“We have done about A$2.25-2.5 billion in reverse enquiries and tenders in [the GSS] space in the past 12 months, which has added liquidity to existing lines… We also carefully think about when we issue into these programmes: we do not want the market to go stale or enter a period of inactivity where no issuance happens.”

WATC noted particularly strong support for its deal, which was able to revise price guidance from 55-59 basis points over EFP at launch to 53-55 basis points at the first update, finally settling on a margin at the tight end of the updated range. The issuer said, however, that it was hard to unpick the bid for a WATC green bond specifically from general demand for an issuer with notable scarcity value given Western Australia’s limited debt requirement.

“It is hard to know the extent to which the support is green-bond related, though there were certainly a number of investors with a specific green lens,” Kaylene Gulich, chief executive at WATC in Perth, told KangaNews after pricing. “Others, though, responded positively to the detail we were able to provide on delivering broader ESG [environmental, social and governance] outcomes and the positive economic story. We are fine with both – we weren’t looking for demand that was ‘just’ green.”

WATC roadshowed in Australia, Japan, Asia and Europe ahead of pricing, to what Gulich described as a highly receptive response. “In my experience these were the most positive conversations we have had with investors across jurisdictions. My sense is that they were impressed with the breadth of the conversation we were able to have about the state government’s ESG credentials and economy – including a lot of interest in the look-through to the mining sector.”

The potential game-changer for government-sector GSS issuance is the arrival of the Australian Office of Financial Management (AOFM) as a green-bond issuer, which is expected to happen before the sovereign funding year ends in June 2024.

Such is the interest in the project that KangaNews surveyed Australian fixed-income 20 investors in May 2023 to gauge their preferences for local sovereign green-bond issuance. A key takeout is that investors will be paying close attention to the credibility of the transaction and the policy backdrop supporting it, even in light of significant progress on climate policy since the change of federal government in 2022.

Adrian Janschek, portfolio manager at First Sentier Investors in Sydney, acknowledged that Australia’s “well-known environmental perception issues” make labelled issuance “somewhat of a political novelty in the first instance”. But he also believes progress is being made at the policy level including a clear direction being set, such that the AOFM should not be afraid to sell a positive story.

Tamar Hamlyn, Sydney-based principal and portfolio manager, interest rate strategies and macroeconomics at Ardea Investment Management, has a greater level of concern. He explained: “The credibility issues are unfortunately significant. There is a risk that the domestic market underappreciates the extent of international negative perception about Australia’s enabled emissions.”

There could be a two-way effect here, whereby a sovereign programme either helps improve investor perception of Australia’s environmental commitments or suffers because of that perception. If the former outcome is to be achieved, investors say, it is vital that the programme be regarded as impactful and that GSS funding provides additionality.

At the same time, nonbank lenders in particular were finding it hard to write new volume. In March, Ernest Biasi, Thinktank’s Sydney-based treasurer, explained: “While term market pricing has improved from last year, funding costs remain elevated and there is intense competition from banks and nonbanks in the lending market, placing persistent pressure on net interest margins. The impact of 10 or so consecutive official interest rate rises has also softened demand for new credit.”

This led to a shift away from the prime mortgage in particular. At the KangaNews-Natixis CIB roundtable, Anny Chen, general manager, capital markets at Resimac in Sydney, revealed a common strategic response. She said: “Particularly in prime, this has been a period where our strategy was simply that we could not compete so we chose not to try to do so. Our focus has turned to cyclical asset classes and diversification. In our case, a couple of ways that we have diversified away from prime are near-prime lending and our entry into the asset finance space.”

Later in the year, however, nonbank lenders were starting to report significantly improved origination conditions even in the prime mortgage space – and awareness of this latest shift in conditions had even reached the central bank.

“A period of intense competition in mortgage markets has eased... with fewer cash-backs on offer for mortgage refinancers and variable housing loan rates for new loans edging higher by more than the cash rate, Carl Scwartz, acting head of domestic markets at the Reserve Bank of Australia, said at the ASF conference. “The banks’ funding cost advantage over nonbanks has also diminished somewhat thanks to higher deposit rates, as customers switch from at-call to term deposits, and a narrowing in RMBS [residential mortgage-backed securities] spreads.”