Next move

A prolonged period of arguably the best global capital-market conditions for a decade appears to be coming to an end as volatility returned early in 2018. Speakers at the KangaNews Debt Capital Markets Summit debated where markets, economies and societies are now – and the future direction.

“It's not clear that the relatively low level of spreads in fixed income markets represents irrational mispricing of risk or is, by itself, a cause of concern. Issuance has picked up, but it is not especially high. Moreover, measures of corporate indebtedness are generally not elevated.”

“Populism is a much-used and little-defined term. The definition I find most satisfying is ‘when politicians propose unworkably simple solutions to complex problems’.”

“Australian politics has seen a combination of unleashed personal ambition and partisan aggression. Problem solving has given way to full-time parlour games.”

“Many borrowers are looking for 10- year funding with the same or fewer covenants than 3-5 year bank debt. However, the longer the tenor the more changes that can occur in the structure of the underlying business. If we want sustainable long-tenor issuance, issuers need to be willing to provide more covenants.”

“To maintain some of the issuance momentum we saw in 2017, we need the QE unwind to be an orderly, gradual process. If normalisation is faster than expected deals will become much harder to execute.”

“Australia’s secondary market for loans is close to nonexistent, meaning a clear lack of transparency when compared with the US. We have been spending time with the Australian client base to expose data sets and improve this area, particularly around pricing.”

“Much of the Australian credit market’s development in scale and tenor has been attributed to QE, so there are certainly questions as to how sticky these developments will be as we move into a tightening cycle.”

“Investors see Australia as a well-developed market. There is good volume and there are good opportunities across asset classes, so it is perfect for diversification. This is particularly relevant for the central-bank investors we see in our Australian dollar bonds.”

“Private equity has record levels of capital to deploy. As long as the leveraged-loan market continues to accommodate them, there will be more mergers and acquisitions coming. Importantly, however, the risk-return equation for lenders into these transactions continues to deteriorate.”

“We need to continue to develop the Australian market. The 10-year segment is now well established, but we need to push maturities out to 15 years where there is considerable offshore demand for this tenor. This will be the next step in Australian-market maturity.”

“There are some interesting technical dynamics around the removal of QE – starting with the short end but which have spilled into the long end. We are still able to carve out preferential treatment from the market because we are from a group of banks that remain favourable. But deals are getting tougher.”

“With such robust growth coming out of Asia it is reasonable to assume we will source a larger part of our funding from the region going forward. We still need to work through regulatory limitations on accessing these markets, while the depth of swap markets and ability to access local currencies are areas that also require some development.”

“The way the regulator has rolled out reforms since the financial crisis has been consultative and well-informed. The market can have confidence that, even with TLAC coming down the pipe, there will be a period of consultation and time to adjust.”

“Some investors in our deals in the last few years were not as prominent five or six years ago. We are seeing new investor pools start to emerge as the US market undergoes tightening in some sectors. But we expect to experience a counterbalance as we continue to diversify our investor pools.”

“There has been quite a significant uptick in global volatility and a change in investor sentiment towards the pricing levels of investment-grade credit in general, including low-beta bank opco jurisdictions like Australia.”

“The second- and third-order ramifications of a housing shock are difficult to assess accurately. We see the potential for confidence and employment shocks, which was in part what drove us to downgrade some bank ratings in 2017.”

“Offshore interest in our senior bond and securitisation programmes has increased significantly. Part of the reason for this is the hunt for yield, but we have also had positive ratings migration since 2012. This could be considered another driver of increased offshore appetite.”

“Looking at our issuance over time, many of our transactions have had very strong European participation. However the lion’s share has come from Asia, which has certainly become a very consistent source of offshore demand.”