2 | K A N G A N E W S o c t o b E r 2 0 1 3

KangatrendsKanga

C

M

Y

CM

MY

CY

CMY

K

In addition to continued demand from life insurance investors, interest from Japanese asset managers – especially at the long end of the yield curve – rebounded from June.According to a UBS Investment

Bank (UBS) report published on August 19, thanks to the yen’s rebound to well above prior lows FX-hedged returns swung in favour of global bonds. As a result, Japanese purchases of global bonds have resumed – and the Australian dollar market, which had temporarily fallen out of favour with some Japanese buyers, has been one of the beneficiaries.

Data from Japan’s Ministry of Finance published in the UBS report suggests Japanese investors were net sellers of Australian Commonwealth government bonds (ACGBs) in every month from August 2012 to May 2013. Selling peaked in December and January at more than US$2.5 billion in each month. June 2013 – the most recent month for which data are available – marked a return to buying, with US$600 million of net inflows.

Hedged and unhedgedAccording to the UBS report, by August offshore bonds had reached their most attractive levels for Japanese fund managers in several years – both in

Improved yield sees mid-year rebound in Japanese demand for AUDJapanese demand for Australian dollar (AUD) issuance appears to have rebounded in the middle of the year, which analysts and intermediaries attribute to two macro factors: relative stability between the Australian dollar and the yen, and improved yields.

absolute terms and relative to Japanese government bonds (JGBs).

Following 225 basis points of cuts from the Reserve Bank of Australia (RBA), the year-ahead FX-hedged return on a 10-year ACGB sat at 110 basis points by mid-August, 40 basis points above the yield on a 10-year JGB. At the same time, US Treasuries with the same hedge had become even more appealing to Japanese buyers: the return was 240 basis points, or 170 basis points above the yield on a JGB 10-year.

Analysts and intermediaries agree Japanese fund managers have resumed

buying of global bonds driven by the securities’ attractiveness on a FX-hedged basis relative to JGBs. Matthew Johnson, interest rate strategist at UBS in Sydney, tells KangaNews historical data suggests Japan will continue to be a net buyer of ACGBs going forward. He says: “Japan has been buying a lot of global bonds. Our judgement is that when they are buying such large volumes, they are buying a bit of everything.”

Another macro factor driving demand is the fact that AUD/JPY levels may have once again started to convince unhedged Japanese investors that there is an FX upside to buying Australian assets. Johnson explains that preceding

movement in the AUD/JPY – the AUD remains high relative to the yen on historical levels but had declined substantially since its recent peak earlier this year – may have drawn unhedged FX investors back to the market.

Johnson says: “I suspect FX-unhedged investors will resume buying Australian fixed income. In particular, if AUD/JPY drops lower there is likely to be a further pickup in unhedged FX investment. The AUD/JPY is returning to recent lows and yields are around recent highs so total returns on FX unhedged investments have become more favourable.”

Japanese investors appear to be re-engaging with Australia in a new FX environment. For instance, Apoorva Tandon, director syndicate, capital markets at ANZ in Sydney, suggests that accounts in Japan are revising entry point targets in lights of recent volatility.

Meanwhile, Rod Everitt, head of Australian dollar syndicate at Deutsche Bank in Sydney, tells KangaNews that although demand for AUD credit from buyers in ex-Japan Asia is beginning to return, by late August it had yet to reach levels seen in the first half of 2013. He says this is partly due to a combination of volatility in markets and the holiday period in the northern hemisphere, but

“If the fed Is successful In tIghtenIng monetary polIcy, the reserve dIversIfIcatIon theme of the last few years may unwInd and thIs may lead to some outflows from the acgB market. In thIs context, havIng the Japanese Back BuyIng australIan Bonds Is a welcome BalancIng Item.”MattHew JoHnson UBS InveStment Bank

C

M

Y

CM

MY

CY

CMY

K

4 | K A N G A N E W S o c t o b E r 2 0 1 3

KangatrendsKangahe adds: “Currency volatility has also had a knock-on effect as the market tries to predict where the currency will move next. Overall, demand is picking up as the market slowly comes back to life.”

Market observationsTandon tells KangaNews Japanese demand for Australian dollar assets in August was more visible than it had been over the previous two months. He says caution was exacerbated by market volatility in June and July, which saw demand come to a near standstill.

Specifically, Tandon says the Australian dollar market has started seeing more demand from the life insurance client base, which is buying at the long end. He comments: “Semi governments and states have been more active in longer-dated opportunistic deals. But it is still a mixed bag in Japan, with fund managers relatively subdued.”

The ACGB market is feeling the benefit of this demand revival, but higher-yielding asset classes – including semi governments, the supranational, sovereign

and agency (SSA) sector and even the credit market – are also attracting interest.

In a September 19 research note, Sydney-based J.P.Morgan interest rate strategist, Sally Auld, comments: “Japanese investors were net buyers of Australian bonds in July for the first time since October 2012. Moreover, Japanese investors bought both ACGBs and spread product, the first time they have purchased both types of securities since July 2012. While we hesitate to draw too many conclusions from one data point, it could suggest that Japanese investor behavior may be less of a headwind for

the Australian dollar and Australian bond yields going forward.”

Oliver Holt, head of AUD SSA syndicate at Nomura in Hong Kong, suggests the backup in long-end rates means yields may have reached a tipping point for some buyers. He points out: “A typical SSA borrower with 10-year tenor, and offering 40-50 basis points over swap, gives a yield of around 5 per cent, which attracts investors back to the market.”

Holt adds that another factor is the steepness of the yield curve. “The reserve bank has caused the short end of the yield curve to compress while the long end has broadly tracked activity in the US rates market. Steeper curves globally give accounts incentive to extend duration in the maturity buckets they invest in,” he says.

SSA Kangaroo issuance has clearly picked up, with offshore demand a key driver (see story on p6). There was no issuance at all in June and just A$400 million (US$360 million) in July, while August saw A$2.3 billion priced. The extent to which Japanese demand is

driving deal flow is unclear, however. For example, the largest deal of the month, a A$500 million World Bank tap, saw just 3 per cent placement into Japan (see story on p10).

But the returning Japanese bid does not appear to be fixated on high-grade issuance. Tandon confirms there has also been a pickup in appetite for corporate credit from Japan. “There are pockets of demand from Japanese fund managers for single-A and triple-B rated issuance due to a broadening of mandates. This signals growth in the market and in the investor base,” he says.

For example, on August 21 Transpower priced a 10-year A$300 million deal which its lead managers, Citi and National Australia Bank, say achieved 40 per cent distribution into Asia, three-quarters of which went to Japan (see story on p18). When Korea South-East Power debuted in the Kangaroo market on September 12, 23 per cent of its A$325 million deal was sold to Asia – and almost as much to Europe.

Headwinds comingEveritt points out the overall international demand picture will also hinge on how the US Federal Reserve (Fed) proceeds with tapering. In the absence of any drastic exogenous factors, he predicts a solid but unspectacular conclusion to 2013. “The market will likely return to a general period of performance at levels seen earlier in the year,” Everitt concludes.

However, Johnson at UBS suggests global demand for Australian dollars may be facing a challenging period. He believes the Fed’s super-easy monetary policy caused an excess of dollars

which consequently found its way into other markets, including foreign reserve managers. He says: “It seems this is now unwinding. While there have been no big flows out of ACGBs – overall flows have been balanced – there is risk that one develops.”

Further, Johnson suggests: “If the Fed is successful in tightening monetary policy, the reserve diversification theme of the last few years may unwind and this may lead to some outflows from the ACGB market. In this context, having the Japanese back buying Australian bonds is a welcome balancing item.” •

“there are pockets of demand from Japanese fund managers for sIngle-a and trIple-B rated Issuance due to a BroadenIng of mandates. thIs sIgnals growth In the market and In the Investor Base.”apoorva tandon anZ

Palladium at Crown Melbourne Friday 22 November 2013 enchantedball.com.au

Bringing hope to the Children Come and join us at the Enchanted Ball in aid of the Financial Markets Foundation for Children.

Here’s your chance to do your bit for the kids. The foundation supports scientific and medical research into a range of emerging children’s health issues in Australia.

This exclusive black tie gala event, which we’ve hosted for more than a decade, is a key fundraising and social event for the banking and finance community in Melbourne. Apart from great entertainment and networking opportunities, a range of fantastic auction items will be on offer. A$5,500 investment will buy you a table to entertain your team or clients. And there are lots of other ways you can get involved sponsoring and supporting this worthy cause - so we are keen to hear from you!

Visit enchantedball.com.au for details or contact: Angus Graham on 03 9095 0143 or angus.graham@anz.com Katharine Tapley on 02 8937 6092 or katharine.tapley@anz.com

Diamond Sponsors

Platinum Sponsors

The Enchanted Ball @enchantedballAU

14846_kangaad_120913 Outline.indd 1 12/09/13 4:39 PM

6 | K A N G A N E W S o c t o b E r 2 0 1 3

KangatrendsKanga

But while longer maturities currently offer investors the yield they are seeking, the sacrifice for some borrowers in terms of all-in cost

remains too great.According to KangaNews data,

Kangaroo supranational, sovereign and agency (SSA) sector aggregate deal flow in August 2013 was A$2.3 billion (US$2.1 billion), propelling the month to become the second-busiest of the year to date – behind January and May at A$4.0 billion and A$2.6 billion, respectively. On the

Offshore SSA Kangaroo bid continues as deal flow ramps upAugust volume from high-grade issuers in the Kangaroo market confounded expectations of a slowdown around European summer. Particularly notable is increased demand for triple-A rated assets at the long end of the curve.

other side of the ledger, August was also 2013’s biggest month for SSA maturities (see table on this page).

Some market participants have attributed August’s strong deal flow at least in part to the month’s heavy redemption profile. There does appear to be a relationship between SSA issuance and maturities on a month-to-month basis: a correlation coefficient of 0.49 in 2013, according to KangaNews data.

Despite the pickup in deal flow, 2013 continues to lag recent years for SSA Kangaroo issuance. In fact, the first eight

SourcE: KANGANEWS SEptEmbEr 2 2013

ssa kangaroo issuance

35,000

30,000

25,000

20,000

15,000

10,000

5,000

0

vo

lu

Me

(a

$M

)

2005 2006 2007 2008 2009 2010 2011 2012 2013 YtD

7,71

0

10,0

16

4,8

50

10,2

65

9,25

0

25,0

75

20,7

75

17,4

55

12,4

05

2,830

ssa kangaroo issuance anD MaTuriTies, 2013

MontH voluMe issued (a$M) voluMe Maturing (a$M)

January 4,025 700February 1,450 2,900march 1,100 300april 500 0may 2,600 2,100June 0 0July 400 0august 2,330 4,550

SourcE: KANGANEWS SEptEmbEr 2 2013

months of the current year produced the lowest level of issuance from the sector since 2009 (see chart on this page).

tenor profileDemand has been present at both ends of the maturity spectrum. Ramona Raschke, manager capital markets at KfW Bankengruppe (KfW) in Frankfurt, tells KangaNews that while the agency sees demand for the five-year part of the curve in Australia there is also investor preference for tenor at three and 10 years. For instance, KfW tapped its existing July 2016 line by A$300 million on August 28.

However, Raschke confirms the fact that the Australian dollar market has been less prominent. “What we have noticed in 2013 is a general decline in issuance activity outside euros and US dollars – our two main funding currencies – particularly in Australian dollars and sterling. This is due to less favourable funding costs relative to the euro, as well as strong performance in the euro market. In US dollars we are still able to achieve funding cost advantages and we have very good access to a broad investor base in addition to duration.”

It is also clear that the Australian dollar SSA buyer base continues to be predominantly found outside Australia itself. Offshore demand at the long end drove significant reverse enquiry in August, facilitating A$780 million of 10-year or longer-dated issuance from the SSA sector. The demand profile matches observations of, in particular, a revived Japanese bid for Australian dollar issuance across the board (see story on p2).

Nordic Investment Bank (NIB) responded to reverse enquiry on its February 2024 deal priced at the end

Sep-Dec Jan-aug

3,71

0 4,7

00

2,4

50 25

0 10,3

80

5,650

1,22

5

4,1

50

MarketplacedConnecting the marketplace with global solutions.

1. Peter Lee Associates Debt Securities Investors Australia Survey 2012. Rank vs. top 4 major domestic banks. From minimum 10 most active investors. Based upon Westpac achieving a no. 1 ranking amongst the four major domestic banks for estimated market share across Commonwealth Treasury and Semi Government Bonds, Covered Bonds, Corporate Bonds, Asset Backed Bonds and CPI Linked Securities, a no. 1 ranking for Relationship Strength amongst the four major domestic banks across Commonwealth Treasury and Semi Government Bonds and Asset Backed Bonds, a no. 1 ranking for overall service quality in CPI Linked Securities and a no. 1 ranking for best service in Covered Bonds. 2. FinanceAsia’s Achievement Awards 2012 – Australia and New Zealand, as determined by publication. 3. KangaNews Fixed Income Research Poll, 2013. Voted by 50 Institutional wholesale investors. 4. Bloomberg Underwriter League Tables January to July 2013, measure of market share based on volumes. Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141 AFSL 233714 (“Westpac”) DW_WBC487A1_KANGA

No.1 Domestic Bank of Choice in Fixed Income1

Best Debt Finance House 20122

No.1Bank for Australian Fixed Income Research3

No.1 Australian Bond Issuance Bloomberg 1H13 League Tables4

From structuring funding solutions to sourcing the best investors Westpac Institutional Bank provides end-to-end solutions that connect borrowers and investors.

No matter how challenging the opportunity our debt markets experts combine extensive market knowledge, solution-based debt structuring and access to the global marketplace to meet customer needs. Whilst our teams live and breathe the Australian and New Zealand markets, our on and offshore presence ensures deeper insight into global market environments, as well as a breadth of network that provides extensive access to deliver the right solution.

To fi nd out how Westpac Institutional Bank’s tactical, economic and strategic advice can benefi t you, contact us at deeperinsights@westpac.com.au

8 | K A N G A N E W S o c t o b E r 2 0 1 3

KangatrendsKangaof August. The A$200 million deal was sold mainly to Japanese accounts, reveals Alexander Ruf, senior funding manager at Helsinki-headquartered NIB. Around a third was bought by domestic asset managers and a very small portion was placed into Europe.

Ana Ascalon Kotamraju, senior treasury specialist at Manila-based Asian Development Bank (ADB), reveals that the Japanese bid was the driver on the 10-year deal the supranational priced in August, which was added out of reverse enquiry during the course of the bookbuild for a 2018 tap.

And while fellow supranational World Bank spurned appeal for 10-year demand in favour of tapping a 2018 maturity on August 21, Andrea Dore, lead financial officer, capital markets at World Bank in Washington, says it is aware of demand further out the curve, too. “World Bank had received some recent proposals to bring a 10-year transaction,” she reveals, “but given that we have seen a lot of recent flow in this part of the curve we

believed there would be more depth at five years”.

KfW highlights appetite from Japanese life insurers as underpinning demand in this part of the curve. Raschke says: “Our statistics show that Japanese life insurance companies have bought mainly long-dated KfW Kangaroo paper in 2013.”

In shorter-dated SSA issuance the bulk of demand continues to come from Asia, with Japan continuing to feature. In total, 10 accounts participated in KfW’s 2016 reopening, with the issuer attracting Asian accounts in the main. According to KfW, 78 per cent of the paper was placed outside Australia while 45 per cent of that

portion went to Japanese accounts. By type, central banks represented 21 per cent of the total demand while asset managers took 46 per cent and banks 33 per cent.

On the real-money side, market participants say the pricing differential arising from the steepness of the yield curve is making some fund managers who have historically been prevalent in the mid-part of the curve focus increasingly on duration. The distribution profile for the ADB 10-year that settled on September 5 is supportive of this theory. According to Kotamraju, 91 per cent of the transaction was placed with funds and asset managers.

The challenge for some borrowers that do not have specific need for 10-year maturities is satisfying this demand for duration in Australian dollars.

supranationals stand outOf the 11 SSA Kangaroo deals completed during August, nine – or A$2 billion in volume terms – came from supranational names, while the remainder fell under the agency banner.

This may not entirely be the product of demand. The differing dynamics of funding calendars between Washington-based supranationals – which operate on a July financial year start – and European agency names that work to a calendar year mean the multilateral issuers have reset their programmes for a new year at the same time as agencies are often reasonably advanced in their funding schedules. July represents a new funding year for, among others, some of the Washington-based supranational names.

One such example is World Bank. Being close to the beginning of its issuance cycle allowed the borrower to be particularly opportunistic in its funding

and launch of two deals into two different markets – Kangaroo and Kauri – in the same August week (see story on p10).

But there have been some opportunities for SSAs outside the supranational sector. At the other end of the spectrum, KfW is edging towards the end of its annual funding schedule. Including August’s €3 billion (US$4 billion) 10-year benchmark, KfW had raised over €49 billion in the year to late August against recently revised annual funding needs of €65-70 billion.

Future issuance plansBy the same time, NIB had completed around 75 per cent of its €4.5 billion 2013 funding programme so only a limited amount of issuance will be required before year end. However, the February 2024 Kangaroo maturity was specifically chosen to allow the issuer to grow the line over time, so Ruf says it will consider increasing this bond going forward.

He concludes: “The 2018 line could also be a candidate for a tap during the

latter part of the year. We do not think we will be in a position to bring a new line in the near future.”

Kotamraju leaves the door open for further ADB issuance before year-end. Late in Q3 the supranational had raised over 70 per cent of its US$11-12 billion 2013 programme. But Kotamraju adds: “For the past three years Australian dollars has been our second most active currency of issuance after US dollars. The Kangaroo market continues to be an important market for us and a consistent part of our programme. We will continue to monitor opportunities and would be happy to return to the market again before the end of the year.” •

“our statIstIcs show that Japanese lIfe Insurance companIes have Bought maInly long-dated kfw kangaroo paper In 2013.”raMona rascHke kFW BankengrUppe

For over 35 years, RBC Capital Markets has delivered Australian dollar expertise to institutional investors, fi nancial institutions, governments, supranationals and agencies around the globe. Focused on developing long-term relationships, our fi xed income capabilities and market insights help clients identify opportunities in today’s changing markets. With our client focused approach, we have been the market leader in Kangaroo bonds since 1996, helping our clients raise over A$39.7 billion across 233 transactions.*

Delivering Australia to the World.

Take Confi dence in Our Approach

Debt Capital Markets | Rates | Credit | Foreign Exchange | Securitised Products | rbccm.com

Rod IrelandFixed Income and Currencies+61.2.9033.3222rod.ireland@rbccm.com

Enrico Massi Debt Capital Markets+61.2.9033.3033enrico.massi@rbccm.com

Bill PainterFixed Income Sales+61.2.9033.3222bill.painter@rbccm.com

Otis ZownirFixed Income Trading+852.2848.1324otis.zownir@rbccm.com

Su-Lin OngResearch and Strategy+61.2.9033.3088su-lin.ong@rbccm.com

*Source: KangaNews, August 26, 2013. Kangaroo Bond League Table (Cumulative) (excluding self-led deals) January 1, 1996-YTD. This communication is intended solely for the recipient as part of a description of our investment banking capabilities, is not and does not constitute an offer to sell or a solicitation of an offer to buy any securities of any issuer referenced herein in any jurisdiction, and may not be forwarded to other persons, reproduced or copied by any means without the consent of RBC Capital Markets. RBC Capital Markets is a registered trademark of Royal Bank of Canada. RBC Capital Markets is the global brand name for the capital markets business of Royal Bank of Canada and its affi liates, including RBC Capital Markets, LLC (member FINRA, NYSE, and SIPC); RBC Dominion Securities, Inc. (member IIROC and CIPF), RBC Europe Limited (authorized and regulated by Financial Services Authority), Royal Bank of Canada – Sydney Branch (ABN 86 076 940 880) regulated by ASIC and RBC Capital Markets (Hong Kong) Limited (regulated by SFC). ® Registered trademark of Royal Bank of Canada. Used under license. © Copyright 2013. All rights reserved.

1 0 | K A N G A N E W S o c t o b E r 2 0 1 3

KangatrendsKanga

World Bank talks Australasian strategy following Kangaroo and Kauri tapsWorld Bank launched two Australasian deals – a Kangaroo and a Kauri – in successive days in late August. Although the issuer says this time frame was almost purely coincidental, it also suggests that, market conditions permitting, it would adopt a similar strategy again.

andrea Dore, Washington-based lead financial officer, capital markets at World Bank, reveals:

“We found a window of opportunity to launch deals into the Kangaroo and Kauri markets in the same week and we did not believe launching into one should preclude us from also tapping the other. We had the capacity to fund and we were eager to take advantage because such opportunities are often short lived.”

The opportunity for World Bank to issue is currently somewhat greater given that the supranational’s fiscal year began on July 1. Heike Reichelt, head of investor relations and new products, capital markets, at World Bank in Washington, explains to KangaNews that the issuer has a US$30 billion funding requirement for 2013/14, which may increase or decrease by US$5 billion depending on loan disbursements to member countries.

deal dataOn August 20 World Bank added NZ$350 million (US$281.7 million) to its February 18 2018 Kauri, at 64.8 basis points over the December 2017 New Zealand government bond. The following day, the supranational finalised a A$500 million (US$464.6 million) increase to its January 2018 Kangaroo, which came at 57.5 basis points over the reference Australian government bond.

The Kauri deal took World Bank’s outstanding volume in the New Zealand domestic market to NZ$3.25 billion across five lines, with no maturities due until the February 2018. Following the 2018 Kangaroo increase the supranational had A$8.75 billion of bonds on issue in Australia across eight lines, the next of which is due to mature in October next year.

Dore says if World Bank sees demand and needs the funding, it would be happy to launch two deals in close succession again – although this is not a strategy the issuer would necessarily actively seek to repeat.

She concludes: “The Kangaroo and Kauri markets are similar but they are not linked. Our funding is investor-driven and hence if a particular strategy makes sense now, that is what we will do. But it does not mean we will deliberately set out to repeat this process in the future.”

World Bank says around 15 accounts participated in each deal and Dore confirms that there was little crossover in the investor base. She says: “There were only two investors that participated in both transactions. We could even have launched these deals on the same day, except that relative-value concerns might have come into play if we had.”

Dore also reveals that the Kangaroo book contained a couple of accounts who were new investors to World Bank bonds.

Distribution data for the respective transactions reveal that 75 per cent of the Kauri was placed into New Zealand, while Australia saw only 42 per cent of the Kangaroo paper stay onshore. European investors absorbed most of the rest of the Kangaroo, at 35 per cent. Contrary to other recent Kangaroo issuance, only 3 per cent of bonds was placed into Japan, while a little more – 8 per cent – of the final Kauri book was bought by Japanese investors.

Dore says: “We were pleased to see a number of domestic accounts involved in the Kangaroo transaction, given that recent deals of this type have been driven predominantly by offshore investors. The 75 per cent domestic participation in the Kauri matched our expectations.”

demand sectorsBy type, banks and corporates were the largest buyers of the Kauri, at 73 per cent of the paper issued. Meanwhile, central banks and official institutions were to the fore on the Kangaroo – taking 50 per cent of total transaction volume. World Bank says it targets central bank participation in its deals and names this as a main driver behind deal selection on this occasion.

A World Bank report published in the wake of the Australian dollar transaction explains: “Central banks generally prefer to participate in transactions that are issued at or below par. Based on where it was issued, the Kangaroo was slightly below par, so in tapping this bond we were not precluding central banks from participating.”

Other drivers, say World Bank, include the heightened deal flow in the 10-year part of the curve. “World Bank had received some recent proposals to bring a 10-year transaction but, given recent issuance at this tenor, we believed there would be more depth at five years,” states the issuer’s deal report.

World Bank now hopes to attract a wider range of investors to both the Kangaroo and Kauri deals going forward, especially because its 2018 Kangaroo is now above the billion-dollar threshold which qualifies it for inclusion in a wider range of global investor mandates.

Dore confirms: “Our goal was to take the outstanding A$700 million 2018 bond up to A$1 billion. So to achieve a A$500 million tap exceeded our expectations. For the Kauri, our target size was NZ$200 million. We exceeded our expectations there too.” The outstanding volume of the tapped Kauri is now NZ$850 million. •

Helping you scale new heights

At TD Securities helping clients turn challenges into opportunities is our priority. While change may be the new constant, our commitment to the Australian dollar market has not wavered. As new obstacles arise, you can count on TD Securities to be right there with you.

Primary Market House of the Year Secondary Market House of the Year Kangaroo SSA Deal of the YearKangaNews 2012

Most Impressive SSA House in Australian DollarsMost Impressive SSA House in Niche CurrenciesEuroweek 2013

London T: +44 20 7628 4334

Singapore T: +65 6500 8031

Hong Kong T: +852 2613 3633

New York T: +1 212 827 7325

Toronto T: +1 416 982 8040

www.tdsecurities.com

Copyright 2013. Services if any described in this advertisement are subject to relevant local legislation and regulation.

Turning Challenges into Opportunities

TD Securities

1 2 | K A N G A N E W S o c t o b E r 2 0 1 3

KangatrendsKanga

By the end of June 2013, cBa reports the increase in the margin it pays for deposits

relative to pre-financial crisis levels has been 64 basis points greater than the equivalent increase in wholesale funding costs.

the bank’s average wholesale funding cost at the end of its 2012/13 financial year was 137 basis points higher than levels from June 2007, according to the results announcement. this reflects a 6

basis point fall since the end of calendar year 2012.

By contrast, cBa reports a 5 basis point increase in its deposit margins between december 2012 and June 2013. the bank is now paying 201 basis points more for deposits than it was in 2007, up from 196 basis points six months previously.

In its profit announcement, cBa acknowledges: “while the cost of issuing new long-term wholesale funding has decreased, domestic deposit costs remain at elevated levels, maintaining pressure on group margins over the year.”

despite the growing cost disparity, cBa continued to bolster its deposit funding base in the 2012/13 financial year. deposits as a proportion of total funding were at 63 per cent by the end of June 2013, up by 1 per cent

cBa’s annual resulTs: DeposiT funDing preMiuM growsAnnual results released by Commonwealth Bank of Australia (CBA) on August 14 suggest the premium paid by the bank for deposits relative to wholesale funding has continued to widen.

to June 30 2013, to bring the total volume of holdings to a$137 billion. the bank added a significant quantity of level-one liquids – cash, and government and semi-government bonds – to increase the size of that portion of the portfolio to a$49 billion from a$44 billion over the year.

Internal securitisation volume remained stable over the period, at a$58 billion, while cBa actually reduced its stock of other liquid assets – including bank paper, repo-eligible kangaroo bonds, external securitisation and covered bonds – to a$30 billion from a$33 billion.

outlookcBa’s results also contain an unusual level of detail regarding future projections, including some key indicators of the bank’s expectations. although it describes economic growth prospects as “reasonably favourable” cBa does not anticipate an imminent rebound in credit growth. forecasting spending and credit growth to remain at around 5 per cent, the bank says credit growth in particular is likely to “remain relatively subdued and to lag [the] usual economic drivers”.

cBa is more positive on the stickiness of the resources investment boom. although it acknowledges that mining capex has now peaked, the proportion of committed projects in the lng sector – a$195 billion out of a$268 billion, the bank estimates – means investment will continue for longer. cBa suggests: “Because [lng] projects are of long duration, the peak in mining capex should be more of a ‘plateau’ rather than the usual ‘inverted v’.”

on the other hand, cBa has yet to see any significant uplift in non-mining capital spending. the bank’s data suggests non-resources capital stock as a portion of australian gdp continues to fall, and it argues that the other sectors of the economy “need to lift” capital spending. •

year-on-year and 2 per cent on the level from the end of 2010/11.

meanwhile, the bank’s total issuance of long-term debt during the financial year – a$25 billion (us$22.2 billion) – actually fell short of the a$29 billion of term maturities falling during the year.

capital and liquidscBa also reports continued strengthening of its capital base and growth in its liquid assets portfolio.

under internationally normalised Basel III standards, the bank claims a common equity tier one (cet1) ratio of 11 per cent at the end of 2012/13 – up by 1.2 per cent over 12 months and 1.4 per cent over two years. on the same basis, cBa claims total tier one capital of 13.3 per cent and total capital of 14.4 per cent as at June 30 2013.

australia’s Basel III regulatory standards for bank capital are somewhat tighter than international norms. under australian prudential regulation authority standards, cBa reports cet1 at 8.2 per cent, tier one capital at 10.2 per cent and total capital at 11.2 per cent. the bank remains comfortably ahead of Basel III minimum levels.

In the liquids book, cBa added a$2 billion of assets in the year

“whIle the cost of IssuIng new long-term wholesale fundIng has decreased, domestIc deposIt costs remaIn at elevated levels, maIntaInIng pressure on group margIns over the year.”commoNWEAlth bANK of AuStrAliA profit ANNouNcEmENt

1 3

Maidment continues: “All tranches were oversubscribed relative to the total launch size of the deal, with 28 accounts participating – some across multiple tranches. A couple of accounts bought all three tranches.”

The fixed-rate note attracted the attention of some less frequent participants in RMBS, with eight domestic real-money investors making up the final tally. Mineeff explains that the fixed-rate notes are structured to be eligible for inclusion in the UBS Composite Bond Index. He continues: “For investors benchmarked to this index, an RMBS exposure provides a diversified opportunity to seek additional returns.”

aud accessAlthough international demand was robust, issuing RMBS in foreign currencies continues to be inefficient for CBA. Maidment says: “Rather than us issuing in USD and having the expense associated with that, we are able to issue

in AUD with investors managing the currency risk themselves.”

Mineeff believes the RMBS market is receptive. “The self-liquidating nature of RMBS contributes to natural demand. For example, in the last 12 months CBA-sponsored RMBS – from the Medallion and Swan programmes – have repaid over A$2.2 billion via amortisation of the underlying securities. This provides a natural reinvestment requirement for many investors.”

And Maidment confirms that CBA will continue to respond to pockets of demand. He says: “CBA is not prescriptive in terms of which markets it may seek to access in meeting its funding plan.” •

The bank priced its second RMBS of the year on August 16. Medallion Trust Series 2013-2 (Medallion 2013-2) is a five-tranche prime RMBS

with a total volume of A$3.2 billion. The top-rated A1 and A2 tranches have a weighted average life (WAL) of 2.5 years and 3.2 years, respectively, and are sized at A$2.011 billion and A$525 million. Pricing came at a respective 80 basis points and 90 basis points over bank bill swap rate (BBSW), the tight end of 80-85 and 90-95 basis points guidance.

Like CBA’s previous RMBS – February’s Medallion Trust Series 2013-1 (Medallion 2013-1) – the new transaction contains a fixed-rate portion. Also rated triple-A, the class A3 notes are for a volume of A$400 million with a WAL of 4.95 years and pricing of 115 basis points over semi-quarterly asset swap, in line with guidance.

Simon Maidment, deputy treasurer at CBA in Sydney, reveals that the eventual size of Medallion 2013-2 – which was upsized from an indicative A$750 million – surpassed issuer expectations. While he says the launch amount of an RMBS transaction is not always an indicator of final size he continues: “That said, going into the transaction we expected a deal size of A$2-2.5 billion. So we are very happy with the investor response we achieved.”

Justin Mineeff, Sydney-based senior vice president, corporate finance securitisation at Commonwealth Bank (CommBank), which arranged the latest deal and jointly led with Citi, confirms

Hefty demand for RMBS sees CBA return in sizeDespite having raised A$5.735 billion (US$5.328 billion) from the residential mortgage-backed securities (RMBS) market in the year to date, Commonwealth Bank of Australia (CBA) tells KangaNews in the wake of its second jumbo transaction of the year that it does not rule out bringing a third such transaction in 2013.

that appetite for CBA’s RMBS was strong despite the earlier issue of Medallion 2013-1 – which was itself upsized to a final A$2.535 billion print – because the standalone legal structure of a closed pool transaction permits investors to consider each deal on its own merits.

Mineeff says strong demand through all the class A notes enabled the significant upsize. He explains: “The structured transaction provides for maximum flexibility in sizing the deal to meet investor demand. Investor preference

changes over time, and a transaction structure that can adapt to investor requirements is vital in meeting demand at the time of the transaction.”

distribution profileMaidment reveals that 60 per cent of the RMBS was placed domestically. By investor type, banks absorbed 75 per cent and asset managers the remaining 25 per cent – a demand profile which continued into the next wave of RMBS issuance (see story on p14). Offshore demand was predominantly bank-driven, while local demand was more evenly split with banks taking 60 per cent and asset managers 40 per cent of the paper.

“goIng Into the transactIon we expected a deal sIze of a$2-2.5 BIllIon. so we are very happy wIth the Investor response we achIeved.”siMon MaidMent CommonWealth Bank oF aUStralIa

1 4 | K A N G A N E W S o c t o b E r 2 0 1 3

KangatrendsKanga

On September 4 AMP Bank priced Progress 2013-1 Trust (Progress 2013-1) – a four-tranche RMBS with total volume of A$650

million (US$603.9 million). The triple-A rated A$598 million class A tranche, which has a 3.6-year weighted average life (WAL), priced at 100 basis points over bank bill swap rate (BBSW).

Two days later, Macquarie Group priced PUMA Series 2013-1. The deal, a three-tranche RMBS with a total volume of A$1.25 billion, was based around a

triple-A rated, A$1.15 billion A-note which had a WAL of 3.5 years and also priced at 100 basis points over BBSW.

The two deals continued a solid run of benchmark-sized RMBS issuance from Australian banks in the domestic market, coming less than three weeks after Commonwealth Bank of Australia (CBA) issued A$3.2 billion in its second substantial securitisation transaction of the year (see story on p13).

According to KangaNews data the new transactions helped bring combined Australian dollar securitisation issuance volume in 2013 to A$21.6 billion – easily the highest figure by the equivalent point in the year

RMBS demand swings back in favour of bank booksMarket recovery and strong investor demand for securitisation issuance saw two new deals, from AMP Bank and Macquarie Group, price in the first week of September. Joint lead managers agree that the pipeline for further issuance is strong, but acknowledge a shift in residential mortgage-backed securities (RMBS) distribution weighting towards bank balance sheet participation.

since 2007. The current year stands a good chance of breaking the post-crisis record for annual securitisation issuance in Australia – which currently stands at the A$24.5 billion, including Australian Office of Financial Management allocations, priced in 2011.

A strong final quarter could conceivably see aggregate Australian dollar issuance in 2013 surpass the A$31.9 billion priced in 2007. However, barring a high level of late-year deal flow, the all-time record of A$39.9 million from 2006 seems well out of reach.

deal breakdownWhile lead managers in the securitisation market say demand remains robust overall, recent RMBS issuance has seen the driving force behind transactions migrate to a liquidity-book focused base rather than the more mixed bank book and real-money bid seen earlier in the year. The jumbo transaction priced in August by CBA highlighted this trend, and more recent mortgage-backed issuance appears to have confirmed and even accentuated it.

According to John Claudianos, Sydney-based managing director and head of securitisation at Deutsche Bank – arranger of the AMP Bank

RMBS – the book on Progress 2013-1 was oversubscribed in volume terms and saw 21 accounts participating. In total, approximately 33 per cent of the deal was bought by real-money accounts, with the remainder taken by bank balance sheet investors.

Similarly, strong demand saw Macquarie Group’s RMBS deal upsized from a launch volume of A$500 million. Kevin Lee, Sydney-based division director, debt origination and structuring at Macquarie Bank – which arranged the deal – says in total 18 investors

participated in the book with roughly 70 per cent sold to bank balance sheets and the remaining 30 per cent to fund managers, insurance companies and agencies.

Dom Di Gori, Sydney-based executive director, structured capital markets at ANZ – a joint lead on the Macquarie Bank RMBS – adds that the improvement in the market has been driven by bank balance sheet investors, leading to a typical 70:30 split with real-money investors in recent RMBS issuance. He says: “There has definitely been a shift towards balance sheets following June’s volatility, and it is this balance sheet bid strength which is

“there has defInItely Been a shIft towards Balance sheets followIng June’s volatIlIty, and It Is thIs Balance sheet BId strength whIch Is gettIng the larger deals away. on the other hand, aBs contInues to wItness strong support from real-money Investors.”doM di gori anZ

1 5

getting the larger deals away. On the other hand, asset-backed securities (ABS) continue to witness strong support from real-money investors as a valuable diversification play.”

The AMP Bank and Macquarie Group transactions differed in terms of offshore participation. While Progress 2013-1 was concentrated domestically with only 16 per cent placed offshore – in Europe and Asia – Macquarie Group’s RMBS saw much larger percentage sold offshore. In fact, 57 per cent of the class A notes were placed into Europe.

Lee suggests this level of international takeup is particularly significant when compared with AUD RMBS deals’ typical offshore participation of around 20-40 per cent.

Strong demand also saw securitisation flow continue in the non-mortgage sector at the same time as the RMBS deals were coming to market. On September 6 Investec Bank priced a A$278.19 million, nine-tranche

ABS transaction supported by loans to individuals and businesses in the healthcare sector.

Gary Sly, executive director, structured capital markets at sole lead manager ANZ in Sydney, tells KangaNews the book for Impala Trust No1 Sub-series 2013-1 attracted 10 real-money investors, one of whom came from offshore.

Sly reveals: “The book experienced strong support, with a couple of new investor names to the Impala programme and a number of sizeable bids. There was good demand for the lower-rated mezzanine notes with oversubscription across all tranches.”

issuance driveRenewed confidence in domestic credit and improved market conditions following volatility in June and July was the main driver behind the timing of the two new RMBS issues, leads and borrowers say. Demand continues to come through across the capital structure in mortgage-backed issuance, too.

Jason Bounassif, head of markets, group treasury at AMP Bank in Sydney, tells KangaNews the RMBS market has performed well in recent weeks, supporting the borrower’s increased book size and allowing oversubscription across all tranches. He adds that the AB, A1 and A2 tranches of Progress 2013-1 were all 3-4 times oversubscribed.

According to Bounassif, AMP Bank’s strategy is to be a consistent domestic issuer and to take advantage of diversification opportunities. “Timing is primarily a function of our funding requirement. However, we continue to access markets for opportunities and will issue when these arise.”

Joint lead managers on the AMP Bank deal also reveal that the borrower had initially planned to issue its return to the RMBS market in July but decided to delay the move until the market stabilised following a bout of volatility. It then allowed European investors to return from the northern hemisphere summer holiday period.

Similarly, a general improvement in conditions also helped encourage Macquarie Group’s most recent RMBS deal to come to market in September. Di Gori tells KangaNews: “June was a relatively quiet month with a few deals starting to prep as issuers saw market conditions get better.”

robust pipelineOf the total AUD RMBS issuance volume so far this year, A$6.3 billion was brought to market between the beginning of August and the pricing of the Macquarie Group transaction in early September. This is by some distance the biggest year-to-date issuance number in the Australian market since 2007.

Lionel Koe, Sydney-based director of securitisation, products and markets at National Australia Bank – which joint-led both the AMP Bank and Macquarie Group RMBS deals – says: “A number of accounts have reached or are approaching their limits. However, as reflected by the size of recent transactions, strong demand and support for AUD RMBS continues from both domestic and offshore accounts, particularly balance sheets.”

Joint lead managers agree that the pipeline for further issuance is strong, with a number of deals expected to come to the market between early

September and late October in both the RMBS and ABS space. Claudianos says: “Issuance levels dropped off between June and July so we can expect to see some of that come back in September and October, before tapering off towards the end of the year.”

But De Gori warns that, although deal flow is expected to continue, issuers need to be wary of oversupply. “When there is a lot of new issuance, as has been the case over the last month, we need to watch how that supply is digested by the market. Being ready to execute when market conditions permit is critical to ensuring a successful transaction,” he points out. •

“a numBer of accounts have reached or are approachIng theIr lImIts. however, as reflected By the sIze of recent transactIons, strong demand and support for aud rmBs contInues from Both domestIc and offshore accounts, partIcularly Balance sheets.”lionel koe natIonal aUStralIa Bank

1 6 | K A N G A N E W S o c t o b E r 2 0 1 3

KangatrendsKanga

Fund managers continue to believe the pre-Basel III subordinated issuance of, in particular, domestic big four banks

is a value hold. They do not anticipate any price action in the wake of the downgrade.

The Moody’s decision to downgrade is based on the rating agency’s view of the likelihood that subordinated debt would fall on the wrong side of “selective” supervisory support for ailing banks. The outstanding subordinated debt of the Australian majors has consequently been downgraded by two notches, to A2 from Aa3.

At a roundtable discussion hosted in Sydney by KangaNews and Deutsche Bank in May, the strong consensus view of more than half a dozen local fund managers was a preference for old-style subordinated issuance from Australian banks, with most of the investors revealing that they

were happy holders of outstanding notes. The Moody’s announcement appears to have made no impact – not least because Standard & Poor’s (S&P) downgraded major bank tier-two notes, to A-, as long ago as December 2011.

Mark Mitchell, Kapstream Capital’s Sydney-based portfolio manager and head of credit, says his firm’s view on the old-style notes is unchanged. “We are still very positive on them. We always use the lowest rating in our internal evaluations, and Moody’s was at a significantly higher level than S&P – and is still one notch above, even after the downgrade.”

An identical view comes from John Manning, senior investment manager at

Australian investors still happy holders of old-style tier two despite downgradeAustralian investors say the downgrade of old-style tier-two debt announced by Moody’s Investors Service (Moody’s) on September 5 does not reduce the value they see in the asset class.

junior-ranking notes as a precondition of public-sector support.

Patrick Winsbury, senior vice president at Moody’s in Sydney, explains: “We recognise that Australian bank supervisors have, in the past, acted in a manner to support all bank creditors. However, the financial crisis has demonstrated that support can be provided selectively and bank recapitalisation costs shared with subordinated creditors without triggering any contagion, as was previously feared.”

Although Moody’s notes that the Australian Prudential Regulation Authority “does not have the explicit legal power to selectively impose losses on bank creditors outside of a liquidation”, it believes the regulator’s “primary mandate” to protect depositors is wide enough to threaten subordinated debtholders.

“In Moody’s view, in the case of one or more banks experiencing severe stress…such recourse could be used to coerce sub debt holders into a distressed exchange, if not for the outright imposition of losses on them outside of liquidation,” the rating agency concludes. As a result, Moody’s no longer feels sufficiently confident that subordinated debt would receive systemic support to ascribe it any ratings uplift.

Local investors say the rating agency minimised the already-small likelihood of a market impact. “Moody’s flagged the change quite well,” Manning confirms. “We don’t normally welcome methodology changes like this but in this case we feel it was well communicated to the market.” •

Aberdeen Asset Management in Sydney. He tells KangaNews: “The downgrade doesn’t change our view that the old-style subordinated major bank notes are an attractive asset class. In fact, we believe Moody’s has until now mis-rated the securities at Aa3 – we have viewed them as single-A risk for some time.”

According to Mitchell, there is no sign of a secondary market response to the Moody’s announcement. He says: “It’s possible that there are ratings-based holders who in theory might have become forced sellers, but given how well-flagged the Moody’s decision was that is less likely. The feedback from our dealers is that they have not seen any significant price action.”

A snapshot of secondary levels bears out Mitchell’s observation. According to Yieldbroker data, 2017 maturity ANZ

Banking Group (ANZ) subordinated debt did not see its secondary level move at all between the close on September 4 and September 6. In the same two-day period – straddling the Moody’s downgrade announcement – ANZ’s senior unsecured 2017 paper tightened, but only by a single basis point.

Moody’s viewMoody’s decision to downgrade Australian bank sub debt rests on its view that supervisory support for struggling banks can no longer be assumed to embrace all instruments. In particular, financial crisis experiences show that banking-sector supervisors are willing to impose losses on

“the downgrade doesn’t change our vIew that the old-style suBordInated maJor Bank notes are an attractIve asset class. In fact, we BelIeve moody’s has untIl now mIs-rated the securItIes at aa3 – we have vIewed them as sIngle-a rIsk for some tIme.”JoHn Manning AbErdEEN ASSEt mANAGEmENt

1 7

the ASX’s OTC derivatives clearing service saw its first interest rate swap activity on September 12,

with the clearing of a transaction between Commonwealth Bank (CommBank) and Deutsche Bank. The exchange expects the introduction of dealer-to-dealer clearing – and its adoption this year by nine foundation customers – will be followed in Q2 2014 by the extension of OTC clearing services to end users.

CommBank and Deutsche Bank are two of the nine foundation customers which committed to help develop the ASX’s OTC clearing service, and then to become users by January 1 2014. The other seven are ANZ, Citi, J.P.Morgan,

Macquarie Bank, National Australia Bank, UBS Investment Bank and Westpac Institutional Bank.

This market interaction has repeatedly been emphasised by the ASX and its clients in the run-up to the service’s debut. Following the first trade, David Farr, chief operating officer, global markets at CommBank in Sydney, complemented the ASX’s “engaging and collaborative approach” to the development process. He adds that this “has ensured that key domestic market requirements have been met, alongside delivering international best practice in OTC clearing”.

OTC clearing development pace picks upCompetition in Australia’s OTC clearing space heated up in September as the two most visible providers – the Australian Securities Exchange (ASX) and LCH.Clearnet – trumpeted key developments in their local offerings.

The global clearinghouse received an extension to its Australian clearing and settlement facility licence in July this year, which opened the door to SwapClear being offered to domestic banks.

Australian dollar product had already been offered for clearing via SwapClear; LCH.Clearnet claims A$3.9 trillion (US$3.6 trillion) in face value of AUD-denominated swaps clear via its system. At the time of its licence extension, LCH.Clearnet said: “SwapClear currently clears over 90 per cent of the global cleared interest rate swap market and is a leading provider of clearing for Australian dollar interest rate swaps.”

The clearinghouse also believes there is value in a competitive central counterparty (CCP) clearing environment. It adds: “In other markets where clearing competition has been introduced, there has been a positive impact by bringing choice, transparency, liquidity growth, the introduction of new products and lower costs to end users without an increase in overall risk.”

ANZ views SwapClear membership as supportive of its international ambitions. The bank’s co-head of fixed income, currencies and commodities, Eddie Listorti, says it will “immediately be better placed to offer our fixed income clients clearing capability in US dollars, sterling, euro and yen by directly accessing the world’s largest clearinghouse for interest rate swaps”.

And he adds: “This links well with our super regional strategy and provides more meaningful participation in the Asian clearing scene, while better servicing our clients in a market much larger than just Australia and New Zealand.” •

Meanwhile, Deutsche Bank’s Sydney-based co-head of markets prime finance, Asia Pacific, Peter Connor, confirms his bank’s support for and development work with the domestic OTC clearing service.

In July, Connor told KangaNews: “As a bank we had a core view that it is important for a market the size of Australia to have its own domestic clearing infrastructure. In Australia the ASX was the incumbent. Once it made the decision to proceed with establishing OTC clearing we have been very involved in working with the exchange to shape the right solution for market participants.”

The ASX has also been working with potential end users in an effort,

the exchange says, to ensure its offering meets the needs of issuer and investor market participants as well as the broker community (see story on p46).

lcH.clearnet memberMeanwhile, ANZ revealed on September 18 that it has become the first Australian bank to become a direct clearing member of – and clear its first trade through – LCH.Clearnet’s SwapClear service. LCH.Clearnet made public plans to extend its OTC interest rate derivatives clearing service to Australia in December last year, saying four local banks had penned letters of intent to use the service.

“as a Bank we had a core vIew that It Is Important for a market the sIze of australIa to have Its own domestIc clearIng Infrastructure. In australIa the asx was the IncumBent. once It made the decIsIon to proceed wIth estaBlIshIng otc clearIng we have Been very Involved In workIng wIth the exchange.”peter connor dEutSchE bANK

1 8 | K A N G A N E W S o c t o b E r 2 0 1 3

KangatrendsKanga

leads say the deal’s success is likely to attract more new zealand issuers to the

australian market. transpower issued a new a$300 million (us$278.7 million) 10-year fixed-rate kangaroo issue with pricing of 135 basis points over semi-quarterly swap.

according to information from joint lead managers, citi and national australia Bank (naB), the book for the issue – which was upsized from a$100-150 million at initial price guidance – met strong demand. In total, 30 accounts participated with approximately 40 per cent of paper sold to asia, three-quarters of which went to Japan.

chris sutherland, treasurer at transpower in wellington, tells kanganews the issuer opted for 10-year tenor in response to the strong demand. “we wanted a reasonable deal size at a longer tenor and were confident there was interest. hopefully this interest will translate into liquidity for transpower’s paper and success for future australian dollar issuance,” he says.

asian participationthe strong demand from asia is a trend which joint lead managers expect to continue for similar

sTrong asian BiD supporTs Transpower’s kangaroo DeBuTTranspower says strong demand from Australian and Asian investors for high-rated Australian dollar credit supported its debut Kangaroo transaction. The deal, which priced on August 21, was the first Kangaroo from a New Zealand corporate for more than a decade.

participation out of asia, with around 30-50 per cent of corporate deal books often being sold into the region. he comments: “we’ve seen this trend recently in the lend lease, port of Brisbane and goldman sachs deals, and there are a variety of names which continue to see strong interest.”

nZ kangaroo pipelinetranspower’s current bond outstandings are nz$3.1 billion (us$2.5 billion) and are expected to peak at nz$3.6 billon. sutherland confirms that the issuer plans to develop interest in its aud programme. “the all-in swapped cost of issuing in australia is the second-

cheapest market for us behind our domestic market,” he concludes.

transpower is just one of a clutch of well-rated new zealand issuers which have begun monitoring the australian dollar market. for instance, auckland council flagged its intention to stick to an on- and offshore funding plan which features public aud issuance as a target market following its placement of a nok1.4 billion (us$236.7 million) private placement on august 14 (see story on p21).

scott suggests that the transpower trade is expected to spark interest from more new zealand issuers. “this deal will definitely get the attention of a range of new zealand issuers looking at funding diversity, many of which are mostly reliant on us private placements,” he says. “global issuers also continue to monitor the aud market closely, and deal outcomes such as this are tracked on market radar screens.”•

deals. ollie williams, vice president, dcm and structured products at citi in sydney, tells kanganews transpower’s book benefited from cornerstone support out of Japan. there was also sizeable interest generated early on in the execution process off the back of the issuer’s

earlier five-day roadshow in the asian region.

williams says approximately a third of the deal was sold to Japanese investors. he points out that these investors are selective in the credits, currencies and tenors in which they participate. “large institutional investors in Japan tend to favour stable single-a and above rated issuers, especially in tenors ranging from seven to 10 years. we expect to see continued demand out of the region for the right names and deals in aud,” he adds.

Brad scott, sydney-based head of corporate bond origination at naB, says interest goes beyond Japan – in fact investors globally continue to be interested in tenor for quality names including out of australia. at the time of the transpower kangaroo, 7-10 year tenors made up over 40 per cent of 2013’s aud corporate bond supply.

scott adds that there is an increasing trend for investor

“we wanted a reasonaBle deal sIze at a longer tenor and were confIdent there was Interest. hopefully thIs Interest wIll translate Into lIquIdIty for transpower’s paper and success for future australIan dollar Issuance.”cHris sutHerland trANSpoWEr

1 9

incitec Pivot (IPL) says strong investor demand for triple-B corporate issuance in the Australian dollar market

supported its debut transaction. The deal, which priced on August 14, was the eighth domestic transaction priced by a triple-B issuer since May this year.

IPL issued a new A$200 million (US$185.8 million) fixed rate 5.5-year with pricing of 215 basis points over semi-quarterly swap. According to information from joint lead managers, ANZ and Westpac Institutional Bank (Westpac), the issue – which was upsized from A$150 million at initial price guidance – saw participation from around 35 accounts with 80 per cent sold domestically.

Other recent triple-B issuers in Australia have pushed tenor out to seven years. Ron Ross, head of capital markets Australia at ANZ in Sydney, says IPL did

not consider a seven-year maturity in line with recent deals because the transaction it executed better suited its existing debt maturity profile. “But is has been encouraging this year that several triple-B issuers – such as Perth Airport, Port of Brisbane, Qantas Airways and Lend Lease – have achieved seven-year tenor,” he concludes.

The debut domestic issue by ConnectEast Finance (ConnectEast) priced on August 23. The firm sold a A$250 million seven-year fixed-rate

Triple-B corporate flow attracting more new issuersAustralian domestic deal flow from triple-B corporate credits may be reaching the stage of self-perpetuation, with two recent issuers saying earlier successful transactions gave them the confidence to come to market.

also a benefit, although not a major reason for choosing this market.”

Nick McKechnie, chief financial officer at ConnectEast in Melbourne, confirms the recent pickup of domestic triple-B issuance gave the borrower confidence to come to the market with a debut deal. He tells KangaNews: “ConnectEast has been planning its refinancing for some time. But we were seeking favourable market conditions so it was pleasing to see the recent issuance, particularly in the triple-B and infrastructure space. Strong demand was shown domestically for the credit which enabled ConnectEast to diversify its funding sources.”

McKechnie adds that although ConnectEast will consider broadening its investor base over time, it has no immediate funding plans following the deal. Instead, it will continue to review its funding mix as refinancing needs arise.

Intermediaries expect the triple-B trend to continue. Gary Blix, head of corporate origination, debt securities and debt capital markets at Westpac in Sydney, says: “There has been an important development in the local market where a number of triple-B issuers can now get

very good execution with seven-year tenor and competitive pricing.”

Alex Lucy, manager, DCM origination at CommBank in Sydney, adds that the increasing deal flow is catching the attention of other triple-B issuers, including potential new names. He comments: “A number of debut issuers have also come to the market. Three of the most recent issuers in the market – Port of Brisbane, Incitec Pivot and ConnectEast – have all been from inaugural borrowers.” •

bond with pricing of 185 basis points over semi-quarterly swap. According to information from joint lead managers, Commonwealth Bank (CommBank) and Westpac, the book for the issue was upsized from A$200 million and priced inside initial price guidance. In total 19 accounts participated, mainly comprising domestic asset managers but also with a complementary level of offshore interest.

issuer confidence Geoff McMurray, general manager, treasury at IPL in Melbourne, says strong investor demand gave the borrower confidence to issue a debut domestic deal. He says: “IPL has been monitoring the Australian market for some time and has seen a number of lower investment-grade credits successfully issuing. IPL has also had ongoing dialogue with major

investors, who advised they’re looking for the diversity and yield that a triple-B corporate brings.”

IPL decided to issue domestically rather than return to the 144A market because Australian dollar issuance gives more flexibility in volume and tenor, which matched IPL’s specific funding requirement for A$150-200 million.

McMurray adds: “Also, IPL preferred to fund in Australian dollars due to already being nicely balanced between US dollar earnings and debt. The investor diversity is

“connecteast has Been plannIng Its refInancIng for some tIme. But we were seekIng favouraBle market condItIons so It was pleasIng to see the recent Issuance, partIcularly In the trIple-B and Infrastructure space.”nick MckecHnie coNNEctEASt

2 0 | K A N G A N E W S o c t o b E r 2 0 1 3

KangatrendsKanga

Issuer specifics likely to make Wesfarmers’ Bunnings deal an outlierArrangers of a transaction secured on properties leased by Wesfarmers to its subsidiary, Bunnings Group (Bunnings), point to strong domestic and offshore demand for the transaction. But they acknowledge the issuer features that made it appeal to buyers are also likely to restrict the range of credits which might follow Wesfarmers’ lead.

on August 29 Wesfarmers launched and priced an issue of senior-secured bonds from a special-

purpose vehicle (SPV) backed by payments made on 15 properties leased to Bunnings. Wesfarmers guarantees the lease payments backing the deal, which it says achieved important capital-management objectives.

The transaction comprised two tranches: A$270.89 million (US$251.68 million) of partially-amortising, floating-rate notes with a weighted average life of 10.3 years and an initial margin of 215 basis points over bank bills, and a further A$33 million of subordinated notes. The deal was arranged by CIMB Capital Markets (CIMB) and Goldman Sachs, with Westpac Institutional Bank (Westpac) joining those two in the lead-manager group.

Luigi Mottolini, executive general manager, group finance at Wesfarmers in Perth, tells KangaNews the issuer decided to come to market with an innovative deal structure largely as a method of finding new investors to support a specific growth strategy. “A lot of thought went into creating this structure,” Mottolini says. “The thinking behind it was to identify a different source of funds for the ongoing need for capital within our property portfolio. There has been quite a lot of expenditure within that portfolio in our retail divisions – particularly Coles and Bunnings – and to keep this growth

momentum going we have to recycle the capital.”

Mottolini says a firm’s decision either to use debt to buy property or to hold property via operating leases makes little difference to its credit metrics. As a result, the issuance of the lease-backed deal was based on its economics and the desire for investor diversification rather than being a matter of leverage. “It was certainly an economically competitive source of funding, as well as a diversified one,” Mottolini confirms.

deal placementMichael Forde, managing director at CIMB in Sydney, says the transaction had a gestation period of around 18 months. He confirms the deal was based

on Wesfarmers’ desire to find innovative ways to fund the substantial property development pipeline within its group. The process accelerated following engagement with key domestic fund manager accounts early in 2013, in the wake of which confidence around execution grew.

“The main challenge was finding an investor base for the residual notes,” Forde tells KangaNews. “The initial approaches were to traditional direct property investors but that sector tends to have fairly vanilla mandates so this type of structure proved difficult. In

the end the process was broadened and we identified a small group of potential buyers, who were very engaged with a negotiation process which took place over roughly a month.”

KangaNews understands that reports elsewhere identifying the buyer of the largest portion of the residual notes as a consortium of ex-Macquarie Bank executives are accurate.

For the senior tranche, the deal’s arrangers initially worked with a handful of potential cornerstone accounts. “With an innovative structure like this one, all parties were keen to minimise execution risk, and we certainly wanted to have a significant portion of the deal covered before a public launch,” Forde confirms. “We went to Australasian funds which

we knew had demand for longer tenor as potential cornerstones, and eventually secured two anchor orders.”

From there the transaction attracted bids from core Australasian institutional investors supplemented by Asian demand. According to Gary Blix, Sydney-based head of corporate origination at Westpac, the final book for the senior notes comprised 19 accounts.

“There was good takeup from asset managers who were already familiar with the Wesfarmers credit story,” Blix comments. “That familiarity, including with the role of Bunnings within the

“wIth an InnovatIve structure lIke thIs one, all partIes were keen to mInImIse executIon rIsk. we went to australasIan funds whIch we knew had demand for longer tenor as potentIal cornerstones, and eventually secured two anchor orders.”MicHael Forde cimb cApitAl mArKEtS

2 1

auckland council responded to reverse enquiry to price the equal longest-dated

transaction it has ever issued, placing nok1.4 billion (us$236.7 million) of september 2028 paper on august 14. the council tells kanganews it does not plan to alter its existing on- and offshore funding strategy for the year ahead, however.

the nok transaction was issued off the council’s emtn programme, with singapore listing. It was led by hsBc, though both issuer and lead decline to provide information on distribution beyond confirming that the deal was privately placed.

auckland council has previously issued australian dollar-denominated paper, into the Japanese market, and swiss franc domestic deals. It confirms that these two funding avenues – plus potential australian domestic issuance – remain its main offshore target markets. But

mark Butcher, auckland council’s treasurer, tells kanganews the nok reverse enquiry it received provided an excellent opportunity to secure substantial additional funding volume in the context of a big issuance year to June 2014.

“the deal we were offered ticked all four of the boxes we look at: tenor, volume, pricing and diversity,” Butcher explains. “It doesn’t change our view about likely target markets going forward, but we certainly didn’t want to turn away an attractive enquiry given the nz$1.8 billion (us$1.4 billion) size of our programme for the year ahead.”

pricing on the new transaction has not been revealed, but Butcher suggests the margin was attractive. “we provide our banking group with our target levels for issuance on a regular basis. for a 15-year term the current target is around 122 basis points over bank bills, and this

aucklanD council sTicks To funDing sTraTegy DespiTe nok Deal

transaction certainly achieved that,” he reveals.

Butcher confirms that auckland council will continue focusing on its three target markets for offshore issuance, and also expects to issue domestic own-name bonds and to secure funding via the local government funding agency during its 2013/14 financial year.

as well as contributing volume, the new issue also adds flexibility to auckland council’s borrowing plans for the year. the council’s funding manager, andrew John, explains: “we will now have more leeway in terms of timing our approaches to market as we address the substantial requirement for the current year.”

there is also a potential impact on future issuance maturities. Butcher explains that lengthening the average tenor of the council’s debt book is a key target but, having placed around a sixth of the annual requirement with 15-year term, the issuer may be more able to meet any demand it subsequently encounters for shorter-duration deals. •

group, enabled these accounts to make investment decisions in a relatively short period of time.”

Adding to the deal’s appeal to its issuer was the fact that it provided additional investor diversification. The structure enabled Wesfarmers to access demand from a particular sub-set of bond investors – those seeking longer-tenor securities. Mottolini says in many cases this smaller group of buyers came from the same firms as typically allocate to own-name Wesfarmers domestic MTN issues, but the specific funds participating tended to be different.

limited issuer rangeThe type of structure used by Wesfarmers is rare but not unique in global markets. UK supermarket firm Tesco has created six separate SPVs to issue guaranteed store lease-backed transactions, most

recently selling £493.4 million (US$776.2 million) out of Tesco Property Finance 6 in February this year. That transaction also had Goldman Sachs as an arranger, along with Barclays.

The potential for future similar issuance in the Australian market may be somewhat limited, however. Forde explains: “I certainly hope other issuers will look at the success of this deal and consider similar issuance as an option. But it has to be said that this structure was a perfect fit for an issuer with the profile of Wesfarmers – especially because the group was willing to support the lease cash flows.”

Forde suggests that it would likely have been harder to place a transaction that was not backed by the guarantee of a strong parent, meaning this type of deal is unlikely to open the door to domestic capital markets issuance from

credits which could not already place own-name bonds.

Mottolini agrees that the guarantee to the cash flows underlying the deal provided by Wesfarmers was crucial. “We identified the fact that this deal would probably not be able to be done for an individual business unit on a standalone basis, but it still really diversifies beyond the traditional sale and lease-back transactions we have done in the past with both Bunnings and Coles,” he reveals.

And Blix echoes the importance of a name like Wesfarmers standing behind the issue. He explains: “We certainly hope there are a number of issuers that would potentially have an interest in a similar structure. But investor comfort in this deal was undoubtedly supported by the fact that it is rated equally with Wesfarmers’ senior unsecured paper – especially given its structure and duration.” •