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.

PARTICIPANTS

John Bishop Treasurer and General Manager, Transaction Services AUCKLAND COUNCIL
Mark Butcher Chief Executive NEW ZEALAND LOCAL GOVERNMENT FUNDING AGENCY
Vince Cinquina Head of Financial Markets WESTERN AUSTRALIAN TREASURY CORPORATION
Chris Collard Director, Treasury EXPORT FINANCE AND INSURANCE CORPORATION
Jose Fajardo Director, Head of Funding and Liquidity QUEENSLAND TREASURY CORPORATION
Andrew John Funding Manager AUCKLAND COUNCIL

Andrew Kennedy Director, Treasury Services SOUTH AUSTRALIAN GOVERNMENT FINANCING AUTHORITY
Justin Lofting General Manager, Treasury TREASURY CORPORATION OF VICTORIA
Rob Nicholl Chief Executive AUSTRALIAN OFFICE OF FINANCIAL MANAGEMENT
Fiona Trigona Head of Funding and Balance Sheet NEW SOUTH WALES TREASURY CORPORATION
Sarah Vrede Director, Financial Operations and Head of New Zealand Debt Management Office NEW ZEALAND TREASURY

MODERATORS

Helen Craig Deputy Editor KANGANEWS

Laurence Davison Managing Editor KANGANEWS

FOREIGN CURRENCIES

Davison Foreign-currency issuance by states is a perennial topic. Can issuers that have placed these deals discuss their value and prospects?

FAJARDO Our issuance strategy focuses on smoothing and extending our funding profile. But we don’t actually have substantial client demand for anything longer than 15-year tenor – which is where our benchmark curve extends to now. Further issuance really comes down to client demand, and we are in regular dialogue with those among our clients that have the capacity for long-dated funding.

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.

TRIGONA New South Wales Treasury Corporation (TCorp) issued 30-year bonds in sterling, Swiss francs and yen some years ago. There wasn’t an active domestic market beyond 10 years at the time so this issuance was the best way of meeting specific client demand. These bonds are mostly still outstanding – we have bought back some of the sterling issuance – and we have continued to look at opportunities to meet our clients’ funding needs in long-dated markets. We have had opportunities to issue, but the position of the 30-year basis swap makes it inefficient to issue in foreign currencies at present.

COLLARD The foreign-currency transactions we have issued in the past were typically structured private placements, for example into the Uridashi market. Over the years we have issued bonds in US, Australian, New Zealand, Singapore and Hong Kong dollars as well as sterling, euros and yen. But we have always swapped the proceeds into US dollars, as Export Finance and Insurance Corporation (Efic) is broadly a US dollar funder.

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?

TRIGONA We look at all options in order to make the most of opportunities and to diversify sources of funding. We consider factors such as the ability to execute, pricing relativities – particularly the basis – and whether the opportunity matches our clients' borrowing needs. The difference is that we don’t have to wait for specific client needs when we issue in Australian dollars – we can manage any mismatch.

CINQUINA We don’t have underlying clients that borrow to the type of very long tenor being discussed. Unless we can bring foreign-currency issuance back to Australia at pricing somewhere close to our domestic curve it’s just not something we can justify doing.

KENNEDY We don’t have enough debt on issue to warrant the type of diversification in our programme that foreign-currency issuance – or, indeed, extended tenor – offers. Liquidity in our existing Australian dollar benchmark lines remains our primary focus.

LOFTING It has been more expensive to fund in foreign currencies for many, many years – going back at least to 2009. We would only look at it if it provided something the Australian dollar market couldn’t. As the domestic market continues to build liquidity at long duration it seems to be getting harder to justify foreign-currency issuance.

Davison Do issuers get reverse enquiry for foreign-currency issuance?

TRIGONA Certainly.

LOFTING I would be surprised if we were not all shown the same or similar foreign-currency transactions to the ones Queensland Treasury Corporation (QTC) has completed over the past year or so. The pipeline of reverse enquiry has been in evidence for two years at least – and we will always look at them. Reverse enquiry is part of the investor-diversity toolkit, it’s just that we will tend to look to exhaust domestic options first.

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?

VREDE In recent years the NZDMO has only issued New Zealand dollar-denominated debt. The two key reasons for this are concentrating issuance in our core New Zealand dollar-denominated products to support liquidity and the fact that debt issued in foreign currencies is typically less cost-effective. We do not envisage any imminent change in our activity or strategy, although we maintain documentation to enable issuance in other currencies.

BUTCHER The New Zealand Local Government Funding Agency (LGFA) has also established an Australian dollar programme to enable us to issue other than in New Zealand dollars. But foreign-currency pricing remains unattractive relative to domestic pricing. Given our annual funding requirement and projected peak debt level it is more desirable to continue to issue benchmark size in New Zealand dollars rather than in foreign currency.

Craig Auckland Council mainly issued in foreign currencies in 2017. What is the outlook for 2018?

BISHOP We continue to monitor domestic and offshore markets closely for issuance opportunities. However, our funding need for the first six months of 2018 is relatively modest because we executed a large euro transaction towards the end of last year.

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.

FLOATING-RATE NOTES

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?

KENNEDY When we entered the FRN market we had very short debt duration – which was a conscious decision. We have extended duration in the current, low-rates environment and this has reduced focus on what is a relatively short-tenor instrument.

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.

COLLARD We have issued FRNs in the past and certainly would consider doing so again in the future. All Efic debt is swapped into floating rate. We are therefore very comfortable issuing FRNs in Australian dollars – or other currencies – over a term that suits investor demand and also the requirements of our book at the time.

LOFTING Our clients are fixed-rate borrowers so we don’t really have a need for FRN issuance.

TRIGONA It’s the same for TCorp. We have issued some FRNs but at the time some of our clients were borrowing in floating-rate format. They’re almost all in fixed now.

BISHOP By contrast, all Auckland Council’s debt is swapped into floating-rate New Zealand dollars so we are open to FRN issuance provided it is fairly priced.

NICHOLL We came under pressure a few years ago to resume Australian Office of Financial Management (AOFM) issuance of FRNs. We resisted this pressure, mostly because we didn’t see the need to develop another market and especially one that would likely have been seen as a substitute for our short duration Treasury notes. I remain confident that this was a good decision.

FAJARDO More than 90 per cent of our client-funding requirements are fixed rate, so we view FRN issuance as a complement to our benchmark fixed-rate programme. We receive feedback from our dealer group that there is demand, especially from bank investors, for FRNs. So we may look at the market this financial year. We will consider it relative to the cost of our traditional benchmark issuance.

CINQUINA Western Australian Treasury Corporation (WATC) is something of an outlier here in that about 30 per cent of our client debt is lent on a floating-rate basis, so we have an underlying interest in having floating-rate exposure at the front of the curve – out to about five years. We have about A$9.5 billion (US$7.6 billion) of FRNs outstanding and as long as we continue to see investor interest in the format – and have client needs for floating-rate debt – we will continue to issue.

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.

DAVISON The green-bond market seems to be gathering some momentum in Australia with 2017 seeing the first corporate issuance and various other breakthroughs. There have still been just two government-sector transactions, however. Can issuers update on their green-bond plans?

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.

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Davison Does anyone share Andrew Kennedy’s concerns about benchmark appropriateness?

CINQUINA My sense is that the issue with the the bank bill swap rate (BBSW) would go away if – as we were prior to the financial crisis – we were all trading at 20-30 basis points below BBSW. But the reality is that we trade where we do, relative to swap, in the fixed-rate market, and we don’t have much control in the matter.

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.

FAJARDO We have looked into this topic, but it’s not something that would prevent us from issuing FRNs at the moment. We are open to alternative benchmarks, such as OIS, if they are accepted by investors.

Craig New Zealand government-sector issuers have not used the FRN format of late. Is there any prospect of change?

BUTCHER We continue to focus on increasing liquidity in our benchmark, fixed-rate coupon lines that match the New Zealand government bond (NZGB) curve. This means no appetite for FRN – or inflation-linked – issuance.

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?

NICHOLL The market remains relatively slow for us, certainly compared with a couple of years ago. The underlying dynamic reflects superannuation-fund growth, some of which will continue to be invested in inflation assets. Our recent strategy with the linker market has been to maintain a liquid asset class and to have the ability to respond to demand growth should it emerge.

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.

VREDE The NZDMO has a strong commitment to the market for inflation-indexed bonds (IIBs). We remain committed to regular tender supply and maintaining a core level of outstandings, as well as a range of IIB maturities.

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.

BISHOP Inflation-linked issuance is certainly on the radar. We know there are some investors, both in New Zealand and offshore, that would like to buy Auckland Council bonds in this format. So this is something we are actively considering.

TRIGONA TCorp has some natural demand for inflation-linked debt. But the recent asset-recycling initiatives of the state government saw us retire loans from the relevant electricity utilities. We were able to reassign these loans to other borrowing clients that had inflation-linked demand, so we have effectively been able to provide the funding without issuing. Going forward, I expect issuance into this sector will be somewhat limited.

NICHOLL This story could change in a quarter – or even a month. If inflation was to take hold in the US and market users believed Australia could follow, I think interest in the linker market could resurface in volume and at pace.

USE OF SYNDICATION

Davison How has the AOFM changed its syndication strategy in response to the changing new-issuance dynamics?

NICHOLL Over the last six or seven years we have used syndications very effectively – at least in our view – to achieve a number of market-development aims. We have continued to refine the way we us syndication and this has helped to underpin their effectiveness.

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?

LOFTING The way we have always approached our debt-raising activities is that we like to avail ourselves of all the appropriate tools and select the one that is most suited to our funding objectives at the time. The objectives we take into consideration when making this decision include volume, duration, if it’s a new line or a tap, and general market conditions.

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.

VREDE There has been no change to the NZDMO’s primary-issuance strategy. Regular, preannounced tenders are the main method of issuing NZGBs and T-bills. For new bond lines, syndication continues to be valued as a method that enables the placement of a large volume into the market, creating liquidity in the new bond from the outset and reducing illiquidity premia.

FAJARDO QTC issues by syndication, tender and reverse enquiry – and will continue to be flexible in issuing by whichever method is optimal. In our last financial year we issued relatively more by tender and less by syndication, but so far this year we have been more active in syndication and reverse-enquiry issuance.

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.

TRIGONA Like QTC, TCorp issues via syndication, tenders and taps to existing lines prompted by reverse inquiry. We’ve tended to issue new benchmark bonds by syndication and this financial year we tapped the 2030 bond via syndication as well. Syndication is a relatively transparent process for the investor and issuer, and focuses attention on a particular bond.

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.

CINQUINA WATC will continue to use all forms of access to markets, be it tap, syndication or reverse enquiry. In the 2017 calendar year we have undertaken three syndications and three tenders in the benchmark-bond space and one dual-maturity syndication in FRN format.

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.