Dampier Bunbury Pipeline (DBP)

Transcription

1 Limited ABN AFSL April 2011 (Update) Cst f Debt Summary Paper Dampier Bunbury Pipeline (DBP)

2 IMPORTANT NOTE Nte 1 This dcument has been prepared by AMP Capital Investrs Limited (AMP Capital Investrs) fr the sle use f DBP fr the purpses f its access arrangement apprvals prcess. In preparing this dcument, any frecasts r estimates used in this dcument have been arrived at n a reasnable basis and represent the best frecast r estimate pssible in the circumstances f the terms f engagement. Hwever, whilst every care has been taken in the preparatin f this dcument, nne f AMP Capital Investrs, any ther cmpany in the AMP Grup and their Representatives have made r make any representatin r warranty that this is the cst f debt that DBP will btain shuld it seek t refinance any r all tranches f its current debt prtfli. DBP may nt rely n this dcument fr this purpse. AMP Capital Investrs and any ther cmpany in the AMP Grup accept n liability r respnsibility fr any reliance n the infrmatin r statement cntained in this dcument. This dcument is cnfidential and slely fr the use by DBP fr the purpses f its access arrangement apprvals prcess. N ther party may rely n this dcument, except with respect t the prvisin f a reprt t the Ecnmic Regulatin Authrity (ERA) in a frm apprved by the AMP Capital Investrs r therwise with the prir written cnsent f the AMP Capital Investrs. Nte 2 Fr the purpses f this paper it is assume that the definitin f a Large Regulated Utility (LRU) is ne which: perates in the Australian market; currently has a Regulated Asset Base in excess f A$2billin; pssesses a Standard and Pr s investment grade credit rating f at least BBB- (r similar rating with any ther internatinally recgnised rating agency); and has a gearing level f arund 60% f the Regulated Asset Base. 1

3 INDEX IMPORTANT NOTE... 1 Nte Nte INDEX BACKGROUND Purpse f paper Update n Market Cnditins DIVERSIFICATION Lessns Learnt Price Tensin Tenr Australian Market Dynamics MARKET SUMMARY OVERALL COST OF DEBT AER METHODOLOGY CONCLUSION

4 1. BACKGROUND 1.1 Purpse f paper AMP Capital Investrs Debt Advisry Team (AMPCI) has been asked by Dampier Bunbury Pipeline (DBP) t prepare an update n the April 2010 Cst f Debt Summary Reprt prepared by AMPCI cvering changes in the financial markets since this time. The paper will then draw an updated cnclusin arund AMPCI s pinin f the cst f debt funding LRUs culd reasnably expect in current market cnditins. This cnclusin will be based n the apprach t cst f debt analysis AMPCI uses fr its brad client base and reasnably assumes is an apprach cmmnly used in the market. In general, the market will assess the individual credit quality f an entity (such as a LRU) by assessing using bth tpdwn and bttm-up analysis. Tp-dwn will assess big picture aspects f the credit such as the stage f the ecnmic and credit cycles as well as verall asset class analysis. The bttm-up apprach assesses the business and financial risk f the entity. Many investment managers will determine an internal credit scre r rating and then cmpare and cntrast this rating with external rating surces. The end result is that individual credit names are cmpared against each ther n a glbal relative value basis. 1.2 Update n Market Cnditins Financial markets cntinue t be vlatile and susceptible t shcks. The Eurpean svereign debt crisis which dminated the new thrughut 2010 is ne such example. Whilst markets remain pen and the availability f capital has imprved, shrter term credit margins have shwed signs f imprvement, hwever lnger dated credit margins have remained stubbrnly high, with little in the way f imprvement since last reprt. Gd imprvement has been seen in the credit margins fr crss-currency and interest rate swaps and minr imprvements have been experienced in upfrnt csts. Having said this, all f these csts remain significantly higher than thse achieved prir t the Glbal Financial Crisis (GFC). 3

5 2. DIVERSIFICATION One f the key risk management tls fr a debt manager t adpt when managing a prtfli f debt is diversificatin. AMPCI strngly recmmends t its clients debt diversificatin strategies. AMPCI believe there are several key reasns fr adpting such a strategy, particularly in the case f a LRU, which is detailed in Sectins Lessns Learnt Diversificatin has been a cmmnly used tl fr business managers and investrs fr many decades/centuries. The phrase dn t put all yur eggs in ne basket has lng been the mantra f these business managers and investrs. In additin, diversificatin is the key lessn learnt by debt managers since the GFC and hence this saying has never resnated s ludly. The GFC prved t cmpanies that they simply cannt rely n a narrw grup f cunterparties, markets r debt instruments. Australian Bank Market: During the GFC, participants in the Australian bank market dramatically reduce the pl f available debt by ratining the debt t their client base. Australian Bnd Market: Disappintingly, the Australian Bnd Market fr an issuer like a LRU was effectively clsed fr business during a significant time thrughut the GFC. Pricing was nt the issue during this perid, the market just simply did nt supprt transactins. At the same time, internatinal markets such as the US Private Placement market cntinued t perate effectively fr similar quality Australian issuers. The table belw shws the cmparisn f the issuance vlumes in Australian Bnd market versus the US Private Placement market fr Australian-based issuers f cmparable credit quality t a LRU fr the perid 2005 t current. Surce: Natinal Australia Bank 4

6 2.2 Price Tensin Price tensin is anther derived utcme frm a diversificatin strategy. By nt exhausting cunterparty limits, market capacity r instrument capabilities, the LRU is able t create mre f a scarcity factr t its debt prfile. This puts the LRU in mre f a psitin whereby it can derive mre cmpetitive utcmes with respect t price and terms, rather than having t accept the lwest cmmn denminatr. 2.3 Tenr It is AMPCI s experience that the Australian bank and bnd markets have histrically (and currently) nly prvide access t capital in shrter tenrs versus many ther internatinal markets. The Australian market tends t be fcussed n 3 and 5 year transactins, sme 7-year transactins, with transactins lnger than 7-years tend t be the exceptin rather than the rule. Internatinal markets (even during the GFC) ffer the brrwer a brad range f maturity chices extending ut t 30-years, with the 7 t 15 year timeframe prving t be the mst ppular. As such, if a LRU wishes t adpt a smther debt maturity prfile and lessen the pint-in-time refinance risk, markets ffering lnger debt maturities need t be cnsidered. 2.4 Australian Market Dynamics Australian Bank Market: The market cntinues t be dminated by the fur majr banks with ther banks rarely dminating a transactin. Given this market dminatin, there is significant transactin risk fr LRU s shuld they nt gain the supprt frm the key market players. This becmes increasingly risky shuld the LRU need t effectively exhaust the market fr vlume and thereby nt being able t affrd t have ne f the majr banks drp ut f the transactin. Australian Bnd Market: Similarly, the Australian Bnd Market tends t be dminated by 6-8 key investrs which creates similar transactins risk t that identified abve. By internatinal standards, the Australian Bank and Australian Bnd markets are small in size, thin in terms f liquidity and dminated by a small number f players. A prudent and efficient apprach t debt management means that at all times a cmpany shuld minimise refinance risk thrugh full diversificatin. By having multiple debt ptins available and never exhausting a single cunterparty, market r instrument, histrically this has prven t prvide: imprved pricing utcmes; imprved terms; reduced executin risk; imprved debt maturity prfile; and financing flexibility. 5

7 3. MARKET SUMMARY current market envirnment are still the:. As such, the mst apprpriate key markets fr LRUs in the 1. Australian bank market 2. Australian bnd market; 3. US public market (144a); and 4. US private placement market. By accessing these markets the LRU accesses investrs wh nt nly have investment capacity but als wh understand the mechanics and credit metrics f a LRU. 6

8 4. OVERALL COST OF DEBT 5. AER METHODOLOGY Using the methdlgy generated by the Australian Energy Regulatr in its Final Decisin n the Victrian electricity distributin business in Octber 2010 and updating the data inputs t be cnsistent with the current bserved perid f the 20 business days up t 28 February 2011 (with the exceptin f Blmberg s 10-year AAA vs 7-year AAA spreads which is the 20 business days up t 22 June 2010) this delivers a Debt Risk Premium f 4.24% and a ttal cst f debt f 9.97%. In additin t this, it must be remembered that this methdlgy gives n regard fr upfrnt fees incurred by the business t establish and issue the bnds it assess. 6. CONCLUSION AMPCI remains f the view that the mst prudent and apprpriate debt strategy fr a LRU is ne which achieves: Pricing efficiency given vlume f debt required t be issued; Market risk minimisatin risk that the target market ceases t functin; Executin risk minimisatin ensuring sufficient limits and transactin can prceed in a timely manner; and Refinance risk minimisatin thrugh tenr diversity. The mst efficient way f achieving these aims is t adpt the apprach t debt management utlined in this paper. In cnsideratin f estimating the ttal cst f debt fr a LRU it is als crucial t include relevant up-t-date market benchmarks fr nt nly credit margins, but als fr the cst f transacting the debt such as upfrnt csts. AMPCI has lked at tw methdlgies t generate an utcme fr the ttal cst f debt fr a LRU. Firstly, the apprach AMPCI believe is the mre cmmn apprach amngst prfessinal, institutinal-level financial market investrs, estimates the cst f debt fr a LRU t be 9.52%. The secnd apprach cnsidered was t utilise the methdlgy adpted by ther regulatrs in Australia, such as the Australian Energy Regulatr (AER). This secnd methdlgy generated a ttal cst f debt utcme f 9.97%. AMPCI has endeavured t prvide transparent and accurate indicatins f debt csts thrughut this paper and as such, believe that this range is the apprpriate range fr the ttal cst f debt fr a LRU. 7