Volume has been maintained despite the availability of compelling alternative funding options, including US private placements and, increasingly, the Australian dollar market. Last year, New Zealand corporate issuers printed a record A$1.5 billion (US$994.1 million) in Australia, according to KangaNews data. New Zealand market users say the fact that issuance volume has been consistent for several years demonstrates that the domestic market continues to offer the best pricing option for local corporates and that most will issue to what they believe is comfortable capacity domestically before topping up offshore if necessary. Simon Eckhoff, director, debt capital markets at ANZ in Auckland, says the local market has been “remarkably resilient” from a pricing perspective.

One example is Meridian Energy. It is rated triple-B plus but Oliver McDowell, vice president at Craigs Investment Partners in Auckland, says it typically prices tightly locally as many investors view its credit metrics as superior to its current rating level. The renewable energy company’s NZ$300 million retail green-bond print on 14 March priced at the tighter end of initial guidance – 105 basis points over mid-swap – with what the issuer says was a negligible new-issue concession.

Although Meridian was the fourth corporate issuer in relatively quick succession, its decision to green-light a trade was rewarded with good demand, according to Janine Crossley, the issuer’s Wellington-based group treasurer.

Spreads in the Australian dollar market tightened in 2023, which made it competitive for New Zealand borrowers. However, Fiona Doddrell, Wellington-based director, debt capital markets at Westpac, says New Zealand spreads have held up well over the last 2-3 years thanks to the strong retail bid.

New Zealand retail investors have historically focused on outright coupon levels relative to term deposits – and the two have begun to diverge of late. McDowell says: “As investors have become more accustomed to a higher rate environment, we have also noticed increased focus on relative value and issue margins. The hunt for yield dynamic has also unwound and investors have increased their holdings of senior investment-grade bonds.”

Bonds have other advantages over term deposits for retail money, Doddrell explains. Specifically, they are typically more liquid and thus a more flexible asset class. Retail investors’ relative valuation can cause a disconnect between retail and institutional demand, however, in the sense that retail often supports issuance at effective credit spreads that are much tighter than what institutional buyers would consider to be fair value.

Outright yield-focused retail demand has been strong as interest rates have gone up, intermediaries say. But with expectations now turning to cuts in the medium term, it is reasonable to ask what will happen to demand.

McDowell says a sharp movement downward in interest rates might have some impact on the retail channel, particularly as he expects term deposits to be stickier. He believes bond margins may need to widen slightly over time to compensate, but he notes that investor duration preferences mean they are likely willing to 3,500 accept a slightly reduced short-term rate for longer-term certainty and liquidity.

He continues: “If investors are convinced rates are likely to fall we may see a FOMO effect kick in, which could lead to some short-term margin contraction. If rates normalise at lower levels, it is likely there will be some rotation into higher-yielding offers.”

Doddrell does not believe retail demand will necessarily drop if rates are lower. She notes that interest rates were significantly lower throughout the pandemic yet investors continued to support transactions even with 2-3 per cent coupons.

Sarah Theodore, Auckland-based head of finance at Summerset, points out that the issuer received strong demand for the NZ$150 million seven-year deal it priced in September 2020 despite the bond’s 2.3 per cent coupon. She believes investors will continue to support companies that have a strong story through the economic cycle, as this will be more significant over the 6-7-year duration of a typical corporate bond.

Even if the retail bid were to encounter yield-based headwinds, there remains cause for optimism regarding the overall health of demand. Doddrell says baseline demand is growing as KiwiSaver funds accumulate. Meanwhile, retail investor sophistication may also be growing. For instance, Doddrell says retail investors are beginning to differentiate between issuers’ credit ratings and the spread on offer.

This may be coming through in the form of more frequent mingling of retail and institutional money in retail format deals. “We had a good mix of institutional and retail in our recent deal, though the retail investor base in particular has been very strong lately,” Crossley says. “Institutional investors look at relative value and they can go offshore – for instance to the Australian dollar market – although the margin tightening in Australia supported participation in our transaction given the lesser pricing delta between markets.”

As a general rule, the further down the rating spectrum the less likely it is that there will be institutional support for a deal – and unrated bond issuance has generally been light in the last year.Doddrell says the unrated corporates that have come to market have had good name recognition from investors.

For instance, Summerset printed an upsized NZ$125 million retail bond, from NZ$75 million, on 1 March. “There was a good mix of retail and institutional investors,” reveals Theodore. “The deal was oversubscribed, as was the case with our two previous transactions.”

This includes growing institutional appetite for Summerset’s paper. Theodore adds: “This is positive not just for the fact that it is great to have their support. It also helps ensure we are maintaining a healthy tension within the retail bond market itself, among the brokering channels, when it comes to reflecting a more accurate level of the bonds’ fair value during the price discovery process.”

Investors of all stripes are particularly keen to lock in extended tenor in the current rates environment. McDowell points out a lot of corporate bond issuance centered around the 5-5.5 year range in 2022 and 2023. For many investors, this means their maturity profile is quite short. Consequently, bonds maturing in 2030 and 2031 are “like gold dust”, he comments.

KangaNews data reveal NZ$1.5 billion of corporate bonds is set to mature in 2030 and a further NZ$500 million in 2031 (see chart 2).

Doddrell agrees investors are keen to fill up these pockets of their portfolios. She points to Spark’s ability to complete a dual-tranche transaction – a rare occurrence in New Zealand – which included a 7.5-year tranche. This was possible at least in part because there were simply not any bonds to be found in the secondary market with 2031 maturities, Doddrell suggests.

While the overall demand environment is supportive, intermediaries agree that ongoing supply will also depend on what corporate borrowers can achieve in the loan market. If the bond option remains attractive and around current relative pricing levels, Doddrell expects issuers will continue to consider it, to receive the additional benefits of diversification and longer tenor. She also points out that seven-year tenor has not come easily to every corporate in the bank market.

Doddrell sees little reason for calendar year 2024 to deviate from recent annual volume norms. Further ahead, she suggests a national infrastructure funding task that is becoming critical will be a natural source of supply in the years to come – as will the electrification task and other forms of climate change adaptation and resilience.

For now, the outlook is solid rather than spectacular. McDowell tells KangaNews: “It feels like the market may need a slight breather following two years of substantial issuance. We also know issuers in certain sectors, such as property, are waiting for margins to normalise before accessing the market. This will have some impact on general activity.”

McDowell continues: “On the other hand, there is a significant volume of bonds maturing this year, which should support investor demand, and margins remain very competitive for most issuers.”