondents revealed an interesting breakdown both in terms of how corporates fund their business and how they expect their funding mix to evolve in the foreseeable future.

The survey data challenges the commonly held notion that Australasian corporates are reliant on bank funding, as the investment-grade sector discloses a significant draw on debt capital markets. More than a quarter of survey respondents say their company’s debt is already “largely” funded in capital markets, while an identical proportion say their debt book comprises a mix of bank and capital markets funding but weighted towards the latter.

Overall, the study found:

>> Two-thirds of Australian corporates (69%) expect spreads to increase in the second half of next year or later.

>> Just over a fifth (21%) expect them to rise earlier – in the first half of next year.

>> Half of Australian corporates (52%) expect yields to increase in the second half of next year.

>> Just over a third (36%) expect them to rise earlier – in the first half of next year.

>> Two thirds of corporates tend to fund their debt financing from a mixture of capital markets and loans.

>> Only 2% use just loans.

>> The domestic market remains the most popular market for corporates, with almost three-out-of-four (72%) of treasuries active in Australian debt capital markets.

>> That said, more corporates are looking overseas as offshore capital markets offer local companies the opportunity to lock in the cheapest long-term debt funding in more than six years and extend the tenor of their portfolios.

>> The US private placement market is the most favoured offshore market and demand for US private placement market is expected to increase the most in 2015.

>> While just one-in-five corporate treasuries are active in the Euro markets, this is expected to also increase; especially as Europe presents the cheapest funding for Australian corporates.

>> Debt capital markets are among the most attractive sources of funds for corporates at present.

Looking forward, Australian corporates should take the opportunity to review their financing and take advantage of the current low financing rates, particularly in longer tenors – and not get caught out by any sudden rise in interest rates here or overseas.

We hope you find these results useful. If you have any questions, or would like assistance, please let us know.

Didier Mahout Samantha Swiss CEO Australia & New Zealand Chief Executive BNP Paribas KangaNews

If you are interested in participating in future poll programs please contact us at brand.communications@au.bnpparibas.com

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When will rates, yields and spreads start to rise?Australian corporates recognise the conducive rates and spread environment – and few are willing to predict its imminent end. Three-out-of-five (60%) do not expect credit spreads to start rising before the second half of 2015, although more expect spread widening to occur sooner than that.

Issuers have a somewhat different view on rates trajectory, as more than 90% of Australian corporate borrowers predict outright yields will increase at some point in 2015 – though more than half do not expect yields to increase until the second half of next year.

Just under 80% of New Zealand corporate treasuries expect yields to increase next year. Interestingly, half of New Zealand (50%) respondents expect spreads to fall before rising.

WHEN YOU YOU EXPECT OUTRIGHT YIELDS AND CREDIT SPREADS TO BEGIN RISING?

Australian issuers

Source: BNP Paribas and KangaNews as at October 2014

New Zealand issuers

Source: BNP Paribas and KangaNews as at October 2014

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Diversifying funding sources Since the financial crisis, many Australasian corporates have talked about undergoing a process of diversifying their debt book to be less reliant on bank funding. This process may not yet have completely played out, as a number of corporate issuers still plan to increase their proportional use of capital markets.

At present, more than 90% of survey respondents say they issue bonds or other debt securities at least once every 2-3 years, and nearly 60% say they are active on at least an annual basis.

Two-thirds of corporates tend to fund their debt financing from a mixture of debt capital markets and bank debt. Some 29% use a mixture of debt capital markets and loans, weighted more towards debt capital markets.

Another 29% use a similar mixture, but weighted more towards loans; with just 12% using a 50:50 mix.

Another 29% solely use debt capital markets, compared to only 2% that use just bank debt.

HOW IS YOUR COMPANY’S DEBT BOOK COMPOSED AT PRESENT IN TERMS OF THE BALANCE BETWEEN BANK AND CAPITAL MARKETS FUNDING?

Source: BNP Paribas and KangaNews as at October 2014

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Exactly one-third of respondents to the survey say they expect to increase their proportional use of capital markets funding in the foreseeable future.

Nearly 60% do not expect the makeup of their debt books to change significantly between bank and capital markets funding, as shown below.

HOW DO YOU EXPECT THE COMPOSITION OF YOUR COMPANY'S DEBT BOOK TO CHANGE IN THE FORESEEABLE FUTURE?

Source: BNP Paribas and KangaNews as at October 2014

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Where in the world?The domestic market remains the most popular source of funding for corporates, with almost three-out-of-four (72%) of c ompanies active in the Australian domestic market.

However, more corporates are looking overseas with offshore capital markets offering Australian companies the opportunity to lock in the cheapest long-term debt funding in longer maturities.

In this respect, the US private placement market is the most favoured offshore market, with 45% of corporates already active in this market. One-in-three (33%) are active in the US 144A market. Demand for US private placement raisings is expected to increase the most in 2015.

Just one-in-five (20%) corporate treasuries are active in the Euro markets. This is expected to increase over time, with 20% of respondents indicating they may engage with this market in the future. We note that Europe offers among the cheapest funding for Australian corporates at present.

The US and Euro markets were followed by the Sterling and Asian debt markets (with 18% of companies active in each) as sources of debt financing. Activity in Asia debt markets is expected to also increase over time.

WHICH DEBT MARKETS ARE YOU ACTIVE IN, OR WILL BE ACTIVE IN, IN THE NEXT TWO YEARS? (TICK ALL THAT APPLY)

Australian issuers

There are a number of reasons behind the strong demand in Europe for debt issued by Australian and New Zealand companies:

>> Negative deposit rates in Europe have made the yield offered by Australian corporate issuers very attractive to investors there,

>> The Euro market is also experiencing negative net issuance, with the volume of bonds maturing and redemptions exceeding the amount of new issues,

>> A lack of mergers and acquisitions requiring funding has also contributed to the shortage of investment opportunities, and

>> Australian and New Zealand credits provide diversification for investment portfolios and have been well-received.

Source: BNP Paribas and KangaNews as at October 2014

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For New Zealand issuers, three-out-of-five (60%) tapped their local market and two-in-five expect to tap it again next year.

The US private placement was their next favoured market, with half (50%) active there and a further 20% expecting to be active there in 2015.

New Zealand issuers

Source: BNP Paribas and KangaNews as at October 2014

Responses from New Zealand corporates suggest issuers there are generally engaged with a much smaller range of markets than their Australian peers. They tend to look at a narrower range of markets and their views on yield and spread also differ from borrowers across the Tasman Sea.

Nearly two-thirds of New Zealand respondents say they are currently engaged with their domestic market and all the remainder say they may do so next year.

USPP is almost as popular, as 90% of Kiwi corporates expect to have some level of engagement with this market in the next two years.

By contrast, few other global options attract significant interest from New Zealand issuers.

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Outlook for 2015-6Looking forward the greatest demand appears to be for the Australian domestic bond market, with half (50%) of corporates expecting to increase the amount that they issue.

This was followed by a third (33%) expecting to increase their US private placement.

Looking forward, funding from Europe is expected to remain low in AUD terms; as while the USD is expected to rise against the AUD, the euro will likely remain comparatively low (in today’s world of two-speed economies – strengthening US, slow Europe, with Australia in-between). The US dollar’s appreciation is expected to be less aggressive against the AUD than it will be against the euro.

Overall, Australian corporates could take this opportunity to review their financing and take advantage of the current low financing rates – and not get caught out by any sudden rise in interest rates here or overseas.

OVER THE NEXT TWO YEARS, HOW DO YOU EXPECT YOUR ENGAGEMENT WITH THE FOLLOWING MARKETS TO CHANGE?

All issuers

Source: BNP Paribas and KangaNews as at October 2014

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WHICH CAPITAL MARKETS DO YOU BELIEVE PROVIDE THE BEST FUNDING OPTIONS FOR YOUR COMPANY IN TERMS OF COMBINATION OF PRICING, LIQUIDITY, EASE AND COST OF EXECUTION, TENOR, AND TERMS AND CONDITIONS? (TICK ALL THAT APPLY)

Australian issuers

Source: BNP Paribas and KangaNews as at October 2014

New Zealand issuers

Source: BNP Paribas and KangaNews as at October 2014

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Loan pricing outlook Australasian corporates are broadly comfortable with the expected trajectory of loan pricing and commitment levels.

More than two-thirds expect no significant change to commitment levels in the next year, with those who hold a different view almost evenly split between an expectation of increasing or decreasing levels.

WITH LOAN PRICING, OVER THE NEXT 12 MONTHS DO YOU EXPECT YOUR COMMITMENT LEVELS TO:

Source: BNP Paribas and KangaNews as at October 2014

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Debt capital markets The majority of corporates revealed that they go to the global debt markets once a year, with just over half of treasury management (58%) saying they issue debt on average once a year.

Over a third (35%) issue every two to three years, with just 5% issuing three years or longer.

Only 2% do not have debt securities on issue and all those that have securities on issue have tapped global markets in the past five years.

HOW ACTIVE IS YOUR COMPANY IN DEBT CAPITAL MARKETS GLOBALLY?

Source: BNP Paribas and KangaNews as at October 2014

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Attractive markets Available liquidity, credit spreads, investor demand for Australasian credit and total cost of funds are making bonds among the most attractive sources of funds for corporates at present, as shown below.

ON A SCALE FROM "VERY CONDUCIVE" TO "VERY CHALLENGING", HOW DO YOU RATE THE FOLLOWING ISSUES IN TERMS OF THEIR IMPACT ON EASE AND COST OF ACCESS TO GLOBAL DEBT CAPITAL MARKETS AT PRESENT?

Source: BNP Paribas and KangaNews as at October 2014

These improvements in the market’s attractiveness prompted almost a half (45%) of respondents to suggest that they will increase their global debt capital markets activity over the next two years.

The other half expect their global debt capital markets raisings to remain the same, as shown below.

We note there are no major issues around terms and conditions and landed cost of funds is of little concern.

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Conducive marketsAustralasian corporates acknowledge the broadly positive capital markets conditions which have prevailed in recent months. More than 90% of survey respondents rated the availability of liquidity to be “very conducive”.

Borrowers also appear to be overwhelmingly comfortable with the level of investor appetite for Australasian-origin credit and credit spreads.

OVER THE NEXT TWO YEARS, DO YOU EXPECT YOUR COMPANY'S CALL ON GLOBAL DEBT CAPITAL MARKET TO:?

Source: BNP Paribas and KangaNews as at October 2014

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What do borrowers want most from banks?The survey also asked corporate borrowers to disclose what are the most important factors in selecting lenders. The broader corporate relationship and ancillary business proved to be the leading factor, with 45% of corporates rating it “very important” and a further 34% “fairly important”.

Service potential ranked almost as highly, while geographic spread appears to be the least important considerations.

IF YOU WERE TO LOOK TO INCREASE THE SIZE OF YOUR LENDING BANK GROUP, HOW IMPORTANT WOULD THE FOLLOWING FACTORS BE IN SELECTING NEW LENDERS?

Source: BNP Paribas and KangaNews as at October 2014

WHAT DO YOU EXPECT FOR THE NUMBER OF BANKS IN YOUR LENDING GROUPS IN THE NEXT TWO YEARS?

Source: BNP Paribas and KangaNews as at October 2014

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About this pollBNP Paribas and KangaNews undertook a poll of Australian corporate Chief Financial Officers and treasury managers in September-October 2014.

A total of 50 CFOs, treasurers and other treasury decision-makers responded with their borrowing intentions for 2015.

Responses came from a representative sample of the Australasian companies which access capital markets. The majority (60%) are BBB-rated with almost a third (31%) A-rated, as shown below.

IN WHAT RATINGS CATEGORY IS YOUR COMPANY?

Source: BNP Paribas and KangaNews as at October 2014

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Important information

This report has been prepared and is being distributed in Australia by BNP Paribas ABN 23 000 000 117, a branch of BNP Paribas 662 042 449 R.C.S., a licensed bank whose head office is in Paris, France. BNP Paribas is licensed in Australia as a Foreign Authorised Deposit-taking Institution by the Australian Prudential Regulation Authority (APRA) and delivers financial services to Wholesale clients under its Australian Financial Services Licence (AFSL) No. 238043 which is regulated by the Australian Securities & Investments Commission (ASIC). This is not a research report nor prepared by the BNP Paribas Research Department and the views expressed herein may differ from those of the Research Department. This Commentary should not be considered objective or unbiased. BNPP may engage in transactions in a manner inconsistent with the views expressed in this material. BNPP may trade as principal in the instruments (or related derivatives), may have proprietary positions in the instruments (or related derivatives), and will likely make markets in the instruments (or related derivatives) discussed herein.

The Material is directed to Wholesale clients only and is not intended for Retail clients (as both terms are defined by the Corporations Act 2001, sections 761G and 761GA). The Material is subject to change without notice and BNP Paribas is under no obligation to update the information or correct any inaccuracy that may appear at a later date. This material is produced for general information only and does not constitute financial product advice, nor an offer to issue or recommendation to acquire any financial product. You should seek your own professional advice in relation to any financial product referred to.

BNP Paribas is incorporated in France with Limited Liability and is regulated by the Autorité des Marchés Financiers for the conduct of its investment business in France. Registered Office: 16 Boulevard des Italiens, 75009 Paris, France. www.bnpparibas.com

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