Institutional options

Setting up a balanced corporate balance sheet is a complex procedure, but Australian Unity’s chief financial officer, Tony Connon, breaks it down into some simple components.

1. The most expensive form of capital is equity. It’s the big gun of listed companies but less attractive at the moment as a result of low price-earnings multiples and weak investor appetite following the big equity recapitalisations of late 2008 through to 2009.

2. Next is hybrid securities, which offer a fixed or floating rate of return until redemption time, at which point investors can choose between converting their notes into equity or redeeming for cash. It’s an increasingly attractive form of funding as it counts as equity for gearing purposes and can attract franking credits if desired. The convertible bond is the most common form of hybrid security but it comes in many formats.

3. Below that is the corporate bond, the mainstay of long-term corporate funding. In April, Australian Unity put to bed a $120 million five-year bond with a fixed margin 3.55 percentage points above a 90-day bill rate. Connon originally had looked to raise $80 million but had not anticipated how strong both institutional and retail interest in fixed interest has become and took advantage of the situation to boost the debt raising to retire some existing debt on the balance sheet. Ratings agencies gave it an “investment grade” rating, which is vital in today’s risk-averse market..

4. Bank funding. This is usually done through a syndication of banks to minimise a bank’s exposure to a single company or project.

5. For working capital or top-up funding, an overdraft facility is still the popular financial tool.

6. Mezzanine finance is an option which sits below bonds but above equity in the creditor queue. It can currently cost as much as 10 per cent over cash.

BRW

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