TCV back as a big issuer

Treasury Corporation of Victoria (TCV) has its most substantial funding task in recent memory. Melbourne-based senior risk manager, Paul Kelly, and managing director, Bill Whitford, discuss the prospects this brings for curve extension and labelled issuance.

TCV announced following its mid-year budget review that it intended to undertake substantial prefunding for 2020/21. What are the primary considerations around this decision?

WHITFORD TCV has always run a level of prefunding driven by the size of its upcoming funding programme and its liquidity requirements. The main reason we have been more explicit about it this year is that the market has started to focus more closely on run rates and comparisons with peers. It makes sense to provide as much disclosure as possible so both dealers and investors are fully informed.

Also, TCV has gone from issuing A$2-5 billion (US$1.3-3.3 billion) a year to now requiring A$5-8 billion a year. It is important to keep ahead of the larger borrowing task.

TCV is emerging from a period of little-to-no new issuance and entering a more active phase. How has this affected investor relations?

WHITFORD Our investor-relations approach is consistent. Even in years when we have not had much to issue, we have always kept our investors aware of our plans and updated them on the underlying local economy.

We talk about Victoria, what we are doing that year and the value of the bonds being triple-A rated, as well as what the government is doing to maintain that rating. Then we make sure investors know our longer-term plans. We talk about the expected funding task, how the money will be spent and what we think about Australian interest rates.

KELLY What changes is the way we raise our debt. In the past, we have mainly relied on reverse enquiry or tap issuance. Now, with the larger programme and the importance of being as transparent as possible, we will look to employ a mix of syndication, tenders and reverse enquiry to complete our funding.

Investors have been receptive to our larger funding task. They are happy with the story in Victoria and have been very supportive of our more recent public transactions. We are the tightest priced semi-government borrower across the curve but this has not detracted from investor demand.

It seems that despite the general push for higher-yielding debt, there is still strong demand, both domestically and offshore, for triple-A rated issuers, particularly in the semi-government sector.

Also, with AOFM [Australian Office of Financial Management] issuance expected to continue to decline, we benefit from the natural transition some investors are making from the sovereign to semi-government borrowers. The 40 basis points or more pick up over sovereign at the 10-year part of the curve makes TCV an attractive proposition.

What maturities does TCV expect to be most active in as its programme continues to grow?

KELLY We have generally been a 10-year-plus issuer. This is because almost all our clients are 10-year-plus borrowers funding intergenerational infrastructure.

Our focus will remain on the back end of the curve and at some stage we will look at issuing a new, on-the-run, 10-year bond. The particulars of this bond, and its timing, will depend on client borrowing needs and market conditions.

As always, we will look for opportunities to raise even longer-dated debt but demand further out on the curve is sporadic. We see a bit from domestic investors and some well-known investors in Asia have demand from time to time. I think it is possible for the semi-government sector to have a liquid 20-year curve in the foreseeable future, though.

TCV was the first of Australia’s semi-government entities to issue a green bond, in 2017. Will it issue again in green, social and sustainability bond format and, if so, when might this be?

WHITFORD We have been talking about this since we first issued in 2017 and we now have the funding requirement.

There are discussions around the most appropriate format for these types of bonds now. Does the market want a pure green bond, does it want a sustainability bond or is it looking for bonds based on the environmental, social and governance credentials of the issuer? We need to clarify all these things and we would need to update our programme documentation accordingly.

Overall, the Victorian government is keen to facilitate investment in the space. When we issue a green or sustainability bond, we are making our clients think about their borrowing portfolio and projects. We are also implementing a state-wide reporting mechanism for specific projects that would focus on sustainability. There are many wins other than just getting dollars in for funding.

We would like to issue something at the tail end of the curve, consistent with our overall funding strategy. But these products are still better suited to issues of 3-5 years. We will need to see where they fit into our existing structure.