Fletcher Building borrows US$300 mln in US private placement market, now has half its debt in that market

By Gareth Vaughan

Fresh from raising US$300 million (NZ$377 million) in the US private placement debt market, Fletcher Building now has half its debt in the market and could tap the low cost, long-term market again if it needs to, Fletcher Treasurer Sara Double says

Double told interest.co.nz the placement, with three big US insurers, gave the building materials manufacturer and distributor improved diversification and duration to its debt profile. The latest US private placement, Fletcher’s third since its first in 2005, is roughly evenly split between 10 and 12 year borrowings, which Double said is about twice as long a term as Fletcher could get from banks.

The deal means Fletcher, which hasn’t sought and doesn’t hold a credit rating, now has NZ$1.085 billion of borrowings in the US private placement market, after using proceeds from the new deal to repay some of its bank debt. This is roughly half its total debt, which stood at NZ$2.007 billion at the end of Fletcher’s last financial year on June 30. Fletcher’s businesses include Fletcher Construction, PlaceMakers, Formica, Pink Batts maker Tasman Insulation, Crane, Firth Industries and Winstone Aggregates.

Double declined to say what interest rates Fletcher will pay its insurer lenders, but acknowledged Fletcher was obviously happy with them, even after the borrowings were swapped to Australian dollars through a mix of fixed and floating interest rates. The deal stemmed from “assisted reverse inquiry”, with a bank Double declined to name playing a role. Price wasn’t the only attraction.

“You’ve got to look at it as 10 and 12 year funding as well (not just price),” Double said. “Banks only go out about five years so it adds to our portfolio, gives us diversification and duration.”

Popular market with NZ companies

The US private placement market has been a popular source of cheap debt for New Zealand corporates over the last couple of years helped by the low interest rates they have to pay lenders there. US debt investors are in the midst of an extended period of near zero official interest rates where the US Federal Reserve has embarked on Quantitative Easing, effectively money printing, to devalue the US dollar. This is encouraging them to invest in corporate and government debt in non-US dollar currencies with higher interest rates.

In a deal arranged by ANZ and JP Morgan, national grid operator Transpower borrowed US$380 million from 15 US-based institutions last September in 10, 12 and 15 year tranches. Transpower's loans carry coupons, respectively, of 3.43% (1.50% above US 10-year Treasury bonds), 3.58% (1.65% above US 12-year Treasury bonds), and 3.83% (1.90% above US 15-year Treasury bonds).

Other New Zealand companies to borrow money in the US private placement market over the last couple of years include Unison, SkyCity Entertainment Group, Powerco, Auckland International Airport, Vector and Mighty River Power. Fletcher's US$300 million, added to the money raised by New Zealand companies in the market in 2010 and 2011, takes the total to US$1.795 billion (US$2.3 billion). Other major New Zealand companies are understood to be considering tapping the market.

"It has been a very good market for Australasian corporates. It's a good, open market," Double said.

Fletcher could go back again

Depending on the company's needs, Fletcher could potentially raise further money in the US private placement market within the next year, Double said, as the market was still open to the company.

Meanwhile, Double said the duration of a debt portfolio held by a major corporate like Fletcher had become more important than ever.

“That's something that all investors look at, both debt and equity investors now. It's important to keep that profile so you don't have too much in current (debt), not just (due in) one year but the next couple of years.”

Fletcher's new US private placement money has been used to repay NZ$290 million of bank debt not due for repayment for between one and two years from Fletcher’s June 30 balance date, and some of its NZ$435 million of bank borrowings due for repayment within two to five years of that date, Double said. Fletcher had NZ$789 million of bank loans at June 30, at which point it had undrawn credit lines of NZ$492 million.

The bank facilities, which Fletcher has retained, are two revolving credit facilities, also on an unsecured, negative pledge and borrowing covenant basis. The first loan is with ANZ New Zealand, Bank of Tokyo Mitsubishi UFJ, BNZ, Commonwealth Bank of Australia, Citibank NA, HSBC and Westpac Banking Corporation. The money in this facility can be borrowed in US, Australian and NZ dollars.

The second bank loan is with Westpac Banking Corporation and is in Australian dollars.

Fletcher also had NZ$441 million of capital notes on issue at June 30. See Fletcher Building's bond issuer page here.

Fletcher’s first foray into the US private placement market was in 2005, with six investors lending it NZ$144 million that matures in 2015 and A$132 million maturing in 2017. The proceeds were used to repay existing bank indebtedness and for “general corporate purposes.” Citigroup was the placement agent on those deals.

It then went back to the market in 2007 to help fund the NZ$1 billion Formica acquisition, borrowing US$325 million with maturities in 2016 and 2019 from 10 institutional investors.  

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