Australia's sleepy capital markets were shaken awake yesterday when AGL Energy launched a $900 million rights issue to buy a coal-fired power station, and Origin Energy signed up 17 banks to fund $US8.5 billion in liquefied natural gas facilities.
Each transaction is significant in its own right. Taken together they represent a ringing endorsement by domestic and international players of Australia's fossil fuel sector. The deals provide strong validation of the robustness of the integrated energy company business models that dominant the market.
However, there may be a less than welcome message for the governments of NSW and Queensland from the competition regulator's intervention in the AGL transaction. But more on that later.
AGL chief executive Michael Fraser moved as quickly as he could to raise equity once he had approval from the Australian Competition and Consumer Commission (ACCC) to buy the remaining two-thirds of the Loy Yang A coal-fired power station in Victoria that AGL did not already own.
Fraser and his equity underwriters, Citi, would have been conscious of the need to move fast because of the potentially large equity capital raisings that are coming down the pipeline later this year, including the $3 billion float of TRUenergy.
The AGL 1-for-6 renounceable rights issue stirred up equity capital markets because it was the largest deal of its kind this year done specifically to fund an acquisition. The decision to make it a renounceable issue at a discount large enough to provide room for rights trading will be welcomed by AGL shareholders.
Fraser appears to have learned the lessons of the global financial crisis when many top 100 companies rushed into capital raisings that were non-renounceable, and therefore denied existing holders a choice.
These panicked capital raisings were not equitable but some would argue that speed was of the essence.
In hindsight, some of the capital raisings done in 2009, which were known as jumbo deals, presented a wonderful opportunity to buy stock cheaply in many quality companies.
Unfortunately, retail investors were cut out of the initial invitations to participate. In the latest AGL issue, retail shareholders, who dominate the register, will be able to either participate in the rights offer or sell their rights into a book-build. The first step in the capital raising will come on Monday when Citi will conduct an institutional book-build.
Trading on Tuesday will determine whether the stock has been well priced.
The issue is being done at $11.60, a 23 per cent discount to the last close and a 19.7 per cent discount to the theoretical ex-rights price.
Completion of the transaction will push Citi into second place on the equity capital markets league tables behind UBS.
The regulatory twist to the deal is that AGL was previously not allowed to buy more than a third of Loy Yang A, which is the largest coal-fired power station in Victoria. It supplies about a third of the state's electricity.
The latest deal includes the 2210 MW coal-fired power station and its adjacent brown coal mine, with estimated reserves of 2.5 billion tonnes.
Rod Sims at the ACCC obviously takes a different view of the market to his predecessor, Graeme Samuel. Under the new ACCC chairman, the purchase of all of Loy Yang A by AGL would not result in a lessening in competition. However, it should be noted that AGL is not involved in the contracting, marketing and dispatch of electricity from Loy Yang A.
It would seem Sims is happy for the number of electricity companies in Victoria to fall from six to five but anything below that would likely cause problems. Given that the Victorian market is structured similarly to the markets in NSW and Queensland, that suggests the sale of generation assets in those states might be off limits to existing players.
That will be a blow to the Coalition governments in NSW and Queensland as it may affect the prices achieved for generators likely to be sold to the private sector at some time in the future.
One final point about AGL that stands out from the announcement yesterday is that its previous PR position on renewables is far less prominent. It is now singing the praises of brown coal as a quality long-term fuel.
The $US8.5 billion project financing deal announced by Origin Energy chief executive Grant King is significant because it has the heavy involvement of government-funded banks from China and the United States.
The China Export-Import Bank took $US2.759 billion of the financing and the US Export-Import Bank took $US2.866 billion. They were simply showing their support for two of the partners in the Queensland coal seam gas project trading as Australia Pacific LNG.
The joint venture is between Origin, ConocoPhillips and Sinopec. The project financing is non-recourse to APLNG shareholders. Each shareholder has provided a guarantee of its shareholder percentage of the debt during the construction phase.
The financing has lifted some pressure on Origin to raise the necessary capital to complete the construction of the LNG plant at Gladstone that is being built by Bechtel.
However the company still has a $400 million funding gap that must be filled, according to analysts at Macquarie Group.
The analysts said Origin could either revisit its dividend reinvestment plan as a source of equity funding or sell a further stake in the project, or consider a modest equity raising.
Ratings agency Moody's Investors Service says its negative rating outlook for Origin reflects the expected weakening in the company's financial profile as the construction of APLNG begins and the associated debt is gradually drawn down.
The project financing, which is the largest in Australia, was led by Origin's executive director, finance and strategy, Karen Moses. The composition of the banking syndicate could well be used as a guide to which banks in the world have the capacity to offer long-term funding irrespective of the turmoil caused by the Greek debt crisis. The facility matures in 17 to 18 years.
The commercial bank tranche amounted to $US2.875 billion and was dominated by banks in this region. The syndicate included the big four Australian banks as well as 11 other international banks.
Notable inclusions from Europe were SociÃ©tÃ© GÃ©nÃ©rale and Bank of Scotland. Also of note was the fact that three Japanese banks were involved - Bank of Tokyo Mitsubishi UFJ, Sumitomo Mitsui Banking Corp and Mizuho - and one Chinese bank, Bank of China.
Copyright 2012 Fairfax Media Publications Pty. LimitedAll Rights Reserved.
(Originally published in the May 25, 2012, edition of Australian Financial Review.)