SAFA continues to forge AONIA-linked issuance path

South Australian Government Financing Authority (SAFA) has continued in its quest to mould the Australian overnight index average (AONIA)-linked issuance market, introducing longer tenor and larger volume. The market environment has changed markedly in the last few months, including for AONIA, but the issuer says engagement continues to grow.

SAFA’s A$1.26 billion (US$862 million) three-year, AONIA-linked deal priced on 11 June. The transaction is SAFA’s fourth linked to the risk-free rate (RFR) and its first with tenor beyond one year. Pricing came a day prior to the maturity of the issuer’s first AONIA-linked transaction, though the new issue is more than twice as large as the maturing line.

The only other Australian issuer to execute a domestic deal priced off the RFR is Commonwealth Bank of Australia, which brought a A$1.5 billion AONIA-linked residential mortgage-backed securities deal to market in November 2019 (see chart 1).

Source: KangaNews 12 June 2020

Market development

Andrew Kennedy, Adelaide-based director, treasury services at SAFA, says the latest deal is a realisation of SAFA’s intension to add longer-tenor AONIA-linked funding. SAFA’s previous AONIA-linked deals were all at one-year tenor and were not classified as benchmark “select lines” by the issuer.

Despite the longer tenor and larger volume, SAFA is still not ready to call its latest AONIA deal a select line – because, Kennedy explains, it is not expected to have the level of liquidity required of a term-funding benchmark bond.

The issuer chose the three-year point on the curve based on market consultation, to intersect the issuer’s fixed-rate, even-year select line maturities, and to match some of its floating-rate client-funding needs.

The deal is also unique from the issuer’s previous AONIA-linked deals in that it has a quarterly coupon. “When we consulted the market on bringing a longer-tenor AONIA-linked deal we were conscious of catering to investor appetite, which included the provision of a quarterly instead of monthly coupon,” Kennedy reveals.

Despite market upheaval in recent months, and investors still facing various pressure points, Kennedy tells KangaNews engagement on AONIA-linked issuance continues to grow in breadth and depth, particularly as many market participants remain conscious of the impending end to compulsory LIBOR publication in offshore markets at the end of 2021.

“We had a lot of open dialogue with investors for this deal and conducted a number of awareness and education sessions. There was a diverse blend of investors in the deal by geography and investor type, but the primary focus still comes from domestic and regional banks,” Kennedy says.

He adds that maintaining the interest of regional bank investors in the deal under current market circumstances was particularly pleasing for SAFA.

“The wider we can make the conversation around AONIA-linked issuance, the sooner it will be possible to make that conversation, and issuance of this kind, a part of the broader market infrastructure.”

No lead

Bank engagement with AONIA issuance has become such that Kennedy says picking a single or a group of lead managers would have been counterproductive to its market development goals. As such, SAFA chose to execute the deal without any lead managers, instead inviting bids through its dealer panel.

Kennedy explains: “The wider we can make the conversation around AONIA-linked issuance, the sooner it will be possible to make that conversation, and issuance of this kind, a part of the broader market infrastructure.”

The engagement from investors this time around meant SAFA was compelled to print a volume larger than its indicative cap of A$1 billion, according to Kennedy. This reflected feedback that investors were keen to own the entirety of their bids, rather than pegging a bid at a higher volume and expecting some level scaling. As a result, 100 per cent of the book was allocated to investors.

SAFA intends to continue issuance linked to AONIA for its short-term funding as well as to explore further avenues for development of the AONIA-linked market with longer term deals that could potentially sit between SAFA’s select lines.

AONIA pricing

The AONIA rate itself has been newsworthy since the beginning of the COVID-19 crisis. The Reserve Bank of Australia (RBA)’s increased repo operations have led to much higher exchange settlement balances. At the same time, the RBA has been remunerating settlement balances at 10 basis points rather than zero as it previously would have done if the cash rate were 0.25 per cent.

The weight of money in exchange settlement balances compared to transaction volume in the cash market has pulled the interbank overnight cash rate – AONIA – consistently below the official cash rate (see chart 2).

Source: Reserve Bank of Australia 12 June 2020

Kennedy says there has been speculation in the market as to how long this might remain the case, but tells KangaNews it did not lead to any cost benefit to SAFA in issuance linked to the rate.

“When we come to the market with these deals, we look at pricing comparable with the bank-bill swap rate [BBSW]. By bringing deals that are either in line with or above BBSW pricing, we are ensuring ongoing investor interest in the transactions,” Kennedy explains.