What a difference a year – in a pandemic – makes

Despite lockdowns and COVID-19, corporate Australasia is optimistic, according to the 2021 KangaNews-Moody’s Investors Service Corporate Borrowers’ Intentions Survey. The results highlight favourable market conditions are expected for future funding plans.

Chris Rich Staff Writer KANGANEWS  

The survey, now in its eighth year, was conducted in late September and received 60 responses from capital-markets-relevant nonfinancial corporate borrowers in Australia and New Zealand.

The makeup of respondents is consistent with previous years and broadly reflects the shape of Australian and New Zealand corporate debt capital market issuance. Most responses – about 90 per cent – come from investment-grade firms, with infrastructure, real estate and construction, general corporate and regulated utilities the dominant sectors.

Unsurprisingly, the economic and health crises caused by COVID-19 remain survey respondents’ key concern related to capital-market access in 2021 – though the level of concern has lessened from 2020 (see chart 1). Last year, a quarter of survey respondents said the pandemic’s impact was “very challenging” – a figure that falls to just 2 per cent in the new iteration of the survey.

Improved credit spreads are the standout positive factor for market access this year – accompanied by the ultimate goal, landed cost of funds – with corporate borrowers continuing to find liquidity conditions highly conducive and confident in the appeal of Australasian credit.

Despite headlines about tensions between Australia and China, corporate borrowers seem if anything less concerned about geopolitical risk than they were a year ago. Barely a quarter of survey respondents rate it even “fairly challenging” to their business, compared with nearly half in 2020 – including 11 per cent that said geopolitical risk was “very challenging”.

Corporate borrowers responded to the survey during extended lockdowns in both Australia and New Zealand but their outlook on the credit cycle is nonetheless rosier than last year, with most believing the economy is in recovery or expanding. Almost a third indicate the economy is in repair and very few believe the situation will deteriorate (see chart 2).

Moody’s expects Australian economic growth to rebound in the fourth quarter of 2021 as lockdown restrictions continue to ease. “Our forecast for growth in 2021 remains at 4 per cent, followed by 3.3 per cent in 2022 as consumer demand is supported by resilience in the labour market, a drawdown of household savings and a pickup in business investment,” says Martin Petch, vice president at Moody’s in Singapore.

He adds that the rating agency expects growth in New Zealand to be about 5.5 per cent for 2021, though the recovery’s momentum will likely moderate over the remainder of the year as base effects fade but a higher vaccination rate underpins activity. “Looking forward, we expect growth in 2022 to moderate to about 3.3 per cent as the impact of eased restrictions supports domestic activity and recovery among key trading partners boosts export demand,” Petch says.

Survey respondents’ outlook, however, has weakened (see chart 3) specifically due to economic conditions over the last few months perhaps including the transition to a ‘living with COVID-19’ strategy in Australia. This policy change only happened in New Zealand after the survey period, so while some or all respondents may have anticipated the shift, the results may not take this into account.

Corporate borrowers are split on what shape the recovery will take. Just more than half of respondents expect a relatively straight-line recovery of some form, with the rest anticipating volatile periods of recovery and decline. Expectations of a prolonged downturn before recovery are almost absent from this year’s results (see chart 4).

Respondents’ forecasts for monetary policy in Australia and New Zealand have notably diverged. In Australia, most of the market expects no change in the cash rate over the next 12 months, despite warning signs across the world that inflationary pressure may not be transitory.

Reflecting the New Zealand economy’s recovery, corporates expect a hike of 50 basis points or more in the next year, having anticipated a cut of 50 basis points or more in the 2020 survey (see chart 5). The Reserve Bank of New Zealand raised the official cash rate in the week after the survey closed.

Corporate borrowers embarked on a range of actions in response to the COVID-19 crisis last year. With the worst of the pandemic seemingly over, survey respondents say they have – for the most part – unwound these response measures. A large proportion however, maintains conservative settings (see chart 6).

Given the high proportion of respondents either unwinding provisions taken last year or not taking them at all – combined with the acknowledgement of favourable spread and interest-rate conditions – capital-markets issuance expectations remain low compared with previous years.

However, issuers have maintained the overall capital-markets proportion of their debt books at a level roughly in line with the prior two years, though this is still notably down from the peak of 2018 (see chart 7).

More promising is the fact that corporate borrowers expect to increase their proportional use of capital-markets funding in future – the most emphatic response to this question since 2015 – while the intention to increase bank funding is at its lowest since the survey began (see chart 8).

Moreover, the survey shows more than half of respondents have already brought forward, or are likely to bring forward, either or both of funding and refinancing requirements to take advantage of low rates and tight spreads (see chart 9).

As to which markets corporate borrowers are most likely to access for their forthcoming funding needs, domestic issuance unsurprisingly remains the preferred option for most Australian-based respondents, with the US private-placement (USPP) market second but some way behind the pre-COVID-19 interest level (see chart 10).

New Zealand-based corporate borrowers note a similar view, though there has been an uptick in the attractiveness of the USPP market from an all-time low in 2020 to more like the long-run norm (see chart 11).

The past year has seen significant progress by capital markets in the environmental, social and governance (ESG) space, with a greater uptake of green, social and sustainability, and transition-linked financing products. Although the majority of corporate borrowers responding to the survey have yet to issue ESG-labelled debt, across the board of possible instruments survey participants’ intentions to issue in one or more sustainable formats have increased from 2020 (see chart 12).

Interestingly, more than half of the respondents indicate plans to issue in a sustainable-debt format other than use-of-proceeds or target-linked product.