Next phase for corporate debt

Financial markets are at the heart of era-defining changes happening in today’s world. How adequately the Australian market rises to the challenge will help define its own future and that of the whole economy. Westpac Institutional Bank leaders speak to KangaNews about the state of the local debt market, the task of integrating sustainability within it and the changing context in which it operates.

It is easy to identify that economies and markets are undergoing fundamental changes in late 2021. A harder task is to identify how to respond to these – particularly from the perspective of a major institutional bank like Westpac. The years since the financial crisis have seen a multitude of challenges to banks’ reputations and business models, while understanding what the nature of future business will be is far from straightforward.

Anthony Miller, the institutional bank’s Sydney-based chief executive, suggests the next phase for institutional banking will be defined in large part by three factors (see box). How financiers adapt to them will determine their success in adapting to a changing world.

They do not necessarily require a complete reinvention of the banking model. In fact, in many ways successful banks will need the same skills as they did in the past. Miller explains: “Investment in the talent pool is critical for us – even in a world of technological innovation. Technology means things can be done quickly and efficiently but it also makes it harder to differentiate ourselves. In this environment, our judgement and our role as trusted adviser are even more critical.”

Alastair Welsh, general manager, corporate and institutional bank at Westpac in Sydney, adds: “The role of the financier is going to be more like ‘old-fashioned banking’ in some ways, in the sense of borrowers having core relationships with lenders that deeply understand them through the cycle and are willing to back them with contingent liquidity. There will be an element of backing the story, the leadership team and the business model through the cycle.”


Nowhere is this more clear than in the area of environmental, social and governance (ESG) integration. Miller believes being up to standard on ESG will become a prerequisite for corporate borrowers to secure funding within this decade. It will not just be a positive factor or even a source of pricing benefit or incremental liquidity but a baseline necessity. This means having an ESG skill set across the bank.

“ESG can’t be something a few people do on the side,” Miller argues. “We have to make sure every banker understands it and is immersed in it – that they have the language, the science and the intellect not just to help clients but to do so by debating and testing them.”

The evolution is already happening. Michael Chen, Westpac’s Sydney-based executive director and head of ESG, explains that his early experiences in sustainable finance largely consisted of trying to persuade clients to go down the ESG debt path. By 2021, clients are actively approaching the bank to do sustainable deals, Chen says – because having a credible ESG strategy is becoming a critical component of being funded at all.

Three factors to live by

Anthony Miller, chief executive at Westpac Institutional Bank, highlights three factors that will define the future of capital markets.

1. Environmental, social and governance (ESG) performance will evolve from being a solution, a product or a market-user preference to an absolute precondition of securing financing from anyone, anywhere at any time. Miller suggests: “Borrowers will have to be up to standard in ESG and meeting a plan that is scientifically verified as delivering into the transition to net zero. By 2028-29, I believe it will be impossible to get funded – debt or equity – otherwise.”

2. Corporate borrowers will increasingly get their term debt from capital markets while banks will become the contingent liquidity partner. Miller argues liquidity is “the most important asset class”. While nonbank entities – including superannuation funds – are increasingly keen to lend to corporate borrowers, they typically want to deploy drawn funds for extended tenor. “This will make things more challenging for banks,” Miller admits. “However, history has shown that when markets and economies become challenging it is important to have credible sources of contingent liquidity. A well run, well capitalised and highly rated bank will attract deposits in these challenging times and may therefore be the right contingent liquidity partner for companies. The right banks can, and should, be the preferred source of contingent liqudity.”

3. Superannuation in Australia has been a success, but it is very long equities and it needs to – and is seeking to – adjust. The Australian savings industry is moving from accumulation to distribution phase as savers enter retirement, and the long-awaited portfolio rebalancing may now be inevitable. “The shape of portfolios needs to change, which means a lot more credit, in particular long-dated credit. Australia could finally have a 20-, 30- or 40-year bond market because it suits the nature of our savings pool,” Miller suggests.

He continues: “We want to be as good as we can be at integrating ESG into everything we do. This means labelled transactions, but also embedding ESG in credit-risk management, pricing, customer selection and portfolio construction. We are setting emissions targets that dictate how we construct our book. This shows how we are moving from just helping clients with ESG to making it central to our own business.”

Eliza Mathews, head of sustainable finance at Westpac in Sydney, adds: “There is, without a doubt, widespread understanding of the importance of sustainability and addressing climate change among our corporate customers. There is still some work to be done on understanding the power of finance to drive change. But a lot of progress has been made even here. Five years ago, I often found myself introducing clients’ treasury and sustainability teams to each other. This is rarely the case today.”

“ESG can’t be something a few people do on the side. We have to make sure every banker understands it and is immersed in it – that they have the language, the science and the intellect not just to help clients but to do so by debating and testing them.”


The coming years will reveal the extent to which Australia’s debt capital market is able to provide the investment required to build a sustainable future. In this respect, overall market development over the past decade is in equal parts encouraging and sobering.

Going back to the period immediately after the financial crisis, the Australian dollar debt market was underdeveloped and unreliable. It was typically only available to the highest-rated corporate borrowers, in small size and at short tenor. It also tended to go into flash hibernation during periods of even relatively mild volatility. It was no surprise that most large companies chose to get most or all of their debt funding from global markets or bank lenders.

Progress has been made. Allan O’Sullivan, managing director and head of frequent borrowers and syndicate at Westpac in Sydney, comments: “There has been development in the domestic corporate bond market, in things like the size of deals available, sector diversity and average tenor as well as the breadth of investor participation including superannuation money and international investors. These have progressed over the past five years, let alone 10.”

But the work is far from complete. “When I think about things like the investment and funding needs associated with meeting the Paris Agreement, it is still an open question whether the domestic bond market will be able to respond meaningfully to this opportunity,” O’Sullivan adds.

This is where the change in the nature and macro strategy of the superannuation industry Miller identifies could come in. Although he notes that a paradigm shift in asset-allocation norms has been forecast – generally wrongly – for many years, Miller argues Australia’s vast investment pool should be approaching an inflection point.


He says: “The domestic corporate bond market has yet to realise what one might think A$2 trillion [US$1.5 trillion] of savings could achieve, at least in the credit sector. There is undoubtedly a historical bias to equities and infrastructure in asset allocation. But I cannot help thinking this will change as the superannuation industry moves to a distribution model.”

In fact, Miller’s macro themes – banks’ changing role as financiers, the evolution of the superannuation investment pool and the critical nature of ESG – all intersect in the sustainability space. The Australian debt market is likely to be asked a huge question that it has the best chance of answering by deploying its burgeoning ESG expertise.

“Sustainability is an opportunity to position the domestic bond market as an attractive one for our customers,” O’Sullivan suggests. “Australia is not behind, and is often in front of, any other global jurisdiction on ESG financing with the exception of the euro market. We have a clear opportunity to capitalise on the momentum in ESG and the economic challenges posed by climate change.”