Issuing Corporate Bonds Overseas

Issuing Corporate Bonds Overseas

Abstract:

In February 2012, like many large organisations seeking to borrow substantial sums of long-term funds, BHP Billiton turned to the bond market. However, the Melbourne based company pursued an issuance in the U.S. bond market. This report will thus investigate the considerations that BHP undertook when deciding to issue in the U.S. rather than the Australian bond market. And in the process will highlight some of the general reasons why companies, particularly Australian companies, frequently issue bonds offshore.

BHP Billiton, the world’s largest resource company issued $US5.25 Billion in the U.S. bond market in February 2012 (BHP Billiton 2011). Considering that in 2011 Australian companies raised around $AUS26.6 billion offshore, compared with $AUS6.2 billion domestically, BHP’s offshore issuance is not out of the ordinary (Henshaw 2012). Although that are many specific factors that drove BHP’s decision, these factors all essentially boil down to a question of cost. Accessing the well-developed, sizeable and liquid U.S. bond market allowed BHP to secure a lower coupon rate and was better suited to accommodate BHP’s bond requirements in terms of size, maturity and credit rating. Avoiding cumbersome Australian regulations, the ability to diversify their funds as well as avoiding an exchange rate risk were also contributing factors that culminated in offshore issuance. If Australia is to develop its domestic corporate bond market, understanding these factors that drive domestic companies to issue offshore is of particular importance.

Arguably the most important factor that led BHP Billiton to issue in the U.S. was the ability to secure a lower coupon rate, reducing the borrowing cost. Graph 1.1 shows that once currency risk is considered, the return on risk-free government bonds in Australia and the U.S. is comparable. However, when corporate organisations issue bonds they have to...