SAFA stays on its toes to manage market environment

South Australian Government Financing Authority (SAFA) has not been afraid to innovate to maximise the alignment of its funding activities with the needs of the state. Andrew Kennedy, director, treasury services at SAFA in Adelaide, says the issuer will maintain an open mind on funding strategy in a market environment that offers opportunities and challenges in roughly equal measure.

As we – hopefully – start to think about the end of the COVID-19 pandemic, what has SAFA learned about market resilience? How has the pandemic changed funding approach?

Change is the one constant in markets, so issuers and investors need to be flexible and adaptable. As a borower, we have constantly had to review the way we communicate and the way we operate in markets so we can identify the right times to issue.

Liquidity circumstances have altered substantially. There was initially a very large influx of liquidity as the central banks came in with their unconventional policy methods. Now, during the step-back process, we have seen inflation emerge.

Our job is to fund the state. Banks will buy and sell to manage risk as they see fit, and investors can pick and choose how they want to manage portfolios. But we always have to issue. Over the last two years, markets have proved to be adaptable and resilient to the constant and unpredictable change.

The changing regulatory environment and unconventional central-bank monetary policy measures have clearly affected the bond market supply-demand equation at times. What risks has this created, and has it added to market uncertainty and volatility?

We have seen central banks globally be very reactive to the pandemic, which has caused increased volatility across all asset classes. The states and federal government require increased funding.

The RBA [Reserve Bank of Australia] has made policy changes as needed and articulating these policies has been very challenging. In turn, this has influenced the attitude of investors and issuers.

As the RBA signalled and executed its withdrawal, spreads have widened sharply. This has affected the ability of issuers to access markets and made investors cautious. Since the RBA has withdrawn, spreads have jumped sharply. This has affected the ability of issuers to access markets and also made investors cautious. When the biggest buyer is taken away over a short period, it will change the supply-demand dynamic.

Banks will have an elevated appetite for high-quality liquid assets based on regulatory capital changes and balance sheet growth, which should offset the wind-back of QE. But the timing will not be the same. This added uncertainty will continue to add volatility to the sector.

Is SAFA planning to open new bond lines to extend duration or fill any of the gaps in the existing curve?

Following the June 2021 state budget, we indicated we would be looking to put a new 2036 bond on the curve – which we have since done – and to maintain liquidity in existing even-year calendar benchmark lines.

While not touching the odd-year fixed rate lines, we will continue to tap AONIA FRNs in these buckets and seek to further extend the curve next financial year.

SAFA took a leadership position with the introduction of its AONIA-linked funding programme in 2019, which was a first for alternative reference rate adoption in the Australian market. How has this been received by investors and what are the plans for the programme?

We have witnessed a diverse range of domestic and international investors embracing the product over the past three years. As the regulatory environment has changed, awareness of the product and the index has developed substantially.

There is wide appeal for the product as risk free rates become the global benchmark standard. It is a good risk management tool – especially for ADIs [authorised deposit-taking institutions] – in a rising and volatile interest rate market.

We will continue to issue in this format because it is the best risk management tool we have for floating-rate issuance. We will also maintain short-term issuance in the one-year AONIA product for liquidity purposes and continuing issuing into the odd calendar years, as well as extending out the curve in time.

What is the rationale behind SAFA’s unusual approach to sustainability funding?

SAFA has taken a longer-term approach to sustainability, by adopting a holistic approach of being viewed as a sustainable issuer rather than consider labelled issuance. This is due to the liquidity risk that arises from having a bifurcated curve and a view that investors are beginning to demand issuers’ provide the credentials of all of their activities and not just represent their best assets.