Summing up the corporate equation

The KangaNews Corporate Debt Summit 2024 took place on 17 October, a matter of weeks after the Australian dollar corporate bond market passed its record for full-year issuance volume. Speakers discussed the prospects for a newly vibrant local debt funding option, and an economic and business environment where cautious optimism is the mood of the day.

“As we look forward to 2025, the question is: will we replicate the success of the year just gone? While several risk events will continue to emerge and re-emerge, it’s our view that this success is replicable given structural change in the availability of liquidity. We are expecting a strong pipeline of activity to continue in 2025.”

“The increase in scams and fraud is at an all-time high. The investment required for security and technology innovation is also high and organisations need the right partners to keep their data and customers safe. The challenge is customer experience – what we describe as a ‘friction right’ environment. This means the right amount of friction that can prevent fraud but also enable the right customer outcomes. There is a lot of concern about consumers’ data rights and permissioned data; it really is a balancing act.”

“There has been a 20-30 per cent correction in [office] values and we can acquire assets at 25-30 per cent below replacement cost. We feel we’re at a trough whereby we may move into a rate cut cycle in the future that will drive sentiment change. This will also be a trigger for capital allocation. We are already starting to see these signals emerge and this gives us confidence as we look forward to 2025.”

“Sydney Airport expects to go from somewhere around 40 million passengers a year to 70-80 million passengers a year by 2050 – it is a massive two decades of growth. The biggest issue we’re dealing with, because there is a lot more international demand, is that supply chains are still affected by COVID-19. This means things like engines and aircraft, where supply chains have not returned to normal.”

“International students only have an impact on housing at the margin. Permanent migration affects housing, of course, But temporary migration, particularly international students – who it’s probably better to think of as ‘educational tourists’ – have a tiny impact. Many of them stay in purpose-built accommodation or even in home stays – so they are actually pumping money into the economy via families with spare rooms. When it comes to housing, it’s purely a political thing.”

“One of the reasons why SLBs have not gained momentum that is less discussed is the cyclical one. When rates increase so much in developing and developed countries, step-ups of 25-50 basis points for a corporate SLB don’t seem that significant. The SLB Principles actually recommend that step-ups be proportionate to the original bond economics, which implies that they should increase when rates are higher.”
ATTILA BRUNGS UNIVERSITY OF NEW SOUTH WALES

“Our house view – which is also the view of many others in the market – is that the global structure of interest rates is going to be higher going forward than it was in the period between the global financial crisis and the pandemic. It is therefore really important to think about business models, funding models and debt stacks in the context of a higher average global rate structure.”

“Right around the world, countries get to a certain point of living standards, their economies become more service oriented and their bid for extra steel per capita tops out – unless they have a big shipbuilding for export industry. This is an empirical regularity across countries: it was the case in the US and again in Germany. China has now reached peak steel.”
LUCI ELLIS WESTPAC BANKING CORPORATION

“One of the reasons why SLBs have not gained momentum that is less discussed is the cyclical one. When rates increase so much in developing and developed countries, step-ups of 25-50 basis points for a corporate SLB don’t seem that significant. The SLB Principles actually recommend that step-ups be proportionate to the original bond economics, which implies that they should increase when rates are higher.”

“In the next 10 years, the amount of people who are aged 85 and above will double. The ‘ageing industry’ is developing even faster than we think and it is going to create huge demand, especially in care sectors. Aged care workers are already the highest growing single job in Australia and anything in relation to this – retirement villages, nursing homes and urban planners to make communities more accessible – will be a beneficiary.”

“AT1 has always been a listed market and there has been some conversation about a listed tier-two option. Our perspective is that the OTC market for tier-two is very deep, liquid and international – we have had deals as big as A$5.75 billion in senior format. We are certainly an advocate for using this for tier-two.”

“There has been a place in portfolios for AT1 over time and while the sector is not massive in a market sense – it’s about A$40 billion – the money has to go somewhere. I expect it will be a mix: some getting recycled to equity, perhaps middle-market funds increasing allocations to tier-two, and there is probably a role for ETFs as well.”

“We like labelled issuance. The challenge is access to high-quality assets given the highly competitive renewables market. We put a significant amount of governance on the assets we include in our green portfolio. We have to be careful about ensuring not just that we can maintain outstandings but also add to the pool.”
JOANNE DAWSON WESTPAC BANKING CORPORATION

“I don’t necessarily think greenwashing risk will affect the green or social bond market, as long as projects are determined before the deal, and the securities and what’s in them is audited every year. The impact is more likely to be on SLBs, because the targets may not be sufficiently ‘stretch’ or ambitious. The regulator could say: ‘This is not a green asset, this is a vanilla bond.'”

“Key to the success of an SLL transaction is establishing early engagement from cross-functional teams. When we introduced the concept of an SLL, for instance, our head of sustainability was enthusiastic about how it could be used to drive change within the business. It is a powerful tool that can be used to bring the business on board to deliver the right outcomes.”

“Demand for data in the digital economy is growing at 20 per cent per year, and this is before AI starts ramping up. We anticipate that, globally, data centres will grow to 97,000 megawatts, from 43,000 megawatts, over the next five years. This means around US$2 trillion of investment. The Asia-Pacific region will comprise around 30 per cent, which means US$564 billion and around 25,000 megawatts.”

“As an investor, SLB KPIs almost feel like a covenant – this is more or less how we would treat these targets. We would be happy to work with an issuer as long as it is moving toward its targets, especially if they are outside its control. If it is willfully ignoring them because it can afford to do so, it is a different conversation. What’s hardest from our perspective is the resources needed to track these things – especially when we have a pretty good markets for use-of-proceeds type bonds.”

“The part of the market that has slowed is sustainability-linked debt. We should focus on this, as it ought to be an essential component of the transition toolbox – because, by design, sustainability-linked instruments are about moving from one state to the next.”

“New entrants – be it private wealth, Asian demand or others – have brought a lot of different liquidity points into the market. This means more price discovery, which also applies in the primary market. In turn, this attracts a greater breadth of issuers, larger deal sizes and transactions across the curve – especially in the 7-10 year bucket, which was not the case in years gone by. Liquidity brings more liquidity, and this has created the really positive feedback loop we have experienced this year.”

“What has been most interesting for me, on the syndicate side, is that the A$21.5 billion of corporate issuance this year has been met with more than A$60 billion of investor orders – almost three times coverage of the issue size.”

“Australian macro factors play a big role in our demand, as does prudential supervision. We have also found throughout the years that the Australian market has a variety of participants such that market movements are just not one way. There are spread players and outright players, for instance. We also like the ease and costs of hedging.”

“With AT1, the initial value proposition that attracted investors to the asset class was income-seeking investors valuing the high yield along with the flexibility and transparency benefits from it being readily traded on the ASX. There were also some tax benefits from franking credits. I don’t anticipate a move one-for-one into another asset class. But I suspect there will be some reallocation primarily to tier-two while a small portion will allocate to equities and, I think, opportunistically into ETFs and listed funds.”

“The Australian corporate bond market this year has been somewhat insulated from some of the global events that would have put pressure on spreads or even funds being available in past years. This is a sign of healthy market development – but it also flags why it makes sense for issuers to continue to maintain optionality, particularly as their debt requirements grow.”

“Given the long-dated nature of our liabilities we are motivated to look at long tenor on the investment side, which can mean 10 years all the way through to 30 years. Even before the development of this part of the market in Australia we supported long-dated issuance – for example, the first 12-year AMTN, for Dexus, a 20-year private placement with AusNet and also the first 30-year AMTN, for Aisrservices Australia. Longer duration has been a particular trend this year that we have certainly supported.”

“We consider the corporate governance, rule of law and the fact that the Australian market has actually grown into quite a dynamic and liquid environment – on the bid and offer side – and we weigh it against what we see offshore. As a local currency market, Australia has really grown exponentially in the last few years.”

“I’d like to see a lot more Kangaroo issuers. They offer diversity of sectors and of names. They also often price cheap to their offshore curves and, particularly during volatile markets, they have higher beta – which means range-trading opportunities we can look into. European banks, Asian financials – anything like this is really welcome.”
ANTHONY IP MILFORD ASSET MANAGEMENT

“Perhaps 10 years ago, the Australian market was there for some of our funding but our primary markets would have US dollars, euros and even Swiss francs. Nowadays, Australia is the one we look to first, because we are very confident we can get 10year funding in good volume. The dynamic has changed, and part of it is building the Asian bid over a number of years.”

“There came a point where we needed to think about overreliance on our domestic market. We are also in a high growth stage. USPP was always the market that provided this. But, more recently, it became clear that there was a developing and growing market a three-hour flight away, and we weren’t even considering it – we were looking to the other side of the world.”

“The more issuance that comes to the market, the deeper it gets – and this benefits all issuers and investors. From our perspective, regular investor engagement is key and we value the opportunity to take our investors to site to see the operations.”