Government-sector issuers roundtable part one: Australian perspectives

In January 2018, KangaNews invited representatives of Australia’s biggest government-sector funders to a roundtable discussion in Sydney. In the first part of the discussion, the issuers shared insights into the global funding environment, global investor demand and their own ambitions with respect to curve duration.

  • Vince Cinquina Head of Financial Markets WESTERN AUSTRALIAN TREASURY CORPORATION
  • Jose Fajardo Director, Head of Funding and Liquidity QUEENSLAND TREASURY CORPORATION
  • Justin Lofting General Manager, Treasury TREASURY CORPORATION OF VICTORIA
  • Fiona Trigona Head of Funding and Balance Sheet NEW SOUTH WALES TREASURY CORPORATION
  • Laurence Davison Managing Editor KANGANEWS

Davison Perhaps we can start with issuers’ review of funding conditions during 2017. Markets in general were very benign, but how was this reflected in demand for Australasian high-grade bonds?

NICHOLL After the big global sell-off in late 2016 Australian Commonwealth government bond (ACGB) yields retraced this rise progressively over about six months. This coincided with the second half of our biggest issuance programme to date, so we were pleased to see strong and steady demand throughout 2017. The results of our syndications and tenders show that there has been solid underlying demand.

Calendar 2017 was also one of our busiest years for investor engagement. We consistently heard from investors that they weren’t concerned about the Australian sovereign being placed on negative outlook by S&P Global Ratings, which confirmed once more in our mind that offshore participation is driven primarily by yield and liquidity.

ACGB spreads to US Treasuries (USTs) remain a key factor for some investors though, and have contracted quite significantly at times, especially in the second half of 2017. A few investors have suggested that if the ACGB curve gets too flat to UST they may stop buying while they look to the market to reprice – but none have suggested that they would necessarily start selling as a result.

The final thing I’d note is the shape of the ACGB curve towards the end of 2017. I think it’s fair to say that other sovereign curves have flattened more than ours, and some investors expect to see further flattening of the ACGB curve in time. This expectation seems to be borne out by ongoing interest in the ultra-long end of the curve.

TRIGONA I agree that it felt throughout 2017 that the market was in good shape for our issuance. The positive conditions were in evidence for us as early as March, when we issued a new 2027 bond that was oversubscribed and certainly put aside any lingering questions about liquidity.

Since then, we have topped up our 2030 benchmark bond via syndication and issued a new 2029 benchmark bond – with both transactions being oversubscribed and very well received in the market. We continued to increase the amount outstanding in various benchmark bond lines, primarily via taps but also by tender. Going into 2018, we have been encouraged by very positive new-issuance volume in the first few weeks of the year.

“It has been particularly pleasing to see more aggressive interest out of the domestic real-money sector. This is certainly a positive dynamic, alongside the good demand for semi-government securities in general.”

COLLARD Funding conditions for high-grade issuers and other well-rated credits remained very accommodative during 2017. This was partly driven by a continuation of the desire for high-quality credits by investors during a period where globally there were ongoing uncertainties – for example the election of a new US president, Brexit ‘indigestion’ and the sluggish European economic recovery.

In the context of these factors, well-rated Australian and New Zealand issuers remained one of the highest-quality credit groups in global capital markets. With this as the background, demand for high-quality Australian credit remains very strong.

Credit has clearly repriced and tightened over the last 12 months and the market’s appetite to embrace credit – whether in fixed-income or equity markets – appears to be insatiable. There is global uncertainty in some jurisdictions and currencies, but this is why investors continue to support Australasian credits which have a proven track record of stability and certainty.

LOFTING Treasury Corporation of Victoria (TCV) wasn’t active in funding markets until later in 2017 – we did a A$500 million (US$397.7 million) tender of our 2028 bond in October - as prior to this we were still digesting the funds from the sale of Port of Melbourne. We could easily have done a larger transaction when we returned – we just didn’t need additional funds.

Our focus in recent months has been on extending our yield curve. We increased our 2040 by A$200 million, did a A$100 million 2047 issue and also increased the outstanding volume of our 2032 quite significantly. Conditions were also very favourable for this type of semi-government issuance. The only caveat is that our spreads had widened somewhat in expectation of the return to term issuance – while still being very attractive on an outright basis.

Australian issuers and global relative value

It remains to be seen how global demand for Australian assets will evolve in the next phase of the rates cycle. So far, issuers say the erosion of Australia’s global yield advantage has not cost them excessively.

DAVISON Flat Australian cash rates and the hiking Federal Reserve have helped erode much of the yield advantage that helped put the Australian dollar on the global investor radar in the early part of the decade. What feedback have issuers had from investors about appetite for Australian dollar assets if the yield pickup remains limited?

COLLARD Even though Export Finance and Insurance Corporation (Efic) did not engage in any term funding during calendar 2017, we continued to receive reverse enquiry from existing and, more importantly, new investors looking to buy Efic debt in Australian dollars and foreign currencies. There are two parts to the investment decision – the return and the credit. Investors are happy with the credit and perhaps they previously saw higher outright interest rates as some sort of ‘arbitrage’ for buying Australian dollar product.

Now the US yield curve is steepening, this overcompensation isn’t necessarily going to be there. But I don’t think this will bring about a decrease in demand for Australian credits because of the quality of the bonds that debt investors are putting onto their balance sheets.


“It’s true that some investors tell us the ACGB market doesn’t provide enough yield so they have to look elsewhere. But for every one of these there are plenty more that aren’t as focused on yield specifically.”


CINQUINA Western Australian Treasury Corporation (WATC) was quite active in the market throughout 2017. The observation I would make is of the surprising strength of investor interest we found, especially in the second half of the year as evidenced by the results of our syndications. From our perspective it has been particularly pleasing to see more aggressive interest out of the domestic real-money sector. This is certainly a positive dynamic, alongside the good demand for semi-government securities in general.

FAJARDO The support for issuance from both domestic and offshore investors has been very strong. This has allowed us to get ahead of our programme: we have issued A$6 billion in the current financial year, predominantly in the long end.

The subtle change in demand patterns is, I think, the strength of demand for 10-plus year paper – especially from offshore investors. Our landmark transaction in 2017 was a 2030 maturity, which attracted 40 per cent offshore distribution. This is higher than our recent experience in syndicated trades.

We were also able to issue a new 2047 line in 2017, the outstanding volume of which is now at A$250 million. In addition, we continue to tap into our euro-denominated 2046 bond. There’s no doubt that we could have issued a lot more long-dated paper had we had further need from our clients.

LOFTING One other thing I’d note is the change in apparent capacity for our group of issuers to issue at around the same time. Three of the states issued around the 10-year mark close together in 2017, and the market digested this without any real problems. I’m not sure we’d have had the same experience, particularly in the long end of the curve, at any previous point.

KENNEDY There was a good combination of factors at play. Rates had backed up internationally and offshore uptake was very positive. We had a similar experience to what Jose Fajardo describes when it comes to the offshore participation in the new 10-year syndication we executed in February 2017 – the largest international participation in the book for one of our deals for many years. We certainly experienced a widening and deepening of our investor base around this time.

The only thing that was a little different for South Australian Government Financing Agency (SAFA) was that we experienced some political overhang from the question of whether the state would introduce a bank tax. This made us a little cautious about market entry in the second half of calendar 2017. Given the tax is now off the table we believe we are back to having good market access, as proved to be the case when we issued in December.

Davison What sort of feedback have issuers received that might explain the strength of demand from, in particular, offshore investors in 2017?

LOFTING I think the fact that yields had backed up, especially in the long end of the curve, certainly helped. Our experience was that the biggest area of demand growth was from Asian investors in the very long end.

TRIGONA Our curve widened more than the US in the 10-20 year segment, which prompted offshore investors to look hard at Australian dollars beyond 10 years. New South Wales Treasury Corporation (TCorp) also issued a 2037 bond in 2017 – our first 20-year transaction – and offshore participation was important in this deal, too.

Davison How likely are issuers to flex issuance into the long end to take advantage of demand?

TRIGONA Our borrowing clients have themselves been lengthening, so this type of issuance is something we have wanted to do anyway. Overall rates are also still very low, so it’s clearly a good time to issue.

FAJARDO It’s similar for us. We’ve had a strategy of smoothing and extending our maturity profile in place for some time, to reduce our refinancing over time. This, combined with client requirements, has given us capacity to issue in the long end.

LOFTING As TCV has been absent from long-term markets for a few years we need to do some work to re-establish the back end of our yield curve. Our clients want to borrow at 10-years or longer duration, too – they are building long-term infrastructure so they want long-term funds.

“We are seeing investors from parts of Europe we never expected to see. But this is part and parcel of good investor-relations work globally – you meet investors you weren’t previously familiar with, and in time some of them come into your curve.”

Davison TCorp and TCV have both had periods of low or zero new-issuance requirements thanks to the proceeds of state asset transactions. Did these issuers have capacity to take advantage of good market conditions on the basis that term funding was always set to resume at some stage?

TRIGONA We certainly had capacity to take advantage of market conditions. We issued A$3 billion at the very long end in 2016/17,while buying back short-term bonds.

The asset-lease transactions by the New South Wales (NSW) government saw a requirement for more aggressive liability management despite the overall low net funding requirement. We saw market opportunities to issue and we are able to warehouse risk on our balance sheet. We can prefund when we feel it is appropriate to do so.

LOFTING We always try to maintain our access to markets and our liquidity but there is only so far we will go to do so, given any additional debt is still a cost to the state. Ultimately, what we want to do is link our client funding as closely as we can with what we issue. We prefund at the margin, but we won’t get years ahead of the issuance task.

Davison Are there any other thoughts on prefunding to take advantage of positive issuance conditions?

FAJARDO We have taken prefunding opportunities in the past. Once we have completed our funding task we may look at issuance opportunities if the market is supportive. We have certainly had positive feedback on this approach over the years we have used it.

NICHOLL We have certainly prefunded over the past few years, for a number of reasons. One is that we have had a run of syndications that were a lot larger than expected – in this case we weigh factors like the additional cash we are carrying and the benefit of regular supply into the market. We tend only to update our issuance rate twice a year and the market has come to expect consistent supply from us. Calibrating our regular issuance against the costs and benefits of prefunding at times – of taking more volume when it is ‘on the table’ – is something we constantly consider.

We were prepared to carry larger cash balances when funding tasks were increasing and the market outlook was distinctly more risky. It’s a different story now, especially given declining issuance and the fact that we are the other side of some significant market-risk events in Europe. This leaves us somewhat more circumstance-specific about prefunding over the coming few years.

KENNEDY As a smaller borrower we feel there is more benefit to us from being transparent in our programme and sticking to what we say we will do. Having investor confidence around when and how our supply will come to market has been a long-term positive. We also probably lack the balance-sheet capacity to run too far off programme, at least compared with some of the larger states.

CINQUINA We don’t usually fund years in advance, but we do undertake some prefunding - largely of loans we know are coming in the next three months or so.


Davison The net new-issuance outlook for the Australian government sector – broadly sovereign down, states up – is a dynamic the market hasn’t been seen for many years. What considerations does this bring for issuers?

FAJARDO It’s a dynamic that has definitely been talked about, especially the element of increased semi-government supply. But it’s still a positive environment given the supply of ACGBs is poised to fall quite significantly.

Queensland Treasury Corporation (QTC) had early maturities this financial year – in September 2017 and February 2018 – so we got well ahead of our issuance programme. In general what we’ll be watching for is whether execution windows get more crowded. We might start to see a greater number of syndications as they are coming from a range of semis, rather than issuance concentrated to some degree into a small number of very large ACGB syndications.

We have already seen SAFA and Tasmanian Public Finance Corporation announcing syndications in 2018, and we are only two weeks into the new year as we speak.

“There is still lots of potential in Asia – and it’s not just Japan. We recognise the importance and potential of the broader Asian investor base and remain highly focused on marketing to the region.”

NICHOLL We only have one more syndication this financial year, but next year we will have at least three new maturities to do – some of which will be issued by syndication.

From our perspective, a factor that’s worth noting is that, as our supply increased and that of the semis fell over the past two years, there has been increased absorption of our paper by domestic bank balance sheets.

It’s no secret that the local banks began accumulating semi-government bonds well ahead of ACGBs – for the obvious reason of yield. But there was a noticeable increase in ACGB uptake as this sector’s level of ownership of the semi sector increased and semi supply decreased. I don’t expect this story to reverse as supply dynamics change, and overall I think the impact will be close to neutral.

Davison This raises the question of who will be the marginal buyer of new semi-government issuance. The last time the states faced a collective large increase in their funding tasks they were assisted by the implementation of Basel III liquid-assets rules in the Australian banking sector. From where will the marginal investment dollar come this time?

TRIGONA In the last couple of years we have witnessed an increase in the fund size for some of the Australian fund managers. These are existing investors with increased appetite for our issuance, especially in the long end. The impact of this phenomenon has been quite significant.

At the same time, we have also seen offshore interest coming through, particularly out of Japan but also throughout Europe. Having this demand as well as the domestic bid is important for us, and it also highlights the need to get on the road and see investors face-to-face.

FAJARDO Two specific areas I would highlight as sources of demand growth are Asian life-insurance companies and central banks in Europe. There are also investors in Latin America, Europe and parts of Asia that we have seen diversify their ACGB holdings into the semi-government sector.

One area where we have attracted new investors is through our debut green-bond transaction, which we priced in 2017. This brought specifically green-mandated investors to our books for the first time, which was certainly a positive outcome.

I should also note, though, that our established balance-sheet investors will have to reinvest their funds and we expect this to continue to be supportive of demand. QTC has negative new issuance in the current financial year - we have A$9 billion of maturities and A$7 billion of expected issuance.

CINQUINA WATC has had quite substantial issuance growth over the last 5-7 years and our offshore marketing was minimal prior to the removal of interest withholding tax on domestic semi-government bonds in 2008. This changed reasonably quickly, and we certainly now see offshore investors as a critical element of our marketing.

We are probably still at the low end on the scale of offshore holding among our peers – at around 20-25 per cent – so there is still work to do. But going offshore to meet investors, wherever they may be, has been part of our programme for some time now and will continue going forward.

We are also seeing growing interest out of Europe, as well as from the Asian region that has been a good supporter of Australian semis for many years. One area that has been lacking in recent times has been the US, though we have seen glimmers of demand from there recently.

NICHOLL It’s the same for us. We have a core base of investors in the US but overall I would say the US remains underrepresented in the ACGB market.

Australian credit in depth

Australian semi-government issuers say global investors tend to be satisfied with a broad overview of their credit stories. While a strong federal-state relationship is important, most buyers do not require an intimate understanding of the minutiae of how the linkage works.

DAVISON Has there been any interest from the market community in potential changes to goods and services tax (GST) distribution in Australia? How engaged are global investors are with the detail of the Australian high-grade credit story and do they really care about things like the mechanics of horizontal revenue equalisation?

Cinquina I think it’s still important to tell the Australian state credit story to offshore investors. This doesn’t necessarily mean the specifics of GST, but the fundamental nature of the federal-state relationship and the way it provides part of the states’ strength is crucial.

The Australian Office of Financial Management does a great job of marketing Australia, of course, but as states we still have to tell our part of the story. GST is just a corollary of this – a part of the story.

The reality is that at any time around 50-60 per cent of each state’s revenue comes from the federal government. At the same time, we also need to recognise that we aren’t always talking to the same individual at any specific investor – for example, personnel turnover in the central-bank sector in particular tends to be on a 12-24 month cycle. So we have to keep telling the story.

Davison QTC has actively pursued US demand by adding 144A language to its programme. What is QTC’s perspective on US demand?

FAJARDO We had significant success in our syndicated issuance when we first introduced the 144A documentation, with a lot of US investors coming into our books. It has been more sporadic of late, and I agree with the observation that these buyers have been less active than those from other jurisdictions.

However, when US investors come in they tend to do so in reasonable size. We continue to find the 144A component a useful tool to have within our programme.

NICHOLL As I just noted, we have meaningful investor representation from the US but don’t see much potential, at this point, for this to grow much further – or at least not as much as in other parts of the world. I did an investor update in the US in 2017, and they were undoubtedly less concerned about the Australian story compared with 3-4 years ago – but Australia certainly didn’t seem to be a priority. We seem to be flying under the radar in the US to some extent.

Davison Which regions are providing the most positive demand story?

NICHOLL I’ve been surprised at the change in European demand in the past three or four years, actually. It started as a central-bank story but has developed to reflect our curve extensions. We have seen a lot more European pension and hedge-fund money entering the market, to the point that London is now the second most important city for us – behind Tokyo – as an aggregated source of demand. I did three trips to Europe in 2017 and still didn’t cover all the investors I could have seen.

TRIGONA We are seeing investors from parts of Europe we never expected to see. But this is part and parcel of good investor relations work globally – you meet investors you weren’t previously familiar with, and in time some of them come into your curve. The ticket sizes we have seen from Europe have certainly surprised on the upside, though.

FAJARDO There is still lots of potential in Asia, as well – and it’s not just Japan. We recognise the importance and potential of the broader Asian investor base and remain highly focused on marketing to the region.

NICHOLL There are a lot of insurance funds in Asia with the potential for expanded appetite. This is an investor category that in my view has been underrepresented in the past.

Davison Are you talking about Australian dollar-denominated insurance assets?

NICHOLL Not necessarily – and in fact one of the barriers to greater participation from this sector remains currency fluctuation and the cost of hedging. There is also the fact that some of these investors have had bad historical experiences in Australian dollar investments, especially during the Asian currency crisis. But I remain of the impression that there is potential for more funds to flow to Australian dollar fixed income.

“There is global uncertainty in some jurisdictions and currencies, but this is why investors continue to support Australasian credits which have a proven track record of stability and certainty.”

LOFTING As a rule, Asia ex-Japan investors tend to be very yield-sensitive, though – this is certainly the case for insurance flow. Japanese demand tends to be more reliant on pension funds and therefore it has largely been a regular flow of money.

KENNEDY The reality is that every individual deal attracts a different investor base depending on its timing, yield and tenor. We don’t go into any transaction with preconceived ideas about where it’s going to sell, and we have ended up with some very unusual and diverse investors in books in which we would never have expected to see them.

Going back to the US, I think there may be a change coming based on what’s happening in the regulatory space. A lot of global funds are now being run by US fund managers rather than out of the UK or Europe, largely as a product of MiFID reporting rules.

This means more active involvement from these underlying funds than was previously the case, but also a new ability to invest in primary – because they are global, rather than US, portfolios. At the margin, I expect we will see more tickets coming from the US though often the underlying assets will be Asian or European in origin.


Davison Now the 30-year point has been established, can we assume the period of AOFM curve extension is finished?

NICHOLL Yes – we consider our curve-extension work to be finished. We will maintain a 30-year curve but we see no merit, and in fact a number of risks, in trying to go beyond this point. We are aware that some European sovereigns have issued even longer-dated bonds. But our view is that this is largely opportunistic and driven by the desire to lock in low interest rates rather than to sustainably extend yield curves.

We continue to be very active in the long end. Since we syndicated the 2047 ACGB we have tapped it for around A$4 billion, to A$11.6 billion, and we have also done taps in the 20-year part of the curve to the tune of around A$5 billion so far in fiscal 2017/18. We plan to continue issuance of this type but will be mindful of the need to support liquidity across the curve.

We haven’t committed to issuing a new 30-year bond every two years – the best timing for this is under active consideration. Market feedback suggests it is better to have a small number of liquid lines than several smaller lines, and obviously at that duration the difference between a 2047 and a 2049, for instance, is not material. Over time, it’s possible that ACGBs issued at 30-year tenor will become less actively traded until reaching the 20-year futures basket. We already see this dynamic between other futures baskets.

Davison Does the AOFM have a specific strategy in place to maintain weighted-average maturity (WAM) as its issuance task eases?

NICHOLL We think the WAM of the portfolio will most likely remain around its current level – about 7.5 years – even as the new-issuance task declines. We don’t have specific portfolio targets at this point in time but it’s an open question as to whether we should once again develop a benchmark portfolio, as was the case prior to 2008.

We have not overlooked the question of how we support the market in the context of declining issuance programmes. The buybacks we are conducting are not specifically about maintaining WAM – though this will be a result. The main thing for us will be how we allocate issuance to support the different components of the investor base across the curve.

Davison Front-end buybacks and lower issuance by the AOFM have led some market participants to predict the end of the basket trade. Does supporting different aspects of market demand extend to technical factors like this?

NICHOLL We are aware of the basket trade but it’s not a focus for us. We know there are short-end buyers, including some investors that are only short-end buyers. The buyback programmes are there primarily to help us manage funding risk, and are a useful way of taking stock off the hands of intermediaries’ trading books – which in turn allows them to support liquidity in other parts of the curve.

We usually fund the buybacks by issuing basket stocks and supporting the futures contracts is undoubtedly a higher priority for us than promoting liquidity in the very short end. We continue to monitor liquidity across the curve, though, and have consistently made clear that we can change our practices accordingly.

“At the margin, I expect we will see more tickets coming from the US though often the underlying assets will be Asian or European in origin.”

Davison How, if at all, do changes in sovereign liquidity and issuance dynamics across the curve affect the market for semis?

LOFTING We hope that as the AOFM’s issuance declines it becomes more concentrated at the longer end of the curve. We certainly want the AOFM to maintain its efforts to back-fill the ACGB curve from to 20 from 30 years – there are still gaps in this tenor.

I’d note that the work the AOFM has done in recent years to extend the yield curve has definitely allowed the semis to go out further in tenor. The semi market now goes out to 15 years in Australia, and I don’t think we could have said this even six months ago. Whether we can fill the gap between 10 and 15 years in benchmark size is still to be determined, but we are testing this – and we would also like to look at 20-30 years in due course.

NICHOLL AOFM curve extensions have certainly broadened the long-dated Australian dollar investor base, and as those investors become familiar with the Australian market they tend to broaden the range of assets they look at.

FAJARDO We are seeing investor breadth come through not just in our primary issuance but also in long-dated secondary turnover.

LOFTING I think the impact on pricing of having the AOFM present at the long end is the most important factor. We always used to have conversations about the fair price for long-dated TCV issuance, and being able to see where an ACGB trades is a big help in this respect. This said, there is still plenty of debate about relative pricing - we discussed fair value for our 2040 issue for several months before issuing.

COLLARD We also receive enquiry from investors around long-dated maturities. Export Finance and Insurance Company aims to match-fund its assets and therefore we would quite happily issue in the longer part of the curve – if we were funding a long-dated project. Given our explicit guarantee by the Commonwealth, we expect that any long-dated issuance would be received favourably by the market.

KENNEDY It’s worth noting that while the AOFM’s net issuance task is declining the gross programme is still a big number. There will be ample liquidity for an extended period unless there is a turnaround in the federal government’s fiscal position on a scale that I don’t think anyone is predicting.

We might see benchmark ACGBs becoming A$10-12 billion in size rather than A$14-16 billion, but there can and will still be good liquidity in these lines.

TRIGONA Our goal when it comes to duration is to maintain what we have already achieved – or perhaps to go a little longer.

FAJARDO We had a strategic goal of bridging the gap between our 2028 maturity and the 2033. We have achieved this with the introduction of our 2030 benchmark, and going forward I don’t envisage we will issue benchmark bonds longer than the 2033 for at least the next year.

TRIGONA We are actively issuing into maturities from 2027 to 2030, so investors can cherry-pick which bond they want. Liquidity is continuing to grow at the back end of our curve.

CINQUINA Going back five or six years, WATC had quite a short WAM but we have done a lot of work to extend it – it is close to four years at this point. We are reasonably comfortable with where we are at this stage, because we don’t have borrower clients with the desire or need to go to 15-20 year debt maturity.

We will likely issue a new five-year floating-rate note and a 2028 benchmark in the first half of calendar 2018, which we have communicated to the market. We have also had some internal discussion about potentially doing something a little longer than 10 years. This will push our WAM out slightly, but given the demand of our client borrowers this is likely to be the extent of our duration ambitions.

“Three of the states issued around the 10-year mark close together in 2017, and the market digested this without any real problems. I’m not sure we’d have had the same experience, particularly in the long end of the curve, at any previous point.”