New Zealand debt market gets back on track

In December 2020, the KangaNews New Zealand Debt Capital Market Summit took place as an in-person event in Auckland, bringing the local industry together for the first time since the COVID-19 crisis. There was no shortage of talking points at the event, which for the first time added international perspectives via videoconference to the traditionally strong domestic agenda.

"We often hear about geopolitical factors and their influence on currency fluctuations, as well as how currency and market rates are tied to traditional commodities like gold or iron ore. I wonder whether responsible data use can be used effectively to contribute to commodity or market value, for example weighting company valuations based on the degree of trust around the data generated or used by these companies to do their business."

"The technology used for cryptocurrencies could give central banks and governments the ability to issue their own digital currencies, which would allow them access to very granular transactional data – effectively every transaction that happens in an economy. This could enable the use of AI to support granular targeting of fiscal and monetary policy responses, for example lower interest rates over property lending for small businesses."

"By virtue of their mandates, high-grade borrowers often need to be active in funding markets throughout the economic cycle and in all market conditions. This is now leading to outcomes in New Zealand that have previously been seen elsewhere, such as large curve-extending trades."

"We were pleased to launch our bond tender programme in December 2020 with dates and volume announced six months in advance but flexibility around the bonds we offer. We were very happy with the inaugural tender and saw this as a major step toward maturity as an issuer."

"Between mid-September and mid-October we ran four nominal bond tenders in which yields were negative. This was a small sample set and it was difficult to discern any different investor behaviour, but bid-cover ratios were still reasonably aligned to history. Ultimately, yield below zero is a psychological hurdle but the world has been living with this for a long time and investors make the same assessments they do with positive yields."

"We are nine months into QE and the RBNZ owns almost 40 per cent of the nominal NZGB market and almost 35 per cent of our overall government-bond market. To give these numbers some context, the central banks with the largest ownership are the Swedish Riksbank and the Bank of Japan, both at around 50 per cent of their markets. The difference is that they have been buying for years."

"We are keen to extend the duration of our debt portfolio. With the current low interest-rate environment, we have seen enormous interest in duration product. The curve is quite steep and investors are keen to pick up yield further out on the curve."

"It is difficult to judge long-end liquidity in the euro secondary market but up to 30 years there are the purchasing programmes from central banks to support it. This means there is strong bid-side liquidity. But on the other side it can certainly be the case that, if bonds are well placed in the primary market and the purchasing programme takes up to 50 per cent of the issue volume, offer-side liquidity dries up very quickly."

"The engagement that the New Zealand nonbank industry had with Treasury and the RBNZ in 2020, through bodies like the ASF, was positive as we now have more active dialogue with government agencies. The building blocks are there for future engagement in relation to matters relevant to the nonbank industry."

"If issuers do not have good, proactive relationships with regulators a crisis is not the time to try to build them. New Zealand’s nonbank sector in general has kept its head down with regulators and as a result we have not built a strong relationship at all levels of government and educated them about our sector. We all felt this during the COVID-19 crisis, where in Australia we saw the regulators step in with lightning speed to support the nonbank sector."

"Nonbank originators were excellent in their communication around the effect of COVID-19 on their books, even compared with the major-bank lenders from which we were asking for the same information. We always received proactive and timely data from the nonbank industry."

"While the final form of UDC’s warehouse structure did not include mezzanine funding, in the early stages there was very strong interest from mezzanine investors in participating – at attractive pricing levels. This interest came from investors in New Zealand, Australia and further offshore."

"We welcomed the delay to capital reforms particularly given the COVID-19 pandemic and our priority to support economic recovery. The combination of the delay, suspension of dividends and restrictions on redeeming capital securities mean New Zealand banks are currently sitting on large capital buffers."

"System cash balances increased to around NZ$30 billion from around NZ$8 billion in the space of a couple of months early in the COVID-19 crisis. The speed of response from the RBNZ to provide liquidity to the system drew a line under any chance of a funding or liquidity crisis."

"The 2008 financial crisis was a slow burn before it got going. At the time, New Zealand banks were not as well funded and we struggled when issuance markets dried up. In the years since, our funding structures and capital requirements have changed so in many ways we were more prepared for a crisis when COVID-19 hit."

"We need to be much more mature in asset-liability management going forward. This includes how we manage in a QE environment and maintain a market presence, because we want to avoid having a maturity cliff at the back end of this."

"We had strong asset growth in 2020 so felt it was necessary to top up our capital level with a tier-two transaction. This was a risk given the final form of tier-two capital is yet to be finalised. But we had enough confidence that the main change will be the removal of the nonviability trigger in current documentation to be comfortable going to market."

"Banks are now dealing with a market setting that no-one was expecting at the beginning of 2020. There are record low interest rates, repayment deferrals for borrowers, a delay in capital reforms, prohibition of dividends and redemption of capital instruments, and a flood of money coming in through LSAP and soon the funding-for-lending programme. It has certainly been a year of challenges."

"We have seen most of the dramatic decline in economic activity reversed and investors now mostly have positive outlooks as policy remains supportive and economies normalise. All the while, however, central banks remain uber cautious with respect to any unwarranted or pre-emptive tightening of financial conditions. New Zealand is a market where we see these forces playing out."

"At the beginning of 2020, the New Zealand market lost its traditional yield advantage to Australia and the government’s fiscal position was getting stronger. Attracting new investors to the New Zealand high-grade market was becoming difficult. COVID-19 was certainly a cure for this as high-grade issuance increased to an unprecedented level."

"We need to think about the eventual withdrawal of central-bank support. There are three options for an issuer reliant on a central bank: it either has to become financially stronger to repay, find new investors to soak up maturities upon refinancing, or the central bank keeps rolling over QE – which nobody wants."

"We have the opposite challenge of the high-grade borrowers in that deposit growth and the RBNZ’s funding-for-lending programme have reduced our issuance task for the next 12-24 months. We have a strategy to maintain contact with our domestic and offshore investors, though – because we want to stay relevant to them."

"We have seen after previous recessions that output gaps, which were not as large as they are now, took a very long time to close. This time, the recovery has been much quicker than most expected, particularly in the US. This raises the question of whether a larger output gap might now close very fast – and whether the market could front-run the withdrawal of support."

"If the global economy deteriorates the economies of Australia and New Zealand will also deteriorate, and vice versa if there is improvement – so these sovereign bonds still work very well as hedging assets. Generally, though, we think things are changing and government bonds may not be as useful hedging assets as they once were due to levels of spending and central-bank monetary easing."

"Extending time horizons from the next quarter or the next year out to the next decade or even several decades means we must account for a wider range of risks. This includes climate change: an intergenerational risk that will have truly massive financial impacts. It is a risk that cannot be ignored by businesses, regulators, consumers or investors."

"There is a massive role for the financial-services industry to play in meeting challenges like climate change and inequality. We have a serious challenge in our communities around financial inclusion. The Aotearoa Circle’s Sustainable Finance Forum’s roadmap has 11 key priority areas and we cannot expect the government or philanthropic sector to solve them all."

"When we are in such a low interest-rate environment, where the cost of borrowing is so low, considerations for housing investment become skewed toward the rate of return. Anything that changes expectations around return, such as housing supply or capital-gains tax, could help balance this."

"Fiscal policy has been driving the economic rescue mission and the central bank has been the supporting actor, with QE. Over the next year or so it will remain the domain of fiscal policy to determine where the economy goes. One of the great things about the fact that the government overestimated the economic decline is that it now has a pot of revenue it can spend if the wheels fall off."

"There is a lack of good information and quality data for reporting on sustainability outcomes. This is a good place for companies to start – so we can better understand systemic risk and investors can make informed decisions. We want our financial institutions to take a leadership role."

"The main problem is that the lower the cash rate goes, the wider the gap between banks’ remuneration for reserves and for anything that money could be used for if lent elsewhere. This bank profit problem could be solved with an effective tiering system as they have in Europe."

"A big issue we have not solved is the supply and demand of housing. There is a migration issue on one hand, where New Zealand housing supply has lagged population growth for a while but can now catch up. On the other hand, we have not nailed the issues of cost of land and the impact of regulation. As a result, we have a very inelastic supply response to housing issues."

"We are starting to think we are bullet proof, and obviously we are not. There are significant medium-term challenges and we have not yet had a slowdown in which people’s economic decisions and loss of income are reflected, rather than the dramatic interruption caused by the government’s health response."

"Vaccines change a lot for our strategy. There are plenty of idiosyncratic risks we can take in the high-yield market, which is something we will do now there is an end to this crisis in sight. With several viable vaccine candidates, the calculus for investment versus speculation changes – and we will also change."

"The LSAP programme created opportunities at the beginning and has been reasonably consistent throughout. While LSAP continues at the prevailing level, yield rises should in theory be contained. I expect that as soon as we see economic conditions that could cause this unwind, the bond market will start to reflect it and push bond yield higher."

"Companies’ stakeholders are now having a larger say, whether it is the consumer, capital providers or staff – who now often want to see the company they work for acting in ways that are focused on more than just the bottom line. To ignore this trend of broader stakeholder engagement is very risky."

"New reporting requirements around climate change will increase the compliance burden on businesses. Having said this, in my view disclosure is good. It helps market participants price risk and helps everyone make informed decisions. However, we also need to be careful not to create a competitive disadvantage for New Zealand by increasing requirements too much."

"Exporters need to be nimble. This time last year, our lamb exports to China accounted for around 40 per cent of total lamb business. By March it was 10 per cent and now it is 55 per cent. We have been able to shift the focus of our exports as the crisis has changed. Having a relatively short-term focus during this period has been essential."

"Investment in the New Zealand property sector is very strong. There is a lot of overseas interest, with global funds interested in Auckland and Wellington. We see growth opportunities, particularly in Wellington, and I can see this leading to term requirements in debt capital markets."

"The tools we as active managers have at our disposal are the same as they have always been. It is business as usual to some extent, because we are in the business of outperforming the market. We are not in the business of chasing the returns that we might have been able to achieve many years ago."

"The move to passive investment strategies has not been as pronounced in New Zealand’s institutional fixed-income and cash markets as it is elsewhere. Part of the reason is that fees have already been sharp and are continuing to compress. Also, outperformance is more predictable in this sector so active management still has a role to play."

"The savings industry in New Zealand has matured a lot in recent years. KiwiSaver is now into its 13th year and has more than NZ$60 billion of assets under management. More than 100,000 KiwiSaver members are retired, which raises the question of whether inflation-linked bonds should become part of the bond indices."

"It is estimated that we will need to double our current renewable-energy production if we are to achieve the degree of electrification needed to meet our emissions targets. This is a daunting task, so reducing use of electricity and improving efficiency is vital. Technology will have a key role to play in this."