Corporates grabbing long-term US funds

Photo / APN

A handful of New Zealand corporates have successfully raised funds on the United States private placement market over the last few months and more are expected to join the queue as they can offer cheaper interest rates, spread over longer terms.

Mighty River Power, Vector, TransPower, Auckland International Airport, PowerCo, SkyCity Entertainment and Fonterra have raised funds in this market - which is made up mainly of the big insurance companies on the lending side, and utility style companies on the borrowing side.

The attraction for insurers is that they can pick up interest rates well in excess of what can be achieved from their US treasury equivalents.

Unlike standard corporate bonds, the notes are not actively traded in the secondary market because insurers typically have longer-term investment horizons.

"For companies who can access offshore markets, a number of those markets are much more attractive on a price basis, so my expectation would be that the majority of the bond issues for the balance of this year will be focused on the overseas markets rather than the domestic markets," said Mike Faville, BNZ's head of capital markets.

"A couple of issuers are looking at the Australian market, but most are looking at the United States and in particular the US private placement market," he said.

"Given that conditions work now for that market, they can raise debt at very attractive levels when they convert it back to NZ dollars."

This month PowerCo raised US$245 million ($300 million), including placements as long as 15 years.

PowerCo, New Zealand's third largest electricity and gas network utility, said the attraction of the market was both the price and the duration.

"We could not raise or issue 15-year bonds here," he said.

"Probably the best that we could do would be five or seven years, which is standard in New Zealand for a company like PowerCo," treasurer Stuart Marshall said.

PowerCo looked at the US private placement market in 2009. While there was plenty of interest to lend then, Marshall said the prices were horrific so the company opted to go for shorter term bank debt instead.

But the company's intention was always to go back to the US private placement market, when conditions were right and it did so this month.

In the United States, "weight of money" market conditions are at play.

Despite America's slowing economy, money has continued to flow into pension schemes and insurance, but the investment alternatives for conservative insurers, who typically have longer-term investment horizons, have dropped off.

"So a lot of the companies that we were dealing with have got cash coming in the door every day, as well as maturing funds that they are eager to find a home for," Marshall said. "There are an awful lot of issuers from this part of the world going up there."

TransPower, operator of the national power grid, is a seasoned player in the private placement market.

"Consistently over the last 12 months, the USPP market has been the most attractive," said Howard Cattermole, TransPower's general manager of corporate services.

"There seems to be an appetite out there for the kind of risk profile that we can offer."