Government-sector issuers roundtable part three: issuance insights
The final part of KangaNews’s exclusive Australasian government-sector issuers roundtable covers the specifics of funding plans – including the outlook for foreign-currency, floating-rate, and green and social securities.
Davison Foreign-currency issuance by states is a perennial topic. Can issuers that have placed these deals discuss their value and prospects?
Looking at the issuance we have done outside Australian dollars, we started to get reverse-enquiry demand from European investors back in late 2016. The cross-currency basis swap has made it efficient for us to take advantage of this opportunity – we have now issued eight tranches and have €401 million (US$491.2 million) outstanding.
We are happy to issue into the euro lines we have outstanding. But more recently we have seen significant growth in long-dated Australian dollar demand while the basis swap has moved quite significantly against us. As a consequence, euro issuance is a less attractive option than it was.
Through the use of derivatives, Efic is able to issue debt in suitable currencies to achieve the lowest possible cost of funding available in global markets.
Davison Does the ability of the Australian dollar market to provide long-dated funding change the equation on foreign-currency issuance?
Davison Do issuers get reverse enquiry for foreign-currency issuance?
Craig Unlike the Australian Office of Financial Management, the New Zealand Debt Management Office (NZDMO) is allowed to issue in foreign currencies – but it does not. Why is this?
Craig Auckland Council mainly issued in foreign currencies in 2017. What is the outlook for 2018?
The fact that we have three funding sources – the domestic market in our own name, offshore markets and the LGFA – leaves us feeling relatively relaxed about the range of funding opportunities on offer.
We have now issued two euro benchmark transactions and thus built a very broad investor base, so this is a market we will continue to focus on. As far as timing for another euro issue goes it is difficult to pinpoint specifically when this might emerge. But what I can say is that we will continue to focus our efforts on the region in the medium-to-long term.
Davison Floating-rate note (FRN) issuance by Australian states had a brief spell in vogue but has all but disappeared in recent months. Why have all but one of the states stopped issuing FRNs – and what might bring FRNs back onto the agenda?
At the same time, there are questions over the robustness and appropriateness of floating-rate benchmarks. I have always had some concern about the use of a bank benchmark for issuance by a semi-government. Is this really suitable?
What happens in the benchmark space will be a very important driver of our FRN issuance in future. We have to decide whether we want to be locked into a benchmark that is not necessarily representative of our sector or is sustainable and robust in the long term. We continue to do what work we can to support alternative benchmarks – and we think there are some good options out there. We would be supportive of the FRN sector if we have a representative benchmark.
Green and social issuance
Two Australian state-treasury corporations had issued green bonds by the start of 2018. While these issuers report positive experiences from their transactions, the prospects of a widespread increase in green issuance volume – or diversity of social-themed issuance – seem slim.
LOFTING Treasury Corporation of Victoria (TCV) will issue another green bond at some stage in calendar 2018. We are currently working on broadening the pool of assets in our eligible portfolio. We have enough to do another issue already, but investors have expressed a desire to see diversity in the pool away from just transport projects. The makeup and scale of the 2018 deal will be determined by market feedback at the time.
FAJARDO The benchmark programme is our principal source of funding, but, like TCV, we are looking at expanding our asset pool. Our debut issue was very successful especially in terms of the diversity it brought to our investor base. We will look at the market again in 2018 if we can expand the asset pool.
We are looking at programmatic green-bond issuance, which should add more flexibility to our plans in the sector. But our first priority is to have liquid benchmark bonds. It would be great to have liquid green bonds, too – but this has to be considered in context.
Davison Does anyone share Andrew Kennedy’s concerns about benchmark appropriateness?
We’re interested in developments around things like an overnight indexed swap (OIS) benchmark. But as things stand FRNs trade off BBSW and we can either accept this and continue to issue or not. We choose to take advantage of domestic demand in the format to meet some of our lending requirements.
We discount our swap book on an OIS basis, but we can’t issue on the same basis.
Craig New Zealand government-sector issuers have not used the FRN format of late. Is there any prospect of change?
THE MISSING LINKERS
Davison Inflation has been the ‘missing link’ in global markets for some time and indeed government-sector issuance of inflation-linked bonds has eased. What is the status of demand and supply prospects for linkers?
We issued a new 10-year linker in 2017 and we have indicated our plan to introduce a new 2045 at some stage. The question is when this will be appropriate, and we will base the answer largely on market feedback.
The attractiveness and viability of other funding instruments such as FRNs – and green bonds for that matter – is evaluated strategically. Key considerations are trade-offs regarding the product’s risk characteristics within the debt portfolio and overall Crown balance sheet, our ability to sustain and support liquidity in all debt products, diversification of our investor base and cost effectiveness.
USE OF SYNDICATION
Davison How has the AOFM changed its syndication strategy in response to the changing new-issuance dynamics?
Calendar 2017 was our largest syndication year with A$28.5 billion issued across six deals. Each time we use a syndication we are thinking about reducing execution risk, achieving useful volume – both to build liquidity more quickly and to help with the overall issuance task – and the cost effectiveness of issuance. It is also true that syndication provides both incentive and reward for intermediaries to be price makers.
Our considerations going into any deal are circumstance-specific. For example, pricing for yield-curve extensions has been more difficult to determine and there have been times when allocating issuance across the year has weighed against the opportunity to print several large deals.
Last year we had almost the opposite of this when we were looking to achieve our largest annual task ever with the risk that external events could have increased this even more during the year. This is why we syndicated a new five-year bond – there was an opportunity at the time to reduce funding risk for the year. This shouldn’t have come as a surprise or necessarily been seen as a structural change in our behaviour given that our issuance programme was so high.
As our issuance programme falls, syndications will play a different role for us. There is no longer a need to achieve large issuance volume via outsized deals. This means the market should not expect to see syndicated issues of new five-year bonds, nor deals as consistently large as last year’s A$11 billion syndicated issue.
The past two deals had print-volume caps at launch but with the benefit of hindsight I am not sure they produced the best overall outcome. This experience has changed the way we would think about this approach were it to be considered in future transactions.
We introduced syndicated taps as an issuance method last year. So far this has proven to be a useful tool to build liquidity in the ultra-long end of the nominal and linker curves. It also assists in extending portfolio duration. It is an open question as to how far into the future these will remain appropriate. But we will continue to use syndicated taps while we see relevant opportunities to do so.
One of the benefits of syndication is that it gives a useful window into market behaviour and preferences at the time, which over time can also be informative. There is now a lot of data to hand from our syndications and we have reviewed it closely.
Davison We saw signs in 2017 that could be interpreted as a move away from syndication – large tenders including for new lines, in particular. Has there been any change in strategy by issuers in this respect, even at the margin – and if so why?
We had been absent from long-term debt markets for a long period, so when we executed the 2028 tender in October 2017 we knew we wanted to issue a public transaction. We also only had a volume requirement of A$500 million and we wanted to tap an existing line in which we had seen significant demand in the weeks prior. So a tender suited our needs. If our volume requirement had been closer to A$1 billion there is a strong possibility we would have opted for a syndication.
In the last six months, we have observed issuers within the semi-government sector considering - and using - a mix of syndications, tenders and dual tenders. The reality is that all these options are open.
Tap issuance provides flexibility, including the ability to respond to clients’ funding requirements and also to reverse enquiry from investors. It also suits smaller transactions. On the other hand, we normally favour a more public format, whether via syndication or tender, if we’re establishing a new bond line or issuing a more esoteric transaction in the long end of the curve.
QTC remains committed to public issuance formats such as syndication due to the transparency that such issuance provides to the investor. In current market conditions, we feel syndication provides the best execution transparency for all market participants when we are issuing new benchmark-bond lines or tapping an existing line for volume in excess of A$500 million.
Issuance via tender has been relatively limited so far for us this financial year. We have completed one such transaction - a A$300 million increase to the 2027 bond via Yieldbroker tender. The regular activity we undertake across the benchmark-bond curve with taps and buybacks is also a useful way to manage exposures and issuance across our maturity spectrum, and to support liquidity in our bonds.
At this point I believe we will continue to look to syndications as our preferred methodology for issuing new bond or FRN maturities and for taps of existing issues where the volume requirement is a minimum of A$500 million in a single maturity.
High-grade issuers yearbook 2018.
The annual guide to Australian and New Zealand sovereign-sector issuers.