SAFA set to explore more AONIA and long-dated options

South Australian Government Financing Authority (SAFA) has been Australia’s market leader in alternative reference-rate (ARR) issuance – and it is already realising the benefits, says Andrew Kennedy, director, treasury services at SAFA in Adelaide. With a larger funding task in view, further development of ARR issuance is on the cards as is greater liquidity in benchmark lines.

Like most of the other Australian semi-government borrowers, SAFA’s funding need for 2021 and beyond has risen as a result of COVID-19. Can you give an overview of SAFA’s task?

During the 2019/20 financial year, SAFA raised A$5.3 billion (US$4 billion) against a revised A$3 billion requirement from the mid-year budget review in December 2019. When the final 2019/20 budget number was revealed in the 2020/21 budget – which was released in November 2020 – the task had grown to A$3.9 billion due to the impact of bushfires and COVID-19.

The 2020/21 funding requirement is A$7.6 billion for new money and refinancing, of which we raised A$1.3 billion in pre-funding during 2019/20. This left a funding task for the year of A$6.3 billion, of which we have raised approximately A$5 billion as of February.

The South Australian government set an agenda in the 2020/21 budget for creating jobs, backing business and building what matters.

Will the focus of SAFA’s funding strategy be more on building liquidity in existing lines or establishing new points on the curve?

SAFA’s funding strategy will continue to focus on building liquidity in its even-year select lines, to approximately A$3 billion in size. SAFA is also extending its maturity profile, with a recently introduced 2034 select line and via issuance into a 2040 maturity during 2020. We are investigating opportunities to issue longer-dated bonds.

SAFA continues to focus on its communication to markets via its monthly intentions update and dialogue with its banks and investors.

Australian overnight index average (AONIA)-linked floating-rate notes (FRNs) remain a part of SAFA’s short-dated issuance intentions and will also continue to form part of SAFA’s considerations for longer-dated issuance.

SAFA’s AONIA-linked funding programme has been in place for around 18 months. What benefits has it has brought for SAFA and investors?

For SAFA, it has allowed better risk management by reducing balance-sheet mismatches in funding and creating alignment with our clients’ borrowing profiles. More broadly, the development of alternate benchmarks and funding products continues to be a work in progress. Global markets are quickly adopting changes to traditional benchmarks as regulatory guidelines and terminal dates approach.

While Australia is moving at a slower pace, there is acknowledgement that change is inevitable. AONIA represents just one of the choices that investors now have to consider as part of a suite of alternatives.

SAFA’s short-dated AONIA issuance continues to evolve, including publishing daily rates for price levels and volume where SAFA can be tapped. This has helped us be successful in filling investor appetite as it emerges.

SAFA increased the volume and extended the tenor of its AONIA-linked funding in 2020. What are its plans for AONIA-linked issuance beyond short-duration funding?

SAFA remains committed to its investigations into the development and usage of AONIA as a benchmark and a product. Our issuance of a three-year AONIA-linked FRN with quarterly coupons received overwhelming support. It was the first time SAFA oversubscribed a transaction due to genuine investor appetite.

We have a number of clients with longer-dated, floating-rate funding requirements, so issuing term AONIA-linked notes remains a key component of our risk-management strategy and hopefully continues to be an attractive product for investors.

SAFA is considering the opportunity to issue AONIA-linked notes longer than three years should there be client-funding requirements and investor appetite.

How much of a focus is curve extension for SAFA? Could a higher proportion of the funding task be issued at the long end?

SAFA’s funding task over the forward estimates is projected to result in its term debt outstanding rising to A$37 billion by the end of the 2023/24 financial year, from A$25 billion currently. SAFA will consider all funding opportunities, including extending the term of its issuance possibly out as far 30 years.

The immediate focus is on building existing benchmark lines in the even calendar years out to 15 years, to A$3 billion in each line, while considering opportunities for longer-dated issuance when it is cost-effective.