It is hard to draw a direct comparison with Asian participation in bank transactions from 2021 as supply dynamics last year were profoundly affected by the term funding facility, at least until the later part of the year. But intermediaries say a market reset over the new-year period laid the foundations for a more supportive environment in 2022.

“There has been greater Asian participation in bank transactions than we saw in deals last year. The key reason is widening in credit spreads,” says Adam Gaydon, Sydney-based head of syndicate at ANZ.

Bank spreads hit their cyclical tight point for new issuance in August 2021, when NAB printed a A$2.75 billion (US$2 billion) five-year deal at 41 basis points over BBSW. This margin was a post-financial-crisis low for a major bank in Australia.

“At levels like those we experienced last year, the feedback we received from Asian investors was that the outright pricing was too tight – it did not meet their minimum hurdle requirements. We certainly saw diminished appetite as a result,” Gaydon continues.

The August 2021 NAB transaction recorded 14 per cent Asian account participation, while its latest domestic benchmark, priced in February 2022, sold 36 per cent into Asia across all tranches. Asian accounts bought nearly three-quarters of the most recent deal’s five-year fixed tranche alone.

The same is true across financial books – including issuance by banks outside the big four. Westpac achieved 45 per cent Asian distribution based on a margin of 70 basis points over swap, while CBA recorded 27 per cent Asian placement from a bigger book. Gaydone also notes “decent” Asian participation in other transactions including Rabobank Australia Branch’s five-year A$700 million deal.

Jack Geddes, director, frequent borrowers and syndicate at Westpac Institutional Bank in Sydney, says Asian demand at the start of 2022 is predominantly coming from commercial banks and central banks, supplemented by some real-money accounts. This demand picture is very similar to the supranational, sovereign and agency Kangaroo market, where Asian demand was the main driver of early-year transactions.

Banks and asset managers were the dominant buyers in all three of 2021’s Australian major-bank benchmark deals, with each investor type receiving more than 40 per cent of the book. Banks were most prominent in NAB’s five-year floating rate note (FRN), taking 73 per cent.

Geddes comments: “There has been a lack of financial supply through 2020-21, which has resulted in a lot of pent-up demand. Many Asian banks have mandates for Australian dollar financial paper that have not been met over the last couple of years.”

Asian accounts’ investment strategy for Australia will likely focus on duration and credit quality (see box). While demand has been strong for financials it may only translate to sporadic or name-specific appetite for corporates, Geddes adds.

“It is very credit specific and investors in Asia will really be hunting for good quality credit, yield and liquidity,” he explains. “While we might not see the same momentum as the financials, I expect it to be strong for some corporate names.”

Geddes says the Asian private-bank bid drives regional participation in most corporate deals. But Asian commercial banks have also been expanding their limits for Australian credit, he adds. “It is a slow burn process – we are not expecting it to have dramatic impact overnight or to represent an immediate increase across deals. But it might allow us to work A$100-200 million directly into some corporate names.”

Asian investors played prominent roles in some of 2021’s Australian dollar corporate deals, particularly those with a sustainability element. Woolworths recorded 31 per cent Asian participation in the six-year tranche and 28 per cent in the 10-year note of its first sustainability-linked bond in September 2021, while Wesfarmers’ June 2021 A$1 billion deal – split into A$650 million seven-year and A$350 million 10-year tranches – saw more than 40 per cent Asian participation.

Some specific pockets of demand come in for – and can even dominate – specific deal types. For instance, Daniel Leong, director, debt syndication at Mizuho Securities in Hong Kong, says Asian insurance companies are focused on long-end supply from 10 years out. “The bid and the interest we are seeing from these investors is quite strong even with the potential for interest rate increases and the effect on spreads,” he says.

But he cautions: “For life insurance companies, which are key buyers of corporate debt, this period is like a double-edged sword. They are glad to see higher yields that will increase their returns to customers. However, they are also wary that higher yields mean their existing portfolio mark to market value is decreasing.”

Inflation and the likelihood of consequent interest rate increases, a clutch of equity selloffs and geopolitical risks have influenced investors’ thinking and behaviour at the start of 2022, alongside the ongoing effects of COVID-19. Some sources suggest this uncertainty may even be slowing the traditional start to the new corporate issuance year in Australia.

While corporate borrowers typically start to tap the market after the February reporting season, at least some issuance generally emerges over January and February. However, there had been no deal flow in 2022 by the end of February. Geddes comments: “We do not normally bring primary transactions during heightened volatility, but it is also a price decision. A bit more spread may be required to negate some of the volatility.”

He adds the return of bank funding witnessed a significant repricing of five-year major bank spreads, to 70 basis points over swap from about 40 basis points. “This has an impact on where corporate issuers can fund,” he explains. “A lot of investors have different portfolios for corporate paper and financials so [relative price] does not necessarily limit their ability to buy corporates. But where banks are funding will always be a consideration for higher grade corporate names.”

Australian corporate credit and financial debt still represents stable value, Leong suggests. “Australian dollar credit product has outperformed the recent moves in more liquid markets like the US and Europe,” he says. “Credit spreads are trending wider, under pressure from Ukraine headlines and rates volatility. However, the relative outperformance of Australian dollars also provides issuers opportunities for competitively priced deals.”