BILL Globally, markets have been quite conducive for IFC [International Finance Corporation] – as they have for most issuers. The second half of calendar 2022 was shaky. We were able to access the Kangaroo market even ahead of accessing the US dollar market, though – which to us was quite telling. Deals in the US were simply too big, in my opinion, for investors to take a risk. In Australia and New Zealand, the trades were a decent size but they weren’t ‘neck-breakers’ if something didn’t go right.

Investors look at the strength of the currencies they are buying relative to US dollars, so we pay close attention to what is happening in the US. A more important dynamic is our credit spreads – and, so far, they have been quite resilient.

With interest rates, one could argue that New Zealand is ahead of the curve on the cycle, as are Australia and perhaps Canada. A lot of this relates to the transmission mechanisms working at different speeds. Most countries outside the US have some form of adjustable mortgage rates. In the US, they are mostly 30 years locked. The Fed [US Federal Reserve] might need to raise rates a little higher if the economy continues to be as resilient as it has been.

This means it is possible that other central banks have to cut ahead of the Fed. There is also an argument that the US dollar gets stronger in times of distress. These scenarios would be supportive for the US dollar.

KOTAMRAJU Markets have been constructive for us this year, similar to our experience in previous years. We have funded more than US$20 billion in the year to date across 22
currencies. As a US dollar-based funder, we continue to access the US dollar benchmark market across the curve and US dollars continues to be our most active currency of issuance.

New Zealand dollars has been constructive and meaningful to our funding programme as we maintain a consistent presence and grow our curve. So far this year, we have tapped the market with a five-year transaction totalling NZ$675 million (US$416 million).

Over the last two years our issuance in New Zealand has been quite significant, growing to about NZ$2 billion per year, with similar volume in the Australian dollar Kangaroo market. The New Zealand dollar market continues to be in our top five issuance currencies.

FUJIMOTO World Bank has issued two Kauri transactions in 2023 to date, for total volume of NZ$1.5 billion. This is more than our full-year issuance during 2022. It is worth noting, though, that in 2020 and 2021 we issued more than NZ$2 billion. While demand for our Kauri paper has been  strong this year, we would be delighted to achieve this level of issuance again.

We have responded to investor demand for shorter-dated bonds, printing a NZ$950 million three-year deal in June. This is a maturity we have not accessed previously in New Zealand and is partly a reflection of diversified investor demand as a result of the Reserve Bank of New Zealand (RBNZ)’s liquidity policy review (LPR).

However, we also believe the demand to be a function of investors’ views on terminal rates in New Zealand and globally. At the same time, political risk and evolving central bank policy, as well as yield differentials, are likely also having an impact on sentiment.

Going forward, we must navigate the market to respond to investor demand at the time of issuance. We would like to return to the Kauri market in the mid-curve or longer. However, given we swap all our bond issuance back to US dollars, it must be competitive with our US dollar curve at that time.

We hear that the mid-curve is still the deepest for liquidity and, as Ana has mentioned, Asian Development Bank (ADB) has issued in this part of the curve. I think it’s fair to say that the current cross-currency market may make it trickier for SSA [supranational, sovereign and agency] issuers and the market is not there for World Bank at the moment – but we continue to monitor it for openings.

MARTIN Global volatility has improved since around March, but there were still things happening in New Zealand to keep investors alert – such as the run up to the May budget and the North Island weather events earlier in the year.

In this context, we have been pleased with how our tenders have played out. Since March, cover ratios have been about three-and-a-half times, above the five-year average, and decent right across the curve.

We did our first syndication for the year just ahead of the Silicon Valley Bank disruption, issuing NZ$4 billion in a bookbuild that attracted more than NZ$8.5 billion of interest. Overall, offshore ownership of New Zealand government bonds (NZGBs) has picked up and has moved toward 65 per cent in recent months – from a low of around 50 per cent in late 2020. The market has been pretty good for sovereign issuance, but we are not complacent.

BUTCHER Adjusting for the volume markets had to absorb in the past year, I’d say conditions have been good – notwithstanding the fact that they remain volatile. To navigate through influential offshore events while increasing funding has been a testament to the New Zealand market’s capacity for growth.

We have had nine auctions and two syndications so far this year. Two or three of the auctions were not as strong as the others. Some auctions will go well and some won’t – as a continuous issuer we must accept this. But overall investor support, including from offshore, has been strong over the year.

We have issued more bonds over the course of the year, but with shorter duration – we haven’t tested interest at the longer end of the curve. Most offshore interest has been in the 1-5 year part of the curve, as opposed to 10 years or more.

WAIT It is encouraging that a number of investors that were traditionally just NZGB buyers have been attracted to LGFA [New Zealand Local Government Funding Agency]. Two or three new accounts have bought reasonable volume over the past three months.

AUSTIN This is a good point. It is a slow burn, but we are getting a more vibrant market. Offshore relative-value players are studying the dynamic between NZGBs and LGFA, and actively putting on spread curve trades. There is a lot more of this type of cross-issuer activity occurring within the New Zealand complex which, at the margin, is adding liquidity to our market.

BUTCHER We have also seen good growth in retail demand. All our bonds are listed on the NZX and turnover has trebled in the past six months – albeit from a low base. The new May 2030 sustainable bond has seen activity on 58 out of 63 trading days since we issued it.

BISHOP Auckland Council hasn’t been active in the longer-term capital market since late 2022. We are planning to sell down part of our financial investment in our Auckland International Airport shares, so we have been funding short for the last six months or so.

When we were last in the market, late last year, conditions were alright but not fantastic. They have improved slightly since then but there is still a lot of volatility around. We probably won’t be back in the longer-term capital market until later this calendar year.

SPEIZER The market broadly agrees with the RBNZ outlook, partly because the reserve bank has done a pretty good job in clearly communicating its current stance. The market hasn’t confidently priced in a lot more tightening. Some easing has been priced in from around the middle of next year, which is not too different from the central bank’s expectation.

The RBNZ has been resolute in tackling inflation. This is a good story for foreign investors, who don’t want unexpected bursts of inflation when they are holding assets. An easing cycle is coming – which is an additional attractive factor for bond investors, as will be the eventual steepening of the yield curve. There is a lot to like about the monetary policy backdrop and what we expect the reserve bank to do.

AUSTIN Offshore participation in our market has been ticking up and it feels like we are going to see continued growth. This is a good tailwind for our market. This time last year, we had endured a two-year period of New Zealand fixed-income yields grinding about 20 basis points higher per month. Fixed-income portfolios were losing money.

While volatility remains elevated, yields have broadly consolidated in the last 6-9 months – and fixed income is back in vogue. New Zealand sits ahead of the pack through the actions of the central bank, so we are well placed.

SPEIZER Exchange rates could become more of a factor over the next year. There is a view that the US dollar, which has had a strong run, will start to ease. One recipe for this to happen would be that the Fed finishes its tightening cycle so the US dollar loses yield spread support. In addition, tightening will cause the US economy to slow. If risk sentiment doesn’t deteriorate too much, this could result in a weaker US dollar.

If this happens it could cause a shift in asset allocation away from the US dollar and into more peripheral currencies and countries – including emerging markets, and Australia and New Zealand.

WAIT We should acknowledge that there has been something of a slowdown in offshore interest over the last month. As the RBNZ was tightening, offshore investors were actively investing in New Zealand because many expected a sharp slowdown in the economy and a risk that the RBNZ could overtighten, in which case rates could fall quite quickly.

Now the RBNZ has said 5.5 per cent is probably the extent of increases, investors are watching the data. They are waiting to see what the next signal from the reserve bank will be and, potentially, when it will to start to ease.

It is a case of waiting and seeing how the economy plays out over the next three or four months. The backdrop is encouraging, though. We have benefited from the RBNZ’s clear messaging, in contrast to some other central banks.

DODDRELL As Ana alluded to, the backdrop is broadly constructive. However, to Mark’s point, the globalisation of markets and trading can at times have big impacts on smaller economies and their monetary policy.

We need to be aware of this when executing primary transactions. Investors want to be compensated for the overall risk as well as New Zealand-specific issues, and it is not a given that investors will pile into every trade.

Sometimes the volatility sits within swap spreads and it can influence whether or not a deal goes ahead. However, in general the market and issuers have adapted to the new normal and trades with strong outcomes are being executed.

CARTER Frequent high-grade issuers are used to being nimble in their execution approaches, and it can be common to closely monitor for a suitable window of execution over a period of time.

In this backdrop, domestic and offshore data events are typically far more ‘live’ than they were a few years ago. We are conscious that any material change in data expectations or outcomes can have an impact on transactions and can therefore limit the number of available execution windows.

MARTIN We have put a lot of emphasis on regular engagement, in good times and bad. Even when we know some funds may not be currently invested or have a contrary view, it is important to remain engaged. We see that we have a role in keeping New Zealand on the radar for global investors – to
benefit the New Zealand capital market, not just to support our own issuance.

In our most recent post-budget round we have done about 40, mostly virtual, meetings around the world. It seems that many investors believe the RBNZ is almost at the peak for rates. This is giving investors increased courage to start looking at our spreads relative to the US and Australia. There appears to be no concern about sovereign credit risk.

The breadth of questions is quite wide. Some investors want to get into the nitty gritty of when the next syndication will come while others may focus on the macro backdrop or the housing market. We generally find investors are well informed.

BUTCHER New Zealand is a small market, and one advantage of this is a small number of New Zealand-domiciled high-grade issuers and banks can present a united front. Hopefully we are all giving a consistent message to offshore investors.

When talking to international accounts, we typically come away quite surprised by how much weight they actually give to New Zealand given our small size in the global context. They are always engaging and informed. The relationships we have are quite enduring, having gone through various interest rate
and spread cycles.

The universe of offshore investors continues to grow – and the fact that NZGBs are now part of the FTSE World Government Bond Index has been quite important. On the flip side, there are some downsides of not having diversity in the local market during volatile times.

SILVER We were in the UK in April where we spoke to a range of institutional investors. I agree that they really look quite deeply into New Zealand. They watch our politics very closely, and they wanted to understand predictions for the next election and to test their views on economic stability.

BUTCHER I should say that I appreciate the certainty of the RBNZ’s transparency and timeline. It is good to get market input. But if it drags on for too long, it can create uncertainty.

What is important for us is the definition of HQLAs [high-quality liquid assets] – what is in and what is out, whether there will be a new category of HQLA for the SSAs and LGFA, and how closely the RBNZ will seek to align the categories with international equivalents. I think alignment is important, particularly when it comes to ensuring ongoing offshore investor involvement and engagement in the domestic capital market.

We have yet to see the LPR have an impact on offshore investor demand. Investors want to understand it, but it is just one of many issues they are considering with regard to investment decisions.

If there were an impact from the LPR, I would expect it to be on bank demand. Bank appetite for LGFA bonds has been flat over the past year but it has moved further out on the curve. The strong lift in offshore investor participation has largely been front-end buying.

WAIT I agree that the most important part is what is in and what is out. For less liquid bonds, we are also interested in the haircut bank books will have to pay for collateral. We are also keeping an eye on the timetable as well as any implications the decision will have for existing lines – specifically whether
they will be grandfathered. The LPR will have implications for NZGB performance in the next couple of years, too.

MARTIN Our perspective is as an issuer but also an investor in high-grade bonds. We are also interested in the vibrancy and functioning of New Zealand capital market.

As an issuer, we are watching to see if the result is increased demand for government bonds. If there were to be a structural shift to increased demand at the short end of the curve, from banks, we have the option to make an offsetting structural shift in issuance, for example. But this issue didn’t come up in any meetings during our recent global investor engagement.

It is encouraging, and to be expected, that the RBNZ is cognisant of the potential impact on liquidity of a large portion of government bonds being held by bank balance sheets.

SPEIZER The second consultation document is a pretty good guide to the spirit of the changes. At face value it indicates greater demand for government bonds – but we don’t yet know if this increase in demand will be trivial or significant. We want to see the numbers.

BILL Anecdotally, we have heard that some of our peers have held off issuance as they are waiting for the results of the LPR. Some issuers will be more severely affected than others.

There has been some discussion about the LPR among supranationals, and the general agreement is that having more issuers in this space, and the SSA sector in particular, is good for development of the market and liquidity overall. IFC provided feedback to the RBNZ and we hope this will be considered. Having more issuers inevitably goes toward creating layers of liquidity. The concern would be if the LPR narrows participation by international issuers and reduces diversification options for local asset managers.

Also, the process must consider what happens to liquidity in a risk-off scenario. Nobody argues that NZGBs are the most liquid but one could envision a scenario of a New Zealand-centric event where perhaps Kauri bonds would perform better on a relative basis. 

We have seen various points raised about liquidity, some of which really relate to availability of bid as opposed to bid-offer spread. For us, liquidity has always meant availability of bid and, in particular, its availability in times of distress.

It is also worth emphasising that none of the discussion about the LPR removes the fact that we are experiencing more investors asking about New Zealand, for example in the central bank community.

BISHOP The LPR is a bit of a concern for us. We are focused on the timing and whether there will be grandfathering of the changes.

With the current wording, I think we would see a lower level of demand for our New Zealand dollar issuance, especially from bank balance sheets – which have traditionally been pretty strong supporters. It is likely to mean we issue smaller transaction sizes or shorter-dated deals.

FUJIMOTO We think it is insufficient to rely solely on turnover data to determine the liquidity of a security. It is more appropriate to consider a broader perspective, on the basis that securities with liquid characteristics in normal markets can exhibit poor characteristics during times of stress. For example, European covered bonds were considered liquid prior to the financial crisis but quickly became illiquid during the stressed period.

A report by the Financial Stability Board in October 2022 mentioned that core government bonds are usually liquid instruments in times of stress. However, it also noted that in March 2020, following the COVID-19 outbreak, many of these instruments experienced extreme dislocation and deterioration in liquidity.

Hence turnover data is useful but shouldn’t be the only tool to determine liquidity. With this in mind, we think it is more appropriate to consider bid-offer spreads as well as other characteristics of bonds.

In addition, SSA bonds have a tendency to display lower turnover volume in the secondary market because a large proportion of our investor base is buy-and-hold. History has proved that SSAs are tightly held, even during stressed periods, so we strongly believe that SSA securities should be part of New Zealand’s tier-one liquid assets – which would also align with international standards.

A key component in the RBNZ’s considerations should be investor views, as investors must be comfortable that appropriate assets are included and at the correct level. For domestic investors needing to sell, there is usually a buyer for SSA paper given international investors’ familiarity with these
credits. There is also a different risk profile that we provide to investors that adds diversification to their portfolios.

KOTAMRAJU ADB has also made a submission to the consultation and we are monitoring progress. We continued to see strong demand from domestic investors in our most recent five-year Kauri issue.

I agree with Marcin’s point that SSAs provide diversification for investors in the New Zealand market and their presence is constructive for the growth and development of the market. ADB and other SSAs attract demand from on- and offshore, which has allowed us to grow our presence in recent years and
provide liquidity to the market.

AUSTIN The market is craving a resolution as soon as possible. The most obvious manifestation is increased conservatism from the balance sheet investor community.

Mark is correct in saying that balance sheets are still comfortable playing along the LGFA curve – and he obviously has better visibility of this than I do. But where we have seen investment beyond the LPR horizon date – such as the recent five-year Kauri deal from ADB or extending along the LGFA curve – balance sheets are either taking the view that these bonds will be HQLA eligible, grandfathered or that, by the time we get three years down the track, these assets will be short enough that they can live with them not being HQLA category one assets or they can exit. In the meantime, they can enjoy some additional carry.

Some real-money investors have expressed concern that a potential reduction in bank balance sheet ownership of some high-grade assets will have a negative impact on market liquidity. It is worth remembering, however, that domestic issuers’ securities will remain in the key indices used by local fund managers, so real-money investors will continue to be natural buyers.

BISHOP With respect to the budget, there will be an impact from the storm events but it will probably not mean a large increase to our capex programme – which is already forecast to be around NZ$3.5 billion a year going forward.

What will change is the reprioritisation of capex: switching out of some projects into ones that are more associated with climate resilience. Although our debt level won’t be any lower than previously forecast, I also do not think it will be materially higher.

The things that will affect our debt requirements, such as the sale of a portion of our financial investment in Auckland Airport and the water reforms, will probably have a greater impact on our debt programme going forward than the weather events themselves.

MARTIN At the May budget, our programme for the full forecast period increased by NZ$20 billion. A relatively small portion of this was additional funding due to the weather events. However, unfortunately, this event will likely not be a one-off: it is unlikely it is a one-in-100-year event anymore. Any government is going to have to consider how it accommodates climate-related spending.

What this means for our green-bond programme is trying to understand what parts of the investment align with the global criteria set out in our framework. When it comes to spending on climate change adaption, the conversation can
be more nuanced. Additional work may be required to ensure alignment to criteria.

BUTCHER The recent weather events affected fewer than 10 councils. In the long term, though, it is a story about resilience and diverting resources to climate change. We did research last year on how many councils had declared a climate change emergency: the result was only 17 councils out of 78. If we did
a climate change emergency declaration exercise now, it would probably double.

I expect we will see greater borrowing, greater capex and greater infrastructure associated with climate change going forward. In the near term, probably the biggest widespread impact from the weather events is construction costs. Councils are having to borrow more to deliver the same projects because construction costs have increased significantly.

SILVER Prior to the weather events in January, we found that most issuers didn’t see value in discussing adaptation; their focus was on mitigation. Since then, when businesses and  communities experienced ‘unprecedented’ rainfall several times over, more councils and businesses now view adaptation as a key component of their planning and are keen to get it into their sustainable finance agenda.

KOTAMRAJU ADB’s vision is to achieve a prosperous, inclusive, resilient and sustainable Asia Pacific while sustaining efforts to alleviate poverty. This suggests that all our issuance is ESG issuance.

Having said this, in response to investor demand we established our theme bond programme in 2010 and this has grown significantly over the years. These transactions have allowed us to highlight ADB’s initiatives in specific areas through our green and blue bonds, and theme bonds such as gender, health, education and water. These areas are in line with ADB’s operational priorities.

We have encountered strong interest for our theme bonds across markets over the years and they have grown to be a significant part of our programme. In the Kauri market, we have issued gender and health bonds in the past two years and some of our largest transactions have been in these themes.

FUJIMOTO Our experience is that more investors have been keen to understand sustainable investing, which is obviously positive for our issuance. Across different markets, we are comfortable with the holistic approach we take to issuance: in other words, and as Ana says, all our bonds could be considered sustainable investments.

During the last 12 months we have seen investors seeking a more holistic level of transparency – so not just an interest in labelled bonds but preferring the whole-of-issuer approach. We have been able to respond to this demand with World Bank issuance and it is pleasing to see this focus on the issuer growing.

We produce an annual impact report that covers projects World Bank supports and how these projects contribute to the UN Sustainable Development Goals. When we meet with investors, they ask us broad questions about aspects such as the sustainability of the projects in which we invest, their efforts to transition to a low-carbon economy and how they invest in human capital. Nowadays we also include some information in response to these types of questions in our impact reporting.

Of course, investors’ sustainability focus can be different across markets. But it is clear that there is greater interest in these types of investments globally.

BILL One thing that struck me when we issued our inaugural Kauri social bond was that we were able to get slightly more volume thanks to the fact it was social. It was only NZ$300 million, but at that point investors were quite reluctant to go further out the curve. Issuing a labelled bond helped extend the curve. We have seen this happen in other markets, too.

SILVER Generally, we are still seeing a lot of interest in green bonds globally, particularly in the UK and Europe. We haven’t seen much movement in SLBs here. Perhaps this is due to the perceived regulatory barriers to retail sustainable bond issuance in New Zealand.

It could also have been due to the ripples of concern about SLBs that we saw from Europe last year. Investors were questioning whether sustainable development targets in SLBs were sufficiently ambitious, and issuers and investors were perhaps concerned about greenwashing or just buried by the
dense weight of EU regulation on sustainable finance – or a combination of these things.

However, our recent travels to the UK confirmed that, while there is still a strong focus on green, SLBs have a very important role to play and the market has solid growth potential. Some investors went so far as to say they would like all issuance to be in SLB format.

SILVER We were balancing innovation and integrity throughout this transaction. The key with sustainability is transparency, which one could say is the antidote to greenwashing. What we hear from investors is: don’t go quiet on us, tell us what you are doing. Investors want to see urgency in ambition and conviction about mitigation, and alignment of capex funding to mitigation.

LGFA’s programme is unique in that it covers financing for proceeds-based lending for sustainable assets – like climate change adaptation, community housing and green buildings – and lending to incentivise climate action, helping councils reduce their overall emissions. It was an easy conversation with investors because they could readily see the value proposition. This was a world-first sustainable bond – nobody had blended sustainability loans and climate action loans in the way LGFA did and there were no ICMA [International Capital Market Association] principles to support this.

Right from the beginning, LGFA and Westpac knew we wanted to align with global sustainable finance market principles and precedent as much as possible. In its engagement with investors, LGFA was very transparent about where the bond didn’t align and why.

Innovation drives any market and we are confident that other issuers will follow this approach. It makes so much sense for lenders like LGFA and for investors that are committed to supporting meaningful climate action across a portfolio of loans.

BUTCHER We were careful to position it as an LGFA bond with some sustainability aspects to it. It wasn’t a sustainability bond, per se, because of the structure and our use of proceeds. The bond was an opportunity to showcase what the LGFA and the local council sector is doing on sustainability.

Overall, we had good investor support. Only one investor didn’t participate due to it not aligning 100 per cent with the ICMA principles. On the flip side, there were a couple of new investors.

This bond is about forming and maintaining relationships with investors. It was beneficial more to ongoing investor engagement than expecting direct, short-term financial benefits. There is a really good reason now for us to say to our councils that we are doing this issuance so you need to do your bit as
well. As an aggregator for the sector, we represent the sector.

MARTIN We are trying to align with global definitions as far as possible, to be globally relevant. There have been some interesting conversations across the government sector where some participants might say something they are working on ‘seems’ green and ask to showcase it, but we have to say it may not align with the global criteria – in which case it can’t be included in the programme. There is also a realisation that, with the passage of time, the bar will only get higher.

SILVER Offshore jurisdictions are developing their own taxonomies to define what is green, social and transition lending and investing. Australia is doing it now and the EU taxonomy is already in place. This is a very weighty document with some challenges. Some of it is applicable to New Zealand, some is not. Discussions in New Zealand are developing around a potential domestic taxonomy, which I think would
bring a lot more clarity for investors and issuers.

The lack of a taxonomy hasn’t prevented issuance in New Zealand. But what we picked up in the UK was that issuers take comfort from aligning with an approved list of sustainability actions, while investors are more comfortable having funds where the bonds align with the relevant taxonomy. A set of clearer criteria in New Zealand would help.

It will be challenging for sovereign investors to engage and form relationships with agencies they previously didn’t have direct contact with, and then ask them to do extra work, tracking and reporting so the issuer can assess and select assets for a pool. But it is about the whole-of-government transition story, which is important for ‘New Zealand Inc’.

MARTIN It has been a huge transition for us. NZDM now has a full green-bonds team now: people who were generally hired with completely different skills from our other teams.