Kāinga Ora’s funding journey so far
It has been two years since Kāinga Ora – Homes and Communities re-entered debt capital markets, in which time the agency’s funding requirement and market footprint have grown significantly. Sam Direen, treasurer at Kāinga Ora in Wellington, discusses the development of the funding programme including the emphasis on sustainable debt and the impact of the COVID-19 crisis.
Can you give an overview of the highlights of the programme’s development?
The three key highlights of the journey so far have been our re-entry to markets, establishing our sustainability framework and, more recently, getting ahead of our issuance task for the first time since coming to market.
Our re-entry to markets came through a commercial-paper tender in February 2018, then we executed a five- and seven-year transaction in June 2018 with good books for a debut deal.
On sustainability, we stuck with our gut feeling and rolled out a sustainability-financing framework rather than a green-bond framework. There is nothing wrong with green bonds, but sustainability is the perfect fit for our business. This area is evolving rapidly and the progress we have had as an organisation – and the engagement this has allowed with investors – has been a highlight.
Recognising the importance of sustainability, earlier this year we created a new position in our team primarily to look at sustainability and further developing our framework. We want to remain at the forefront of this market in New Zealand and tell the compelling story we know exists with our wellbeing bonds.
Recently, it has been good to get ahead of the issuance curve. We had intense financing pressure even before COVID-19. To deal with this we negotiated a Crown standby facility and brought in two new primary dealers.
This put us in a good position once COVID-19 hit. We were able to put questions around offshore investor appetite and the size of our financing task to rest, at least for the time being, with a couple of game-changing transactions in April 2020 – which was incredibly satisfying. It was amazing how quickly our financing requirement and liquidity position changed.
Measuring impact is a huge topic in the sustainable-debt space. What can you tell investors about the positive outcomes of investment in Kāinga Ora bonds?
There are the big things, like the 200 homes we already have certified 6 Homestar by the New Zealand Green Building Council and the 3,000 homes currently under construction we expect to achieve this certification. This is something we did not have when we launched our sustainability programme in March 2019.
But it’s the real-life stories that matter. As an example, a tenant was recently placed into a new home in Christchurch – where it gets really cold in winter. The house is of such good quality that the tenant did not need to turn the heaters on. They were saving on electricity, but not only that: after just a week in their new home they no longer needed to take medication for a respiratory illness.
This is exactly the kind of outcome we want to see and hear about. It is also what the government is trying to achieve with its focus on wellbeing. It is not about departments and entities just having budgets to do their own thing. It is about achieving outcomes across government that cover all the different parts of people’s lives.
Are you happy with the extent to which liquidity in the Kāinga Ora programme has developed?
Liquidity has many components. Turnover was always going to be a challenge for Kāinga Ora while we were looking to establish lines in volume via syndicated issuance.
Spreads to swap and other comps largely reflect our supply dynamic. This can be broken down into two periods: the first year, when our bonds were in limited supply, and then the second year, when our financing task increased and supply concerns waned.
Moving forward, tenders will be a key focus for us to generate more liquidity in the secondary market. We intend to launch the tender programme in the second half of the calendar year.
The last nominal bond Kāinga Ora executed, amid the COVID-19 crisis, had a noticeable uptick in offshore participation. What factors contributed to this result?
The timing was key. It was after New Zealand Debt Management reopened the market with its syndicated deal the week prior. The Reserve Bank of New Zealand (RBNZ) had slashed interest rates and implemented its large-scale asset purchase programme, which brought a lot of confidence to the market. We heard there was a lot of cash that needed to be put back to work once markets began to settle and we wanted to take advantage of this opportunity.
We were prepared to offer a new-issue concession to ensure we achieved our volume and diversification objectives, and this certainly helped. It is tempting to focus on every last basis point as an issuer, but we need to put this in perspective. As the most recent addition to the universe of high-grade issuers, we need to offer a value proposition to investors. Our goal is to lower the cost and risk of financing over the long term.
The COVID-19 crisis has changed the way borrowers manage their international investor relations. How are you adapting your strategy to keep investors engaged?
We are organising a virtual investor day with KangaNews on 19 August 2020. This is an opportunity to showcase all facets of the business and operations, and for investors in any jurisdiction to engage directly with senior Kāinga Ora personnel.
Moving forward, our primary dealers tell us some investors are comfortable meeting online – particularly if they have met us before – so perhaps some travel can be substituted. However, investors are the customers in debt issuance and we will do our best to accommodate individual preferences.
We are always open and happy to be contacted directly by investors. We find this mutually beneficial because it helps us work out where we need to improve our market communication. We do not want investors to be shy but equally we do not want to be hassling investors, because we know they are also very busy.
There was some speculation in the market about Kāinga Ora bonds being added to the RBNZ’s purchase programme. This has not come to pass – has this affected Kāinga Ora?
It would obviously have been good to be included, but we understand why the RBNZ made this decision. At the time we had no more than a fifth of the amount of bonds on issue as others in the programme so we can see why the line was drawn where it was, particularly given the fact our bonds have been moving in line with other high-grade issuers.
We have not had much feedback on this, and we are not dwelling on it either. We have a job to do, as does the RBNZ – and we respect the role it plays. It is possible that some investors find a compelling case to purchase our bonds over competitors given the yield pick-up. Kāinga Ora’s triple-A rating from Moody’s Investors Service is also worth emphasising, we think.
The New Zealand government’s budgets going forward are clearly going to be radically different from what they were in the recent past. Has there been much change to the expectations of funding requirement for Kāinga Ora?
The latest New Zealand government budget had an announcement of 8,000 new public homes on top of those previously announced in the 2018 budget. Kāinga Ora’s role in this is to be confirmed, but typically around 70 per cent of public homes are built by Kāinga Ora.
The government has flagged an increase in our borrowing protocol of around NZ$5 billion to make this happen, bringing our total borrowing protocol to around NZ$12 billion. This is yet to be formalised, but we expect our bond programmes to be around NZ$2 billion per year for the foreseeable future.
Our preference is for any amount above this to be sourced away from debt capital markets, such as through Crown loans. This will help to ensure ongoing consistent supply but provide a release valve should build programmes change significantly.
What role do you see inflation-indexed bonds (IIBs) playing in the Kāinga Ora funding programme? Do you have ambitions to build larger, liquid lines and what are your volume aspirations more generally?
There are three key benefits for Kāinga Ora in issuing IIBs. They provide better matching to our housing assets, a natural hedge to housing rental income and investor diversification. So we are keen to continue exploring this option.
The deal we priced in April this year was in play since January. We decided to execute when we did given the strategic nature of our issuance and our desire to have the ability to print more in future.
We see IIBs accounting for up to 20 per cent of our portfolio over time. However, building liquidity in IIBs has different challenges from nominal bonds. Our preference is to work with intermediaries and investors towards an issuance approach that works for all parties. We will remain tactical in our approach to the market for this product, but we are keen to issue more.
HIGH-GRADE ISSUERS YEARBOOK 2020
The ultimate guide to Australian and New Zealand government-sector borrowers.