2 | K A N G A N E W S S E p t E m b E r 2 0 1 2

KangatrendsKanga

• Emerging trends in Debt Capital Markets - Domestic & International

• Debt Investor Relations:

• Enterprise Risk Management – utilising treasury’s insights

• Risk and Governance for Treasurers

• Balance sheet hedging & Managing FX – where to the Euro, US$, Renminbi and Yen?

• OTC Derivative Reform

• Career Pathways for Treasurers

• Insurance and legal considerations for treasurers

• Current trends in capital management – maintaining balance sheet fl exibility in uncertain times

• Working capital management, global cash management & corporate liquidity risk conservation

• Treasury objectives and the public sector remit

• Cost of capital considerations for government investment decision making

www.fi nance-treasury.com

FINANCE AND TREASURY

ASSOCIATION’S 25TH SILVER JUBILEE

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The FTA Congress annually provides vital insight and analysis of key issues affecting fi nance, treasury and risk professionals. In 2012, the 25th Annual FTA Congress: Treasury insight for challenging times – a precious commodity will explore topics including:

The Finance and Treasury Association (FTA) is the leading association in Australia for professionals working across the treasury and financial risk management industry.

QTC placed a new 2019 bond via a A$1.65 billion (US$1.74 billion) bookbuild on August 1.

Entering its new financial year the semi-government treasury corporation continues to hold good liquidity, according to Richard Jackson, the corporation’s Brisbane-based general manager, funding and markets. The combination of an internal need for funds in the seven-year part of the curve and the agency’s interest in issuing a new deal in the wake of the addition of 144A capability to its benchmark programme were the drivers for the new deal.

“We weren’t necessarily expecting significant participation from US investors because we thought they might want to see how the first issue with 144A language worked, so it was certainly good to get that deal done,” Jackson says.

Rod Everitt, Sydney-based head of AUD syndicate – which led the QTC deal with National Australia Bank and UBS Investment Bank, and also worked with QTC to add the 144A language – says the transaction primarily attracted domestic support, with just over three-quarters of the paper sold into Australia.

But he adds: “There was also very good demand from Asia, predominantly

outside Japan and with particularly notable central bank interest.”

The new deal’s good reception was aided by a relatively calm market, Jackson tells KangaNews. “Our experience certainly suggests conditions have settled down somewhat – spread volatility is significantly less since the start of the year,” he explains.

Shorter datesIn the second week of July two semi-governments also came to the Australian market with large syndicated deals as a result of reverse enquiry, for a total of A$1.5 billion. Unusually, both transactions were for shorter-dated maturities. New

South Wales Treasury Corporation (TCorp) sold A$1 billion of July 2014 paper and South Australian Government Financing Authority (SAFA) issued A$500 million of December 2013 notes.

However, while closely timed it appears the deals were not driven by the same bid. While the SAFA issue was an FRN, TCorp issued fixed rate bonds in what it says will be a new benchmark line.

James Arnold, Sydney-based director of debt capital markets at Citi – a lead manager on both deals – says while reverse enquiry was a common driver they had different distribution dynamics. “The TCorp transaction was well supported

by the domestic account base, but there was especially good engagement from regional accounts. The SAFA book had a more domestic feel with some Japanese participation,” he comments.

In the FRN market, demand for semi issuance continues to be for relatively short-dated notes, predominately around three years, according to Enrico Massi, Sydney-based managing director and head of debt capital markets at RBC Capital Markets – joint lead on SAFA’s transaction. He explains: “With a new financial year for the Australian semis and ongoing funding requirements, there will be some opportunities in this type of

structure. We’d like to think FRNs will continue to develop as a complementary source of demand for semi governments.”

Swap-plus pricing was instrumental to SAFA’s deal, adds Massi. The issue offered a margin of 3 basis points over the bank bill swap rate. The three other bookbuilt FRN deals placed by semis in 2012 – by Treasury Corporation of Victoria, TCorp and Western Australian Treasury Corporation – also offered pricing above swap. “The spread to the bank bill swap rate is important in grabbing investor attention,” Massi explains. “At this stage, we don’t see FRN investors moving to sub-swap pricing in the Aussie market.” •

Multiple demand drivers support semi-government syndicationsThree state government issuers priced syndicated bond deals in a three-week span from mid-July, with issuer and lead manager sources identifying a range of sources of demand for the transactions. The deals included two shorter-dated bonds in fixed and floating rate note (FRN) formats, and a new seven-year benchmark issue from Queensland Treasury Corporation (QTC).

“Our experience certainly suggests cOnditiOns have settled dOwn sOmewhat – spread vOlatility is significantly less since the start Of the year.”RichaRd JackSon Queensland Treasury CorporaTion

• Emerging trends in Debt Capital Markets - Domestic & International

• Debt Investor Relations:

• Enterprise Risk Management – utilising treasury’s insights

• Risk and Governance for Treasurers

• Balance sheet hedging & Managing FX – where to the Euro, US$, Renminbi and Yen?

• OTC Derivative Reform

• Career Pathways for Treasurers

• Insurance and legal considerations for treasurers

• Current trends in capital management – maintaining balance sheet fl exibility in uncertain times

• Working capital management, global cash management & corporate liquidity risk conservation

• Treasury objectives and the public sector remit

• Cost of capital considerations for government investment decision making

www.fi nance-treasury.com

FINANCE AND TREASURY

ASSOCIATION’S 25TH SILVER JUBILEE

CONGRESS

A PRECIOUSCOMMODIT Y

CROWN PROMENADE HOTELMELBOURNE VIC AUSTRALIA

A PRECIOUSA PRECIOUSCOMMODIT

CROWN PROMENADE HOTELCROWN PROMENADE HOTELCROWN PROMENADE HOTELMELBOURNE VIC AUSTRALIAMELBOURNE VIC AUSTRALIA

31 OCTOBER – 2 NOVEMBER 2012CROWN PROMENADE HOTEL MELBOURNE VIC AUSTRALIA

Register Online Now – www.ftacongress.com.au

WWW.FTACONGRESS.COM.AU

The FTA Congress annually provides vital insight and analysis of key issues affecting fi nance, treasury and risk professionals. In 2012, the 25th Annual FTA Congress: Treasury insight for challenging times – a precious commodity will explore topics including:

The Finance and Treasury Association (FTA) is the leading association in Australia for professionals working across the treasury and financial risk management industry.

4 | K A N G A N E W S S E p t E m b E r 2 0 1 2

KangatrendsKanga

KfW Kangaroo uptake suggests resilience to German outlook revision

i ssuer and leads on the first German-origin Kangaroo deal to price following the July decision of

Moody’s Investors Service (Moody’s) to revise the outlook on its Aaa rating on the German sovereign to negative say demand for the transaction was unaffected. In fact, KfW Bankengruppe (KfW) says its new 2017 bond attracted strong Australian demand despite the potential threat to its local repo eligibility.

The ratings issue is especially sensitive for Kangaroo issuers in the supranational, sovereign and agency (SSA) sector because the Reserve Bank of Australia (RBA)

only grants repo eligibility to institutions with universal triple-A ratings. If Moody’s downgrades Germany or Holland to Aa1 status, any borrowers affected would under current rules drop out of the RBA’s list of securities acceptable for repo.

Pricing affectedThere appeared to be an impact on Kangaroo pricing. KfW’s A$650 million (US$685.4 million) five-year Kangaroo offered a margin of 127.25 basis points over Australian government bonds while, two days previously, Nordic Investment Bank (NIB) priced a A$450 million five-year Kangaroo deal at 101.5 basis points over the local sovereign. At the start of July, Yieldbroker ratesheets indicate KfW 2015 Kangaroos were trading a handful of basis points tighter than equivalent-maturity NIB bonds.

However, KfW says the book for its new 2017 Kangaroo did not show any drop-off in bank investor participation. Klaus Peter-Eitel, vice president, capital markets at KfW in Frankfurt, tells KangaNews: “The feedback we received was that the [Moody’s] announcement did not affect investment decisions. Given a take-up of 50 per cent from domestic accounts and 57 per cent from banks in our new Kangaroo issue we don’t see an impact on the level of participation. We had the highest portion of bank participation in a KfW Kangaroo deal in 2012 so far.”

According to Rod Everitt, head of AUD syndicate at Deutsche Bank in Sydney – lead manager on the KfW transaction with TD Securities and UBS Investment Bank – the response to the issuer from Kangaroo investors was positive. “We didn’t get any push back at all – I don’t think the ratings issue was even a concern for domestic bank investors,” he reveals. “We knew there was good demand for KfW, which had been there for several weeks ahead of the deal and did not dissipate. The success of the transaction is a testament to KfW’s approach in terms of its engagement with investors, transparency and strategic approach to the Australian market.”

Effect on kangaroosWhat impact an actual downgrade to the German sovereign and, in all

KANGAROO BORROWERS WITH AAA RATINGS REVISED TO NEGATIVE OUTLOOK BY MOODY’S INVESTORS SERVIcE

iSSuERoutStanding kangaRoo volumE (a$m)

total kangaRoo iSSuancE (a$m)

moSt REcEnt kangaRoo PRicing datE

Bank nederlandse Gemeenten 1,960 3,460 May 16 2012

FMs Wertmanagement 750 750 Jul 19 2012

KfW Bankengruppe 22,500 29,350 aug 1 2012

nederlandse Waterschapsbank 600 1,100 Mar 14 2007

rentenbank 9,550 13,950 Jul 20 2012SourcE: KANGANEWS AuGuSt 10 2012

likelihood, related agencies would have on their subsequent Kangaroo issuance prospects remains unknown. According to KangaNews data, nearly A$35 billion of outstanding Kangaroo bonds has been affected by the outlook revision from Moody’s on the Dutch and German sovereign ratings.

KfW alone has A$22.5 billion of paper on issue in the Kangaroo market, while Rentenbank’s outstanding volume is just under A$10 billion. The other affected borrowers are Bank Nederlandse Gemeenten, FMS Wertmanagement and Nederlandse Waterschapsbank (see table on this page).

The RBA declines to comment on whether it would be prepared re-examine its repo-eligibility rules in the event of a downgrade affecting large volumes of outstanding paper, and those criteria remained unchanged by August 20. Following the downgrade of Austria and France by Standard & Poor’s (S&P) in January this year – which took just under A$2.5 billion of Kangaroos off the repo map – the RBA also made no change to its repo criteria.

One source familiar with RBA thinking on repo-eligibility tells KangaNews that even the exclusion of a more substantial volume of outstanding Kangaroo paper from the repo list, following a significant downgrade, might well not trigger a revision of eligibility criteria.

As to KfW’s likely response, including whether it would consider petitioning the RBA for a repo rule change should a downgrade occur, Eitel says: “This is a theoretical question and we will decide how to deal with it when it happens – if it happens at all. In December 2011 S&P placed KfW’s AAA long-term rating on credit watch with negative implications, but confirmed the AAA rating and declared its rating outlook as stable again in January 2012.” •

5

Pricing and safe-haven status offers potential for Canadian Kangaroos

P articipants involved in recent Kangaroo deals from Canadian issuers say attractive AUD pricing

and investor demand for the perceived safe-haven status offered by Canadian credits could help clear the way for further flow. Late July saw a flurry of Kangaroo issuance that included a brace of Canadian-origin deals, including a debut, for a total of A$950 million (US$1 billion).

Province of Manitoba (Manitoba) was the first mover, issuing its inaugural Kangaroo transaction on July 26 with a A$200 million, 10-year led by National Australia Bank and TD Securities (TD). TD was also on the top line, this time with Citi and Commonwealth Bank of Australia, when Export Development Canada (EDC) placed A$750 million in a new five-year issue a day later.

Since EDC first entered the market in mid-2010, a total of just over A$6 billion of Kangaroos has been issued by Canadian agency credits and by the country’s banks in covered bond format, trebling the total Australian market issuance by Canadians since 2000. In total, Canadian entities have A$6.8 billion of outstanding Kangaroos (see table below).

Pricing experiences differ Investor demand and a favourable basis swap made the Australian dollar an appealing proposition for Manitoba. Garry Steski, director of capital markets for Manitoba in Winnipeg, says the cost of Kangaroo funding was actually cheaper than what the province could have done in the Canadian domestic market at the time of pricing.

EDC’s Ottawa-based deputy treasurer, Susan Love, says the agency’s relative pricing experience was not the same as that of Manitoba but the Kangaroo option still appealed. “Aussie pricing is several basis points back of our USD pricing, yet it offers investor diversification within Australia and internationally,” she explains.

The Canadian agency was encouraged by the response to recent issuance by other high-grade borrowers in the Australian market, Love adds – particularly recent deals placed by the Asian Development Bank and International Finance Corporation.

demand profileJames Arnold, Sydney-based director of debt capital markets at Citi in Sydney, says Canadian issuers are likely to find a good response in the Australian market

on an ongoing basis. “The timing is always going to be right for that type of name: a rare borrower that has linkage to North America with a clean ownership structure,” he says. “To that extent it’s less about the market conditions and more about their specific needs.”

Investor interest in lending to entities from Canada is a reflection of the country’s perceived status as an investment safe haven, Steski suggests. “We understand that the appetite for Canadian names in Australian dollars has been increasing in the last few years, similar to what we have been experiencing with Asian investors,” he says.

Demand for Canadian names in AUD is strong, agrees TD’s Singapore-based head of Asia syndicate, Tom Irving – but he also says the story is one of demand for diversity in general rather than Canada in particular. “Investors are looking for a range of names, not

specifically geographies to invest in,” he tells KangaNews. “Manitoba and EDC are well-suited to this requirement as a debut issuer and rare issuer, respectively.”

In what was its first Kangaroo issue of 2012, 51 per cent of EDC’s new 2017 line was placed with buyers in Asia, with 40 per cent sold to Australian accounts and the remainder bought by investors in the Americas and Europe, according to Arnold. Manitoba’s book also saw both domestic and international distribution, the issuer says.

Steski explains: “Being a non-AAA rated – and therefore non-repo eligible – borrower, the demand for our transaction centred on real money both on- and offshore plus selective central bank interest. As an inaugural issuer, we felt there were some accounts that would like to see how the trade performs prior to investing. But we anticipate they will be looking to invest in Manitoba at future opportunities.”

In addition, Irving says there is still room for more Canadian provincial credit as, although the Province of Québec and the Province of Ontario have issued in the market before, the provincial borrowers who have tapped the Kangaroo market at any time represent fewer than half the active provincial names. “We have three provinces now active in the Kangaroo market: eight have been active in US dollars, so we still have a way to go,” he tells KangaNews. •

cANADIAN BORROWER KANGAROO ISSUANcE

iSSuERoutStanding kangaRoo volumE (a$m)

numbER of linES

moSt REcEnt kangaRoo PRicing datE

Bank of nova scotia 1,000 1 Jan 20 2011

Canadian imperial Bank of Commerce 2,050 3 Jul 21 2011

export development Canada 2,250 3 Jul 27 2012

province of Manitoba 200 1 Jul 26 2012

province of ontario 800 2 Jun 10 2011

province of Québec 675 2 Jul 5 2011

SourcE: KANGANEWS AuGuSt 10 2012

6 | K A N G A N E W S S E p t E m b E r 2 0 1 2

KangatrendsKanga

Korea Eximbank (Kexim) (A/A1/A+) priced its debut Kangaroo transaction on July 18, following a roadshow in Australia. The bank placed

A$500 million (US$527.2 million) in a three-year line – making the transaction the largest-ever Kangaroo by a Korean issuer by A$150 million, according to KangaNews data.

At least one other Korean credit engaged with the Australian market in recent months. A delegation from Korean National Oil Corporation (KNOC) commenced an Australian investor roadshow in the first full week of July.

Kexim is Korea’s most active borrower, having issued a total of US$10.3 billion in 2011. Its task for 2012 is around US$11 billion, with US$7 billion of that

complete by July according to Yoon-Yung Kim, executive director at Kexim in Seoul.

Kim says the bank’s drive to diversify its investor base as its funding task grows has so far led it to issue in 24 different currencies, although its role as an export credit agency means over three-quarters of total liabilities end up denominated in US dollars. Nearly a fifth are Korean won-denominated, leaving just 4 per cent of liabilities in other currencies after swaps.

However, the agency hopes to make the Kangaroo market a strategic issuance destination. In advance of its debut issue Kim told KangaNews: “If we do a deal we don’t want to be a one-time issuer.”

In terms of its credit profile, Kexim made a point of highlighting to Australian investors its close relationship with the Korean sovereign. The agency shares Korea’s A/A1/A+ rating profile, including the improvement to positive outlook given by Moody’s Investors

Service to the sovereign and select state-owned entities on April 2 2012.

Kexim compares itself to other official export agencies like Australia’s Export Finance and Insurance Corporation, Export Development Canada and one of the purposes assigned to Germany’s KfW Bankengruppe. Tim Galt, Sydney-based executive director, fixed income syndicate at UBS Investment Bank – organiser of Kexim’s roadshow and lead on its Kangaroo along with ANZ and RBS Australia – explains: “As a surrogate issuer for the Korean sovereign Kexim falls into the agency category. Versus peers it is an attractive name to own given the diversification and yield opportunity.”

Meanwhile, if it succeeds in issuing a Kangaroo KNOC will likely be a trailblazer. Three Korean banks have

now placed Kangaroos in 2012, but these are the first Korean names to visit the Australian market since 2007 and there has never been a corporate Kangaroo borrower from any Asian nation. The last true Kangaroo corporate deal came from Vodafone, in 2006.

KNOC executes the oil and gas-related policies of the Korean government, specifically the mitigation of potential global energy market disruption. According to the firm’s Seoul-based director and EVP, planning and administration, Kwon Hum-Sam, the country is the world’s ninth-largest consumer and seventh-largest importer of oil.

The task given to KNOC by the Korean government is significantly wider than that of an import manager. KNOC’s exploration and development projects – which include partial or complete equity investments in firms in Canada, the UK

and the US as well as a relationship with Woodside Energy in Australia – mean the firm contributes to 50-60 per cent of Korea’s total oil and gas production.

Although KNOC’s debt is not explicitly guaranteed by the Korean government, the company is 100 per cent owned by the sovereign and shares its ratings. According to KNOC, Standard & Poor’s rates the firm’s likelihood of government support as “almost certain”, compared with the “extremely high” assessment given to similar entities such as Korea Gas Corporation and Korea Electric Power Corporation.

In terms of its approach to the Australian market, Kyung-Luck Sohn, vice president in the finance management department at KNOC in Seoul, points out that the firm has been a consistent issuer in

both the global markets it has issued in to date – US dollars and Swiss francs.

Having debuted with a US$1 billion issue in 2009 KNOC has sold US dollar bonds in every subsequent year – with all but one of those deals having billion dollar volume. KNOC priced its first Swiss deal in 2011 when it placed CHF325 million (US$335.3 million), and it has already returned in 2012 for a further CHF300 million.

Kwon believes Australia’s trade linkages with Korea and likely affinity with an energy sector borrower should help make investors comfortable with the KNOC credit. “We have a number of opportunities in the capital markets, but even so we decided to explore the Australian market because of the link between our two countries in finance as well as trade,” he tells KangaNews. “We definitely want to build a relationship with this market and become a regular issuer in Australia.” •

Largest-ever Korean Kangaroo deal follows brace of roadshows

“if we dO a deal we dOn’t want tO be a One-time issuer.” yoon-yung kim Korea exiMBanK

7

Kangaroo demand broadens through busy July, borrowers say

k angaroo borrowers say demand driving bumper high-grade July deal flow was concentrated

in Asia, but Australian and European take up has been a growing feature of selected deals. A total of 16 Kangaroo transactions from 12 issuers priced in July for a combined volume of A$4.6 billion (US$4.9 billion).

While the relatively small size of most of July’s deals means monthly issuance volume records were not broken, the quantity of trades was the highest ever according to KangaNews data. All the deal flow came from the supranational, sovereign and agency (SSA) sector, though not all the borrowers were rated triple-A.

Alhough demand in Asia continues to be instrumental in deals, issuers say domestic investors have shown renewed interest in recent Kangaroo transactions.

For instance, FMS Wertmanagement sold 49 per cent of its second-ever Kangaroo transaction, which priced on July 19, to domestic investors, according

to the company’s Munich-based director of funding management, Andreas Nockel He tells KangaNews: “We have seen strong demand for our name in various currencies but the recent transactions prior to our second Kangaroo benchmark strongly underpinned the demand for SSA issuers in Australia. It was the right time to access the market with our second Kangaroo bond, as we came away with a strong order book including more than 20 different participating accounts.”

Rentenbank accessed the market twice in July, most recently for a A$150

million increase to its 2020 line. The agency’s Frankfurt-based assistant vice president of funding, assets and treasury, Holger Koncewicz, says though the issuer generally tends to have a good balance between domestic and international accounts, the July 20 tap was mainly driven by local accounts.

The biggest issuer in July – International Finance Corporation’s (IFC), which placed A$800 million in a new five-year line on July 17 – experienced a different demand dynamic. Ben Powell, senior financial officer at IFC treasury in Washington, says the supranational was surprised by the level of interest from non-Asian central banks.

Powell tells KangaNews almost 10 per cent of the deal placed in Europe and the US. He explains: “The newest theme we’ve seen in our Kangaroo issuance is the relatively recent interest from non-Asian central banks, and in particular those in Europe. It is particularly encouraging to see new central bank

investors play in primary and secondary markets.”

The most active name in July was African Development Bank (AfDB), which tapped its 2022 Kangaroo twice in a 24-hour span starting on July 23, by A$100 million on each occasion, before adding A$150 million to its 2016 on July 25 and topping up this line by A$50 million two days later. The supranational issued the longer-dated taps in order to accommodate predominantly Asian demand, complemented by accounts in Australia, according to Hassatou N’Sele,

manager of capital markets and financial operations at AfDB in Tunisia.

The taps were mainly placed with existing AfDB Kangaroo investors that wanted to increase their positions, N’Sele explains, although there was also participation from regular investors in AfDB’s global benchmark issues and from new buyers. She confirms the tap priced on July 23 attracted around 80 per cent Asian and 20 per cent Australian investors, while the A$100 million priced on July 24 comprised only Asian investors.

issuance outlookRecent SSA issuers are optimistic they will access the Kangaroo market again before the end of 2012, though some are more confident of a return than others.

Rentenbank expresses a conservative outlook, as Koncewicz says the agency has already completed around 70 per cent of its total funding volume for the year. He comments: “The focus for the remaining volume will be on mid- to long-term

maturities, but a further tap of our 2020 or 2022 Kangaroo lines would fit depending on general market conditions.”

Along with other German and Dutch agency names, the outlook on Rentenbank’s Aaa credit rating from Moody’s Investors Service has been changed to negative in the wake of the rating agency’s similar revision of the two sovereign borrowers – along with Finland and Luxembourg – on July 23 (see story on p4).

Powell says IFC has the potential to do more in the Kangaroo market,

the newest theme we’ve seen in Our KangarOO issuance is the relatively recent interest frOm nOn-asian central banKs, and in particular thOse in eurOpe.”bEn PowEll INtErNAtIoNAl FINANcE corporAtIoN

8 | K A N G A N E W S S E p t E m b E r 2 0 1 2

KangatrendsKanga

a survey of australian self-managed superannuation fund (smsf) investment

patterns published by multiport on July 19 indicates that reduced equity allocations in recent months have benefited cash and short-term deposits rather than fixed income. Overall, fixed income represented just over 10 per cent of total smsf holdings by June 30 2012 according to multiport’s data.

multiport, an smsf and managed account administration firm, surveyed 1,900 smsfs using its services – representing approximately a$1.4 billion (us$1.5 billion) in total assets under management.

the results suggest fixed income allocations fell to 10.5 per cent at the end of June, down from 12.3 per cent the previous quarter and the same figure a year earlier. combined domestic and offshore equity holdings fell by 3 per cent quarter-on-quarter and 4.2 per cent year-on-year, while cash and short term deposit allocations grew by around 4 per cent over both periods.

the reduced equity allocation outstripped the decline in the value of

the australian securities exchange’s all Ordinaries index over the same period, which multiport says indicates “a degree of withdrawal due to market uncertainty”.

Assets must performhowever, philip la greca, head of technical services at multiport in sydney, says investors are asking assets to perform even in a mood of extreme caution. “the increased allocation to term deposits is particularly interesting – it indicates that investors don’t want ‘lazy’ cash,” he comments. “they want to make cash allocations work because they are not yet comfortable rebuilding allocations to other asset classes.”

the term deposit asset allocation grew to 11.6 per cent by June 2012 from 7.8 per cent a year earlier. Over the same period, pure cash allocations increased only marginally – to 15.2 per cent from 15 per cent.

competitive term deposit yields only reinforce their position as a sweet spot for nervous investor allocations. “there is a willingness to look at wider fixed income investments but the risk-return payoff is hard to make work

cASH, NOT BONDS, THE WINNER fROM SMSf ALLOcATION OUT Of EqUITY

when the comparison is a good rate still available in cash – for very little risk,” la greca comments.

fixed income’s conundrum in the smsf sector is how to offer investors a product with sufficient yield to attract allocations without requiring layers of subordination that add complexity and make investors wary. la greca tells Kanganews: “i believe the investment manager who can crack the code of an easy-to-understand fixed income product that still offers an attractive risk-return equation will steal a march in this sector. at the moment, smsf investors simply don’t have easy access to straightforward fixed income product.”

multiport’s survey also indicates an ongoing low takeup of managed funds in the smsf sector even though, as la greca points out, most smsf assets are advised and might therefore be expected to be guided towards managed investments. fixed income managed funds account for just 2.6 per cent of smsf asset allocation, compared with 1.5 per cent for long-term deposits and 6.4 per cent for hybrids and other direct fixed income investments. in australian shares, nearly eight times as much smsf capital is directly invested as opposed to being allocated to managed funds. •

but it will depend greatly on how the supranational’s overall funding mix progresses and to what extent longer duration is available in other markets. He acknowledges: “We easily have the potential to raise A$1.5-2 billion in our new financial year, but demand for IFC issuance is strong globally and our programme is limited to about US$10 billion equivalent. Given our long-standing focus on getting outstanding lines in Australia up to a billion or more, though, we will look to increase the new five-year deal accordingly before the end of 2012.”

Newcomer FMS Wertmanagement is committed to future issuance and intends to be a frequent issuer in the Kangaroo market, according to Nockel. He tells KangaNews: “The Australian dollar market is an important funding source for FMS Wertmanagement, partly due to our natural funding needs in Aussie dollars of approximately A$2.8 billion – about 75 per cent of which consists of infrastructure loans with long maturities. In addition, we have the option to swap the proceeds back into euros and take advantage of the favourable basis swap levels. Finally, we can approach domestic

investors who are not present in other FMS Wertmanagement transactions.”

N’Sele tells KangaNews AfDB is also positive about short- and long-term issuance prospects: “Our aim is to be a regular issuer in Australian dollars, and our focus at this time is to bring our existing lines to liquid levels through well-executed taps. The AfDB borrowing programme is around US$5.2 billion in 2012 and we’ve done about 40 per cent. Indeed, we plan to continue to be active in Kangaroos and respond to investor demands. The Australian market is definitely one we are closely monitoring for additional taps.” •

9

P roposed changes to the australian prudential regulation authority (apra)’s

aps120 relating to the capital treatment of banks’ holdings of subordinated securitisation tranches have been left broadly unchanged following a consultation period.

apra released its discussion paper on proposed changes to aps120 in november 2011, while the response to submissions received was published on July 12 this year. in the paper the regulator proposes that any subordinated notes originated by a different entity and held by an authorised deposit-taking institution (adi) be deducted from the holding bank’s common equity tier one figure.

the response document explains: “there are risks, not appropriately captured by apra’s existing prudential framework, if securitisation

is used to move risk around within the adi industry or to bring risks originated by non-adis into the adi industry. these risks include the loss of transparency as to where risk ultimately resides and increased contagion risks.”

apra says submissions argued that swapping subordinate tranches of securitisation is only occurring in isolated cases and that apra should use its existing powers to respond to these isolated cases. however, the regulator asserts that “swapping subordinated tranches to circumvent prudential regulations is only one example of why apra considers that adis should not hold such tranches”. the regulator adds that if securitisation risk remains within the adi sector it is preferable that it be retained by the originator rather than passed between banks.

APRA STANDS fIRM ON INTER-BANK SUBORDINATED SEcURITISATION HOLDINGS

On subordination, apra says several submissions suggested that a ratings-based definition would be preferable to its existing proposal – that subordination is any tranche exposed to the bottom 10 per cent of a capital structure, unless that tranche is also the most senior.

the submissions argue that not all securitisation capital structures are created equal, apra reveals. for instance, the bottom 10 per cent of a prime residential mortgage securitisation has a very different risk profile from the same portion of riskier underlying assets.

apra is unmoved by these submissions: “the global financial crisis demonstrated the risks of over-reliance on assessments by credit rating agencies, especially in relation to the risks associated with securitisation structures.” •

ANZ highlights internationalisation of Dim Sum market following return

aNZ Banking Group (ANZ) priced its second deal in the Dim Sum market on August

9, extending the tenor it achieved on its debut in December 2010 and significantly upping the volume placed. The bank priced CNH1 billion (US$157.1 million) of 2.9 per cent three-year note, compared with its debut offering of CNH200 million of two-year bonds.

Luke Davidson, head of group funding at ANZ in Melbourne, tells KangaNews the Dim Sum market has developed greater international relevance. “Liquidity in the RMB swap market has improved, and therefore the swap has become more economically attractive,” Davidson reveals. “Where the only commercially-viable option in our

first transaction was to take two-year funds and use them locally, now there are opportunities to swap out – which broadens the range of alternatives for using renminbi proceeds.”

Liquidity in RMB cross-currency swaps has been a key headwind to the use of the currency as an international funding tool. When KangaNews reported on the Dim Sum market in mid-2011, market sources said pushing swap tenor to three years was only starting to become possible. And in August 2012, Australian corporates at a roundtable hosted by BNP Paribas and KangaNews said they view the Dim Sum market as too short in duration to attract their attention (see p22).

However, over the longer term ANZ sees the Dim Sum liquidity pool as a

potential complementary contributor to group term funding. “The market is developing rapidly, off an admittedly small base,” Davidson continues. “If it reaches a scale equivalent to the issuance achievable in CHF, CAD or even NZD it will become a meaningful contributor to group funding.”

Although ANZ’s second Dim Sum issue attracted a broadly similar, regional investor base to its first deal, Davidson also says: “The most notable thing we did differently on this occasion was to list the transaction in London. That enabled us to capture some demand from Europe and the Middle East, including some solid central bank demand, which I expect will continue to be a significant contributor to these deals in future.” •

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CBA’s deal, Medallion Trust Series 2012-1, accounted for A$1 billion (US$1.05 billion) of the A$1.6 billion of asset-backed securities (ABS)

priced on August 2 and 3 by Australian firms. FirstMac was the first mover, with its A$300 million RMBS coming to market on August 2. A day later CBA priced its deal and FlexiGroup returned to the ABS market with a A$255 million consumer loan-backed transaction.

Pricing appears to be relatively static in the RMBS market. The largest tranche of CBA’s deal offered a margin of 140 basis points over the bank bill swap rate (BBSW) for a 3.54-year weighted average life (WAL). The most recent previous RMBS from a big four bank came from Westpac Banking Corporation in May this year. That deal’s largest tranche also offered 140 basis points over BBSW in margin, but for three-year WAL paper.

deal pipelineA number of securitisation intermediaries had suggested in advance of the August deal flow that the short- and medium-term issuance pipeline was more healthy than it had been for much of 2012. And CBA’s Sydney-based senior manager, corporate finance securitisation, Justin Mineeff, says the optimism about further deal flow remains in the wake of the Medallion deal. “A number of issuers are considering deals and the strong result for Medallion is a positive sign. Issuers need to engage with investors early in the process, as there is a lot of detailed questioning about collateral and structures from the buy side. That is a positive for issuers such as Medallian, which have a transparent process.”

While the new CBA deal was one third the size of the bank’s only 2011 securitisation transaction, Edward Freilikh, executive manager, group funding at CBA in Sydney, says the scale of the prior issue was a function of pent-up demand. Prior to the 2011 deal, CBA had not issued a public securitisation since 2007 and much of the outstanding Medallion paper had amortised significantly in the intervening years.

As a consequence, Freilikh argues that investors had substantial appetite and limits available in 2011. The 2011 trade also included a fixed rate, soft bullet tranche that was developed for a different investor base than traditional, floating rate, pass-through RMBS buyers.

Demand for RMBS appears to continue to be focused in the bank investor sector. Freilikh says distribution on the new Medallion issue comprised two thirds of the paper being sold to bank balance sheets and the remainder going to real money. There was small participation from offshore investors, he adds, which contributed less than 10 per cent of the total.

The distribution by investor type is a reverse of the profile of CBA’s 2011 securitisation, in line with the balance sheet predominance of most recent RMBS issues. However, Mineef tells KangaNews the structure of the new Medallion deal also likely had an impact.

“At 3.5-year weighted average life we know some institutional investors see their mandates drop away,” he comments. “This structure did, however, provide the lowest cost of funds for the issuer”.

From a borrower perspective, securitisation continues to appeal. “Medallion is a compelling trade for us to do because it generates incremental capacity in the domestic market, and at a cheaper level than raising offshore wholesale funding,” comments Freilikh.

Increasing the level of wholesale funding raised domestically is a focus for CBA, Freilikh adds. “Investors have incremental limits for RMBS which generates additional capacity for CBA in the domestic market” he explains.

CBA offered the mezzanine notes for sale but, as was the case with its only RMBS deal of 2011 and also other recent big four securitisations, it retained both the lower-rated tranches and used the transaction purely for funding purposes. •

CBA’s market return headlines signs of life for Australian securitisationThe return of Commonwealth Bank of Australia (CBA) to residential mortgage-backed securities (RMBS) issuance was the most notable evidence of increased positivity in the Australian securitisation market in early August. The three deals that priced at the beginning of the month helped issuance for the year climb above the all-time low-running record seen in 2008.

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Retail deal flow resumes in Australia and New Zealand

R etail corporate issuance returned to vogue in early August as Caltex Australia (Caltex) advanced its

bookbuild, APA Group (APA) upsized its trans-Tasman offering and TrustPower capped public offer applications on its New Zealand market issue.

Continuing demand for retail fixed income allowed Caltex to move the bookbuild date for its subordinated notes offer to August 3 – from August 8 – and to nearly double the size of the offer at the tighter end of its indicative pricing range. Caltex allocated A$525 million (US$553.6 million) through its bookbuild, at a margin of 450 basis points over bank bills.

The transaction opened on July 31 with a indicative volume of A$300 million and a marketing range of 450-475 basis points over the bank bill swap rate. The

notes carry a five-year call date with a final maturity date of September 15 2037.

APA completed its bookbuild on August 16, having upped the size of its offer to A$475 million from an initial A$350 million and set a margin of 450 basis points over bank bills. The notes will have a March 2018 first call date with final maturity in 2072.

APA disclosed an indicative margin on the forthcoming transaction of 450-470 basis points over bank bills. The security holder, broker, institutional and general offers for the APA issue were all opened in both Australia and New Zealand.

Unusually, APA has not appointed any of the Australian big four banks to its lead manager group – the first time this year that a retail transaction has been brought to market with none of those

names on the top line. An issuer source tells KangaNews that the absence of the domestic majors is an indicator of market activity rather than a strategic decision. APA prepared its deal quietly and found all the big four already committed to other forthcoming deals, the source explains.

TrustPower opened its subordinated bond offer on the same day as the APA announcement, in the New Zealand market’s third new retail corporate deal of the year. The company has attached a 6.75 per cent coupon to the seven-year issue and says almost all of the NZ$75 million (US$61.1 million) general offer has already been reserved for clients under firm allocations. Just NZ$2.5 million of the general offer remains for public bids. In a statement, the issuer says the high level of demand has enabled it to cap public pool applications at NZ$25,000. The remaining NZ$75 million is available as an exchange to holders of existing TrustPower bonds maturing on September 14 2012. •

a lthough nZ$1.25 billion (us$1.02 billion) of issuance from international borrowers

in less than a week may have reduced the short-term prospects of further Kauri deal flow, issuer and leads on the recent world bank Kauri transaction say demand for new Zealand dollars – especially in asia – is growing. world bank placed nZ$400 million on July 31 in the largest single Kauri issue since 2007.

glen sorensen, wellington-based director, syndicate at anZ – which led the deal with deutsche bank – says a wider investor base allowed world bank to achieve substantial volume. “a key component of the deal size was the offshore bid,” he explains. “domestic demand has been consistent and strong, with some

development in terms of diversity of bid, but asian interest was central to the larger size of this transaction.”

a new type of asian buyer is starting to make its presence felt in the Kauri market, sorensen adds. “historically, Japanese buyers were quite significant in Kauri deals and as that bid reduced over recent years so deal size went with it. more recently we have seen a new and wider Kauri investor base emerging from asia outside Japan,” he reveals.

according to world bank data, half the new Kauri was sold into asia. most of the remainder – 42 per cent of the total – was placed in new Zealand, with the balance sold to european investors. andrea dore, lead financial officer at world bank in washington, tells Kanganews: “for our last Kauri

POSITIVE SIGNS fOR NZD ISSUANcE fOLLOWING KAURI AND GLOBAL DEALS

transaction 65 per cent of the demand was from domestic investors. this time almost 60 per cent was from non-domestic investors. so it seems that demand from international investors has picked up for liquid nZd global bonds from high-grade issuers.”

the very near-term prospects for Kauri issuance have likely been reduced by the recent volume of new Zealand dollar issuance: as well as the world bank Kauri, morgan stanley priced a nZ$750 million global bond issue in the first week of august.

sorensen says the new Zealand dollar basis swap pushed around 4 basis points lower following the two deals, which he acknowledges could be a sufficient variance to change the value proposition of immediate issuance for high-grade Kauri names. but he adds: “in the medium term most of the factors for Kauri issuance remain favourable.” •