Corporate borrowers’ economic outlooks have noticeably declined in the past 12 months. Nearly two-thirds of survey respondents in 2019 say their local economy is in a downturn phase – almost twice the proportion who held this view a year ago (see chart 1).

Unsurprisingly, therefore, the vast majority of corporate borrowers expect further monetary easing in the year ahead. The survey was conducted prior to the Reserve Bank of Australia cutting the cash rate by 25 basis points in October, but more than half of Australian corporates surveyed predict at least one more cut in the next 12 months (see chart 2).

The picture is if anything even more bearish in New Zealand, even though the Reserve Bank of New Zealand made its 50 basis point cut in August – before the KangaNews-Moody’s survey was conducted. Despite the already lower official cash rate, nearly three-quarters of Kiwi corporates expect a further 50 basis points or more of cuts in the year ahead.

Borrowers confirm that most factors are already conducive for capital-markets issuance – and the main headwind is beyond the control of local central banks anyway. Availability of liquidity and appetite for Australasian credit both seem set fair, while most corporate issuers are at least satisfied with the cost of issuance and with terms and conditions (see chart 3).

The main concern when it comes to accessing capital markets is geopolitical and trade risk, which 60 per cent of Australasian issuers assess to be challenging – albeit most of these only “fairly” challenging. No other factor comes close to having a majority of corporate issuers suggesting it is a challenge to issuance in the second half of 2019.

Patrick Winsbury, associate managing director, corporate finance and financial institutions groups at Moody’s in Sydney, says: “From an Australian perspective, a transmission mechanism for geopolitical risk into credit is via a bond issuer’s fundamental credit profile. This could be direct – for example if sales revenue or cash flow declines as a result of declining exports – or second order, being a generalised decline in consumer and business sentiment as a result of uncertainty.”

The availability of relatively supportive capital markets might be inducing corporates to be more active. A record proportion of survey respondents – 63 per cent – say they expect their companies’ call on debt capital markets to increase over the next two years while just 3 per cent say they expect to be less active (see chart 4).

For context, in 2019 roughly half the responses to the KangaNews-Moody’s survey came from companies that say they issue in debt capital markets on average at least once each year. A further third say they issue every 2-3 years and the remaining 20 per cent say they are less frequent issuers or do not currently have debt-market securities outstanding.

Whether an increase in projected capital-markets activity means corporates will be borrowing more overall is hard to determine. More than 40 per cent of survey respondents also indicate they expect their companies to have a greater proportional use of capital-markets funding in their debt books in the foreseeable future, suggesting more issuance may in many cases reflect rebalancing rather than additional debt.

When it comes to market selection, Australian corporates appear to be increasingly comfortable with the value proposition of their domestic issuance option. Three-quarters of survey respondents from Australia indicate that the local market is among the best debt-funding options available – again, a record response (see chart 5).

US private placements (USPPs) also score for Australian corporates, while supportive euro pricing throughout 2019 has seen this issuance option rebound in popularity among a select group of issuers.
A similar picture emerges when it comes to the markets Australian corporates think they may be engaged with in the year ahead. Domestic issuance continues to be the most likely approach, euros has rebounded from a low level and there are slightly reduced expectations of USPP activity (see chart 6).

Winsbury says Australian borrowers may have come to look on their domestic market as a fallback funding option to be used when other debt sources are less appealing. “While the Australian dollar corporate bond market may be strategically important, other funding markets may offer a lower spread or longer tenor, or have greater certainty of funding for particular issuers,” he comments. “Many issuers will regularly tap the Australian dollar market in smaller amounts to maintain access if foreign markets experience dislocations in future.”

New Zealand corporates, meanwhile, have historically been more tightly focused on their home market – and the 2019 KangaNews-Moody’s survey suggests little change in this outlook. Issuance in New Zealand remains the clear best option for most local corporates (see chart 7) and reduced expectation of future market engagement almost across the board (see chart 8) may represent nothing more than a lower refinancing period ahead.

While the range of markets into which Australian and New Zealand corporates, taken as a whole, plan to issue may be relatively narrow, the KangaNews-Moody’s survey indicates an ongoing willingness to offer at least some premium to gain access to a new liquidity pool. More than half of all survey respondents say they would pay at least a 6 basis point premium for this sort of funding diversity and 15 per cent would pay as much as 20 basis points (see chart 9).