Open economy, closed border: opportunities and challenges in New Zealand

New Zealand’s government-sector issuers experienced market upheaval as severe as their neighbours in Australia during the height of the COVID-19 crisis in March and April. Intervention from the Reserve Bank of New Zealand (RBNZ) and an enviable pace of economic reopening have improved the outlook, but issuers at a KangaNews-Westpac roundtable in June say plenty of challenges remain to be faced.

  • John Bishop Group Treasurer AUCKLAND COUNCIL
  • Kim Martin Acting Director, Capital Markets NEW ZEALAND DEBT MANAGEMENT
  • Vanessa Rayner Head of Financial Markets RESERVE BANK OF NEW ZEALAND
  • David Austin Head of Institutional Sales
  • Mat Carter Director, Debt Capital Markets and Syndicate
  • Joanna Silver Head of Sustainable Finance
  • Imre Speizer New Zealand Financial Markets Strategist
  • Matt Wilsher Associate Director, Debt Capital Markets and Syndicate
  • Matt Zaunmayr Deputy Editor KANGANEWS

Zaunmayr How would issuers summarise market access and conditions in New Zealand since the start of the COVID-19 crisis?

MARTIN It was clearly very volatile in March and the feedback was that liquidity was very poor. However, it appears now that things have normalised. Looking at our usual metrics for market conditions, tenders are well covered averaging around 2.5 times subscription. This is with the backdrop of increasing weekly tender volume, to around NZ$1 billion (US$648.3 million) per week from NZ$150-250 million per week before the crisis.

During this period, we have also had two record syndications, which we used to really test market access. The most recent was by far our largest-ever volume, at NZ$7 billion, with a good range of investors by geography and type. We cannot discount the volatility we all experienced in March but we are pleased with the market conditions we have been seeing more recently.

DIREEN Once we saw some normalisation we took the opportunity to return to primary issuance – and we are glad we did as we were able to diversify the pool of investors that buy our paper as well as reduce funding risk. We have not needed to access the market since late April and are still some way away from our next transaction.

BUTCHER We have been fortunate. We got through some pretty dark times where the primary and secondary markets were actually failing. It was horrendous in March and early April. There were days when the bid-offer spread on our bonds in the secondary market was 50 basis points, where it would normally be five.

This was partly because bid-offer spreads on government bonds were also widening a lot. This was not unique to New Zealand – it was similar in the Australian semi-government market and other government bond markets around the world.

The positive aspect is that we have been able to issue NZ$1.8 billion over the last six months. There have been times when this came with wider new-issue premia and overall pricing was wide compared with prior years. However, we have been able to access the market – and for record volume.

There have been dark times but, with the assistance of the reserve bank, market confidence has returned quickly. Where we are now relative to last year seems okay. It has been an interesting time and no doubt another chapter in the book on the history of markets.

BISHOP We have not been active in public markets but have had a similar experience. We raised a fair amount through private placements in March and April. This was expensive and the maturities on offer tapped out at around three years, but we did get more than NZ$500 million away.

The market has returned to a sort of normality now. Our next major issuance is likely still a couple of months away, though.

Zaunmayr What is the view on market conditions from an intermediary perspective – and in particular what has Westpac seen when it comes to investor capacity to absorb new issuance?

CARTER As the borrowers have said, there was a sentiment of market dislocation coupled with material volatility in March. This led to a ‘cash is king’ ethos – a theme we have not seen for a while.

The end of March and start of April was very concerning. But kudos to the RBNZ and other global central banks, which efficiently implemented measures to enhance market functionality.

One can’t help but compare the 2008 financial crisis with the current period. However, that crisis played out over 2-3 years, whereas the COVID-19 crisis played out in only a matter of weeks. It has been a sprint rather than a marathon – hopefully this remains the case and volatility can remain somewhat in check going forward.

Regarding market capacity, we have seen strong execution outcomes from the local high-grade borrowers, together with Kauri issuance.

A huge amount of liquidity needs to be put to work and trading books are now also short of paper. The NZ$7 billion deal from NZDM [New Zealand Debt Management] had an orderbook of NZ$14 billion, which is a highlight when talking about market capacity. The LSAP [large-scale asset purchase] programme has also been a real positive for the overall secondary backdrop – we have seen a significant contraction in credit spreads across many sectors and the market is keen to see more primary supply further down the credit curve.

AUSTIN In times of stress, investors in particular focus predominantly on shoring up liquidity. A lot of domestic investors looked to their experience in the 2008 financial crisis to assess what measures they would take this time around.

This saw funds looking to convert a meaningful portion of their portfolios into cash or near-cash instruments. Offshore investors were also liquidating New Zealand dollar assets as they sought to revert to core markets. In New Zealand, pretty much all enquiry was coming from the sell side.

Trading books needed a release valve, which the RBNZ provided with its LSAP programme. This cleared the way for the market to resume some normality.

Now, cash levels remain extremely high. There is close to NZ$30 billion of cash in the system compared with around NZ$7.5 billion typically. There is a lot of cash sitting on bank balance sheets looking for a home, while fund managers and retail investors have also accumulated additional cash from maturing assets.

“We need efficient price discovery to achieve monetary-policy effectiveness. A good amount of two-way activity has returned to high-grade fixed-income markets and bid-offer spreads have come back in. Bond-swap spread levels have also returned to the levels of early 2020.”


Zaunmayr What is the RBNZ’s view on market conditions and domestic high-grade issuance over the couple of months since it began its QE programme?

RAYNER I agree with what has been said on market conditions. We observed severe dysfunction in mid-March as the market responded to uncertainty in the economic outlook. As Mark Butcher mentioned, this was not unique to New Zealand. But the increasing uncertainty resulted in increasing demand for liquidity.

Domestically, we saw a spike in short-term interest rates and widespread sales of high-grade bonds to raise cash. We also observed that internal balance-sheet constraints were hampering the ability of financial intermediaries to manage the large volume of sales. On some days there just were no buyers of New Zealand high-grade bonds. We were very concerned about what we were seeing throughout this period.

Prior to establishing the LSAP programme, we also implemented other measures to try to provide confidence and liquidity to the market. We began by injecting an unprecedented amount of liquidity via the FX swap market and did some small-scale purchases of government and LGFA [New Zealand Local Government Funding Agency] bonds.

We also established a term auction facility to provide banks with liquidity out to 12 months if they needed it. And we started corporate open-market operations so banks could support their corporate clients.

These measures were all introduced in the lead up to the announcement of the LSAP programme. While our markets team was doing all it could to restore market function, our economics colleagues and the Monetary Policy Committee (MPC) were assessing the economic impact of the pandemic.

It quickly became clear we would need to provide more stimulus through lowering the overnight cash rate, providing forward guidance and launching the LSAP programme.

The primary objectives of our LSAP programme have been to lower interest rates across the economy and to support market function. On the market-function piece, we are pleased to see confidence has been restored to New Zealand financial markets. Inevitably we will go through periods of ups and downs but it is pleasing to see some stability relative to March and April.

We need efficient price discovery to achieve monetary-policy effectiveness. A good amount of two-way activity has returned to high-grade fixed-income markets and bid-offer spreads have come back in. Bond-swap spread levels have also returned to the levels of early 2020.

Another sign of success has been the large volume of high-grade issuance absorbed by the market in the last couple of months. It will be positive to see more issuance beyond the high-grade sector in the coming months to show continuing improvement to market function.

By helping to restore market function we have been able to achieve monetary stimulus. The sovereign yield curve is lower and flatter, which is being passed through to lower interest rates in the financial system and economy. This happened quickly with wholesale rates but recently we have seen it pass through into retail rates as well. This is what we want to see.

Negative rates loom in New Zealand

The possibility of a negative official cash rate in New Zealand at some point in 2021 is a major discussion point locally. If it comes to pass it could reshape the local bond market – though perhaps without seriously disrupting demand.

ZAUNMAYR The Reserve Bank of New Zealand (RBNZ) has not ruled out negative interest rates domestically but has said such a monetary measure is not immediately implementable. What would the desired outcome of negative cash rates be?

RAYNER We would be considering the ability of negative interest rates to stimulate economic activity and return inflation and unemployment to our stated policy objectives. We have signalled that it is a tool we are considering but it is among a suite of tools we have at our disposal.

We have found the ability to implement negative rates requires banks to be operationally prepared. We sent a letter to banks to ensure they are ready to implement negative rates if the Monetary Policy Committee (MPC) decides to use this tool.

We are doing work internally to assess the relative effectiveness of various tools and, depending on the economic outlook, the MPC will look at the best way to respond.

Zaunmayr What was the thinking behind the types of securities and tenors targeted by the LSAP programme, and by the volume of regular purchases?

RAYNER The asset composition of the programme is determined by the MPC. It has a range of principles in mind around the effectiveness of particular securities for achieving monetary-policy objectives, the efficiency of the market, financial-system soundness and the risk to the RBNZ’s balance sheet.

Once the decision is made around the size, duration and composition of the programme, implementation is delegated to staff in the financial-markets department. Our strategy has been to buy bonds across the curve in a balanced manner, because we think there are multiple channels through which monetary-policy stimulus occurs. This is across price and quantity channels.

We have seen a notable impact on yield across the curve. This will ultimately reduce borrowing costs for government, businesses and households. The capital-gains channel is also part of the transmission mechanism. Investors that already own these bonds will see some wealth-channel effect.

There is also the volume of purchases. Buying at the long end of the curve will reduce the term premium, encouraging investors to rebalance portfolios into riskier asset classes and reduce credit spreads.

We may also see offshore investors sell out of New Zealand dollar assets, which will result in a lower exchange rate – all else being equal.

We do not want market participants to read too much into the weekly purchase schedule because ultimately the stance of monetary policy is decided by the MPC and we have varied our purchases operationally from week to week based on market conditions. We ramped up purchases significantly in the early stages of the programme to support market function and clear inventory. We have slowly reduced our purchase volume as market conditions have improved.

“It was clearly very volatile in March and the feedback was that liquidity was very poor. However, it appears now that things have normalised. Looking at our usual metrics for market conditions, tenders are well covered and averaging around 2.5 times subscription.”

SPEIZER The market’s perception of the LSAP programme so far is that it has been highly effective. It has cured a briefly dysfunctional government bond market and had a lot of other benefits including bringing rates down across the curve.

Vanessa Rayner is right about the market being fixated on the weekly pace of purchases. Tweaks to this pace have sometimes been met with modest reactions. In time, the market should learn that the RBNZ recalibrating its approach on an ongoing basis is not that significant.

One thing I’d be interested to know is whether the RBNZ foresees a time when it will potentially sell securities that it has acquired during QE and, if so, what pre-conditions would need to be met to do so?

RAYNER Future decisions around the size, duration and exit strategy from the LSAP programme will be determined by the MPC and will depend on the outlook for economic activity, unemployment and inflation.

The indemnity letter for the LSAP programme says it is our intention that these bonds will be held to maturity. We are a long way away from contemplating what an exit strategy for the programme looks like, though. The statement from the June MPC meeting was that there are still downside risks to the outlook and the RBNZ is ready to provide additional stimulus if necessary. At this stage, we expect monetary policy to remain stimulatory for a long period.

Zaunmayr We have heard the RBNZ say it is is keen to see corporate issuance to indicate ongoing market recovery. What is the outlook for corporate issuance in H2?

CARTER The corporate sector has focused on immediate liquidity needs, which have been satisfied through the bank loan market and equity raising. Thus far, the COVID-19 crisis has been short, sharp and violent, so debt capital markets issuance has not been on the immediate radar for most corporates. In fact we have not had any New Zealand dollar corporate supply this year.

With the stabilisation in market tone, we expect to see corporate supply in the second half of 2020.

Another important point to note is that many corporates will want to wait until after the release of their annual results in mid-August. If we stay on the current trajectory, there will definitely be opportunities for strong execution and the corporate supply will be welcomed by wholesale and retail accounts.

For retail-driven transactions, issuance will be at lower coupon hurdles compared with last year due to the compression in term-deposit rates and the lower-for-longer yield environment.

Zaunmayr There does not appear to have been much dislocation in pricing between issuers that are part of the LSAP and those that are not. Why do borrowers think this is the case?

DIREEN The LSAP programme has clearly helped us even though we have not been a direct target of RBNZ purchases. We had never really been ahead of our issuance run rate in the 2.5 years since our market return. Having settled conditions allowed us to bring a nominal bond transaction of NZ$1 billion, which was a game-changer for us – so we strongly support the work the RBNZ has done.

We have not seen much pricing dislocation and I think this is because there is not much credit difference between those that are in the programme and those that are not. The market appreciates this and prices it in.

There may have been some speculation from investors on whether we would be included in the LSAP programme. But not being included did not stop us from achieving a great outcome in our last deal. We are happy with the point we have reached.

BISHOP The moves by the RBNZ have brought confidence back. Although we still have not seen a lot of trading in our bonds, pricing has largely followed the LGFA.

To be fair, the LGFA has probably performed a bit better. This means it is likely relatively more attractive for us to raise funds via the LGFA at the moment than through our own name – though this in turn may in part be down to the RBNZ programme.

BUTCHER We had record council borrowing in the March and June quarters. In fact, it has been helpful that the bulk has come through the LGFA as opposed to being scattered too far around the marketplace. A lot of councils began hoarding cash at the start of the crisis and, by contrast, this did not help with our issuance task in the first half of the year.

I also want to touch on the RBNZ’s role. It is important for the market not to be completely reliant on the reserve bank. I think the RBNZ should be the buyer of last resort.

In the early days of LSAP, New Zealand dollar yields went well through Australian dollar and US dollar yields. This was concerning because it meant there would potentially be a flood of bonds coming back from offshore. The role of LSAP to me should be to keep the market at an equilibrium with a clearing price with which investors are engaged and borrowers can get issuance done.

As Vanessa Rayner says, who knows when LSAP will end. At LGFA, we are already thinking about how and when it might end and how we will extricate ourselves from the support. We do not really want to go down the path of Europe or Japan where the market has been totally reliant on the central bank for almost a decade. The more reliant the market becomes, the more difficult it is to return to normality.

RAYNER It is important that we do not suppress market signals too much because it could lead to inefficient allocation of capital. There needs to be active participation in the New Zealand market so it can flourish. The RBNZ does not want its presence to impede market function and we need to balance this when considering the speed and size of the programme.


Zaunmayr The New Zealand government released its budget in May. Has this been helpful for NZDM’s communication with market participants?

MARTIN We recently did a series of virtual engagements with our domestic and offshore investors. There was an acknowledgement of the achievement of presenting the budget on schedule. Investors recognised the challenges posed by the uncertainty and also the operational limitations of doing this during a strict lockdown.

Because of the inherent uncertainty, along with the main economic forecast the Treasury included three other scenarios in the budget. Investors welcomed our five-year forecast for the bond programme. They also appreciated the clarity provided by our practice of pre-announcing our full tender schedules, even if these are now quarterly.

Because of the New Zealand election this year, we are required to provide a pre-election update. At this time, investors will receive an update of all economic and fiscal forecasts and our borrowing programme, rather than having to wait for the half-year economic and fiscal update in December.

New Zealand’s economic upside

New Zealand became the envy of the world in June when it was able to lift all domestic social-distancing restrictions. The economic challenges are not over, though – especially while the national border remains closed.

ZAUNMAYR The New Zealand economy has been able to open earlier than expected – at least domestically. Is there any possibility of the economic hit from COVID-19 not being as severe as expected and, as a result, of funding tasks surprising on the down side?

SPEIZER We have already seen a positive surprise in the recent high-frequency data. This caused us to upgrade our economic outlook slightly compared with the depths of the crisis. For example, we are expecting unemployment to peak at around 8 per cent this year rather than 10 per cent.

This is still not a great situation, but it is not as bad as we had thought. If this faster rebound has durability we will continue to tweak our forecasts.

However, there are some big risks out there. The big one is obviously a second wave of COVID-19 infections, which we are already seeing in the US and elsewhere. This would slow the economy and, for New Zealand, may push out the timing of the travel bubbles we were expecting later this year.

Zaunmayr What guidance have other borrowers been able to give to the market?

BISHOP In the long term our borrowing requirement will remain roughly the same as it has been previously, at around NZ$1-1.5 billion per year of new and refinanced debt. We have had calls with domestic investors and our banks. We have not formally engaged our offshore investors since COVID-19 began but we will look at the best approach for doing so over the coming months.

DIREEN The government has announced the delivery of an additional 8,000 houses over the next four years. Kāinga Ora’s borrowing protocol limit is still being worked on through the Ministry of Housing and Urban Development. But it will likely be around NZ$12 billion, up from NZ$7 billion currently.

We have always wanted to give as much certainty as possible to investors but it can be challenging when decisions around the quantum of both building and financing are not ours to make. We are involved in a government workstream on financial sustainability and continue to make the case to other agencies that bond programmes need to be predictable and not swing from year to year based on build requirements.

We have gauged changes in sentiment based on just NZ$500 million variation in our bond programme so we are advocating for a cap on our New Zealand dollar market issuance and to divorce the bill programme from the bond programme. From our perspective, we would prefer to have an alternative form of financing for any amount over a certain threshold.

We have a programme of NZ$2 billion this year and expect it to remain similar for the next few years – but it could change.

BUTCHER Investors always ask us about issuance intentions and timing. In April, we increased our projected funding requirement for each of the next three years by around NZ$250 million, which is around 10 per cent for each year. We had sampled our council borrowers for this – though it is difficult to get certainty as we are a funding conduit.

Council borrowers are now beginning to think about the future. Most have spent the last couple of months focused on addressing short-term issues around potential revenue shortfalls and maintaining services.

Councils have a lot of debt servicing capability. We are about to relax some of our financial covenants to allow greater borrowing and this should allow further investment in infrastructure and other projects for COVID-19 recovery.

We still think our funding projection for the coming years is about right, though. This allows for an extra NZ$500 million to NZ$1 billion of new borrowing by councils each year.

We have concerns, though, on councils’ ability to deliver capex due to capacity constraints and a history of a lot of capex being promoted and publicised by central and local government but then delayed. If projects cannot be started, council borrowing requirements could be lower.

Zaunmayr How have borrowers adapted their funding strategies to allow for a large increase in overall volume, for instance via curve extension?

MARTIN We have had an active policy to extend the weighted-average maturity of the portfolio for a while. We have had a 20-year bond in the past and returning to this point is a strategic objective we will achieve with the new 2041 line we plan to issue in July.

We receive demand for deals with even longer tenor but we are wary of creating orphan bonds and like to have relatively even spacing between bonds on our curve. We also want to be able to issue into bond lines and keep them liquid through their lifetime. This is harder to achieve if we issue a lot further out.

However, we are giving ourselves as much freedom as possible within our funding task. For example, we recently issued a short-dated infill bond, the new 2024 line, and have undertaken syndicated taps for the first time, to add volume to existing lines.

We have also had an increase to the cap on each of our nominal bond lines, to NZ$18 billion from NZ$12 billion, to give us greater flexibility. There may be times when markets are again more volatile and issuing long-end bonds may not be the right approach at such times.

“Once we saw some normalisation we took the opportunity to return to primary issuance – and we are glad we did as we were able to diversify the pool of investors that buy our paper as well as reduce funding risk.”

Zaunmayr How deep is New Zealand dollar demand for long-end bonds and does it extend across the full spectrum of high-grade borrowers?

WILSHER The long-end market is in its infancy in New Zealand but, with yield at an all-time low, there will be some natural movement from investors further out on the curve to find more attractive yield. I think we will see this in NZDM’s 2041 transaction.

How relative value stacks up compared with offshore markets will be a key aspect of demand, particularly given the RBNZ is participating in the long end of the market much more than other central banks.

Zaunmayr Is curve extension a big focus for the other borrowers – and how easy will it be to achieve?

DIREEN Our nominal curve goes out to 10 years and we have also issued a 20-year inflation-indexed bond. We have been interested in issuing long-dated debt since early 2018, even before we came to the market for the first time.

We saw little bits of interest over this time but nothing material that presented a compelling opportunity for us to issue a long-dated transaction. We were presented with reverse enquiry for an inflation-indexed bond in January and worked on this transaction for several months. This issuance makes sense for us because of the nature of our asset base – long-lived housing – and our rental-income-based revenue stream. The diversification it provides for us, as a developing issuer, is also important.

We would like to issue up to 20 per cent of our debt in long-dated funding if the demand is there and the opportunities make sense for our portfolio.

BUTCHER In general we are probably a little disappointed with the local government market for not extending the tenor of its debt. The only thing holding LGFA back from issuing longer bonds is that we already have a much longer average tenor of issuance versus average tenor of lending.

Councils had an initial surge of debt extension when we first came along. But this seemed to cap out at around the seven-year maturity mark. Until this process of extension resumes, any bond issuance we do in the long end is the LGFA largely taking funding onto its book. This is a lot more expensive at the back end of the curve. But we will entertain some long-dated funding in order to develop the market and extend average tenor.

Carter The long-dated market is typically a function of offshore currencies. We haven’t seen many New Zealand dollar placements at the long end but we have seen some offshore peers undertake long-dated funding in euros. Are any of the borrowers looking at foreign-currency funding more closely now than before the latest crisis?

BUTCHER Our view is unchanged. We continue to monitor offshore funding markets for pricing but we need to be very price sensitive. The councils do not need to borrow through LGFA so if we start landing offshore funding back into New Zealand dollars at levels far wider than they could issue domestically in their own names they are unlikely to fund through LGFA.

DIREEN How we view the opportunity versus financing in New Zealand dollars is similar. Our appetite for foreign-currency funding is low – we have legacy loans with the Crown and we think this mechanism could be used for any residual financing needs, should they arise. This could tie into our work on financial sustainability. Diversification and tenor are appealing but ultimately it comes down to cost.

BISHOP Euro deals are still on the agenda for us. We have completed three euro benchmark deals so we have a nice curve. We have always mixed our funding between domestic issuance in our own name, offshore funding and borrowing through the LGFA – and this will remain consistent going forward. We have nothing planned offshore at present, though.

“We got through some pretty dark times where the primary and secondary markets were actually failing. It was horrendous in March and early April. There were days when the bid-offer spread on our bonds in the secondary market was 50 basis points, where it would normally be five.”


Zaunmayr Could labelled green, social and sustainability (GSS) issuance become more prominent as issuers seek additional capacity for larger funding tasks?

CARTER We are seeing demand from domestic and offshore accounts for GSS bonds from New Zealand issuers. The depth of domestic New Zealand dollar environmental, social and governance (ESG)-specific demand is still gathering pace. While it is obviously not as deep as it is in offshore markets, it is clear that appetite is increasing.

It is also important to note that investors are putting a critical ESG lens over nominal issuance. In an environment where liquidity needs have increased for some issuers, discovering additional pockets of demand such as in GSS bonds may have greater focus.

Zaunmayr Globally, we are seeing transactions aligned with financing requirements linked to COVID-19-related needs from supranational, sovereign and agency names, and also from a handful of corporates. How has COVID-19 changed the shape of the sustainable-finance market? Might this evolution extend into New Zealand?

SILVER Fundamentally, the pandemic has driven a much greater focus on the need to understand and mitigate more severe and sustained societal risks. One of the ways we have seen this play out is in the social-bond market – which has quadrupled in volume this year, accelerated by the response to COVID-19 in the public and private sectors.

Social bonds have to date been a much smaller market and one that is more difficult to understand, track and scale up than green bonds. Despite this, these bonds have emerged as an important part of the toolbox for borrowers financing their post-COVID-19 strategies and relief packages.

In offshore transactions, we have seen real benefits for a handful of market participants – largely supranationals. It was the same in the early days of the green-bond market and we expect eventually that corporates, insurers and banks will follow suit in the social-bond space. Public-sector issuers generally have a wider social mandate, though, so it is likely these will remain the biggest social-bond issuers.

The types of things that could be financed through social bonds in New Zealand include wage subsidies, supply-chain management and preservation, operations disruption and the funding of essential services.

Zaunmayr Do any borrowers see more scope to use the social side of what they are funding to promote issuance tasks?

DIREEN We have been intrigued by the issuance of COVID-19 bonds and, while we focus on sustainability and our wellbeing agenda, this highlights that there is demand in the space.

When we talked with European investors in November 2019, sustainability came up in every meeting – even the ones where our briefing note said the topic was unlikely to be of interest. This train is not slowing down despite COVID-19 and we are doing our best to evolve our practices to stay at the forefront.

As an issuer, it is quite tricky to keep track of all the different threads that relate to sustainable finance and it takes a lot of work to do it properly. We are not interested in doing a half job on this.

For us to honour the badge of a wellbeing bond is a multi-year journey. We are making good progress on this and the fact that the Kāinga Ora – Homes and Communities Act has sustainability as a core focus and outcome means we have board support to continue this.

BISHOP Prior to COVID-19, we were looking to increase our issuance of green bonds in New Zealand dollars and in offshore markets. We had a long-term objective of doing most, if not all, of our issuance in green-bond format.

This has been put on hold because of COVID-19. But we expect these plans to ramp up again once we return to more normal markets. It is still very much front of mind to be a leader in the green and sustainable space.

BUTCHER We remain intellectually curious and we are still putting in place our internal GSS framework for lending to councils. This would allow us to build an asset that we could put into a GSS issuance framework.

The question I have is whether there has been GSS issuance in Australia by semi-government and other high-grade borrowers during the crisis. I am an avid reader of KangaNews but have not seen any issuance of GSS bonds highlighted recently. Instead I think the focus has been more on getting funding in the door and, in this case, borrowers tend to default to their vanilla funding.

“We had a long-term objective of doing most, if not all, of our issuance in green-bond format. This has been put on hold because of COVID-19 but we expect these plans to ramp up again once we return to more normal markets.”

ZAUNMAYR National Housing Finance and Investment Corporation issued a social bond at the end of June but you are right that none of the state treasury corporations have issued in GSS format this year.

It seems to be the case that programmatic GSS bond issuers now have access to incremental demand from specialist investors. On the other hand, other issuers’ focus has been on getting the funding they need and the work to issue in GSS format under recent circumstances has probably been too much.

CARTER The base case for dealing with this economic crisis has been for issuers immediately to resort to bank debt or their nominal bond programmes, unless they are already a programmatic GSS issuer.

SILVER We see real parallels between COVID-19 and climate change – they both affect economies and societies, and threaten the wellbeing of the global population. The only difference is the timeframe available to respond, although the climate-change window is perhaps not as large as many think.

There have been calls across a lot of channels to keep this front of mind in New Zealand. This is probably partly due to the structure of the current coalition government, but also to New Zealand having a long-term, stable climate-policy framework.

My sense is that the understanding of the need to finance the transition to a net-zero carbon economy and adjust to the transition has not gone away. The intention to align funding with wider goals has also not changed in the minds of a lot of large institutions.

Zaunmayr What insights can market participants offer on the secondary-market performance of GSS bonds compared with conventional bonds?

SILVER We have heard from fund managers that when they have vanilla and green bonds in a portfolio they will lose the former before the latter – based on their view on value.

It is worth mentioning that a lot of GSS bonds overseas have been very well oversubscribed, often by more than two times. There has been meaningful participation from the socially responsible investment community.

In New Zealand, a lot of fund managers are waking up to the realisation that having a strong and authentic ESG mandate is important. Green and social ‘washing’ still occurs but investors and stakeholders are becoming more savvy. Social bonds can help ESG fund managers with their mandates and provide a way to engage and support financing the transition we need with a degree of urgency.

AUSTIN The government recently announced that default KiwiSaver providers appointed next year will be required to exclude fossil-fuel investments from their funds. The detail around how this protocol will be applied is not yet clear, but it has raised the fund-management community’s urgency in regard to ESG investments and clarifying how they fit within investment portfolios.

RAYNER We have talked about the challenging circumstances we are in. From the RBNZ’s point of view, this is an opportunity for issuers and investors to take a long-term, sustainable view of the recovery. We are in a world where borrowing costs are low and there is significant investment required for our country to achieve its task of climate-risk reduction and adaptation.

The RBNZ has a climate-change strategy and we are thinking about this in terms of the long-run economic and environmental outcomes for New Zealand. There is an opportunity here to provide leadership during difficult times and ensure capital is going towards a more sustainable and climate-resilient economy.

DIREEN It is a long-term game for us. We do not have a huge market in New Zealand and a lot of our issuance goes to domestic investors. Not many investors in New Zealand have specific ESG mandates, but if we can pick up incremental investors in each bond issue over time we think it will help support pricing in the long term.

The driver for us has always been aligning our financing with organisation and government commitments and objectives, and the discipline it instils within our programmes and practices.

MARTIN In our most recent round of global investor engagement, ESG conversations were generally notable by their absence compared with February – when there was not a meeting where they did not come up. The most recent meetings were, understandably, more about getting information on the here and now.

More broadly, we have been responding to feedback from investors that they want us to take a holistic approach as an issuer. We hear that they consider New Zealand’s sovereign ESG credentials more broadly rather than necessarily wanting a specific labelled product.

We are doing work to raise awareness on relevant issues, such as New Zealand being ranked 19th out of 193 countries on the SDG [UN Sustainable Development Goals]. Investors also want to hear about momentum and progress, so we are working to make this information available.