Benchmark foreign-currency issuance: the last word?

Larger funding tasks and lack of competing issuance from Australia’s major banks might, at the margin, make benchmark-sized foreign-currency issuance by Australian states more likely. The reality is that this type of funding is still very much a last resort.

ZAUNMAYR Foreign-currency issuance emerged as a much more relevant funding option in 2020, albeit not in benchmark form. How significant is the near-absence of the major banks from wholesale funding markets and the consequent impact on the cross-currency basis?

KELLY The major banks’ absence has certainly helped us on the cross-currency basis swap. However, whether it is euros or the Australian dollar long end, the scenario remains that it is very opportunistic. Our view on foreign-currency borrowing is that it needs to provide something the domestic market cannot. It is always our preference to borrow in Australian dollars but we will consider foreign currencies if they can give us tenor, volume or price that we cannot otherwise get.

FAJARDO We consider offshore funding as part of our strategy of smoothing and extending our maturity profile. We are more likely to consider foreign currency in benchmark size at the 10-year point of the curve.

There were periods last year when the economics were close, and we were looking at a benchmark US dollar deal. However, with domestic spreads performing, those economics dissipated. Offshore funding levels are now much wider compared with where we could issue in the domestic market.

TRIGONA When we look at foreign-currency issuance, we are looking for tenor and for investors that are not buying our bonds in Australian dollars. The domestic market is still challenging beyond 14-15 years and we know we can get longer-dated funding in the euro market.

Again, though, it needs to be comparable to our domestic cost of funds. We were able to achieve this in 2020 and currently have €430 million (US$473.3 million) outstanding in a 30-year line, which is only just shy of benchmark size. If it gets to benchmark size it opens the door to a lot more investors and potentially to larger issuance.

FAJARDO Foreign-currency issuance can bring diversification with new investors but also the ability to tap into different pools of money from existing investors. We found a similar dynamic with our green-bond transactions, where there is crossover but investors are using different portfolios.

ZAUNMAYR Did funding levels in offshore currencies during 2020 shift the dial at all for other states?

CINQUINA We have noted the activity in foreign currency, ultra-long bonds but it is not something we have needed to look at.

KENNEDY We are concerned with maintaining liquidity in our benchmark lines so we need to weigh the cost of issuing in long-dated offshore currencies with the effect it would have on our benchmark programme. At this stage, issuing in offshore currencies is not part of our considerations.