NEW ZEALAND: USPP: LONG-TERM VIEW DEBT STRATEGISTS: RBA MARKET COMES BACK AND SUSTAINABILITY ON GRAVITATIONAL PULL TOGETHER IN PERSON MARKET AGENDA DEFINES MARKET ORBIT

VOLUME 16 ISSUE 123 _ FEB/MAR 2021 www.kanganews.com

AUSTRALIAN CREDIT CHANGES SHAPE A RAFT OF FACTORS HAVE ALTERED THE AUSTRALIAN CREDIT-ISSUANCE LANDSCAPE FOR THE MEDIUM TERM AT LEAST. LOCAL ASSET MANAGERS SAY THEIR MARKET REMAINS FUNCTIONAL AND INVESTABLE, THOUGH. Australian Securitisation Deal of the Year The $12bn AUM La Trobe Financial group is honoured to be recognised by peers and the Australia debt capital markets community for our $1.25 billion RMBS transaction in May 2020.

Widely hailed as effectively re-opening Australian securitisation markets, the transaction saw support from global investment houses in Asia, the US and Europe and from Australian institutional investors.

We thank KangaNews for this award, as well as our local and global investment partners and clients for their continued trust and support over the past seven decades. We also thank the team at the Australian Office of Financial Management for their invaluable support for the industry as a whole at a time of unprecedented market volatility. Australian Securitisation Deal of the Year

13 80 10 | latrobefinancial.com

La Trobe Financial Custody & Securitisation Services Pty Limited ACN 141 583 191 Australian Financial Services License 379454 La Trobe Financial Services Pty Ltd ACN 006 479 527 Australian Credit Licence 392385 KangaNews FEB/MAR 2021 EDITION VOLUME 16 ISSUE 123 www.kanganews.com Contents COVER STORY

Head of content and editor Australian credit LAURENCE DAVISON [email protected] changes shape Deputy editor 29 MATT ZAUNMAYR The Australian dollar credit market has been reshaped in the [email protected] wake of COVID-19, largely as a consequence of RBA market Staff writer CHRIS RICH intervention. A supply-demand imbalance is evident but fund [email protected] managers say their approach has not changed.

Head of commercial Jeremy Masters [email protected] 4 20 MARKET NEWS COLUMN n QTC TCV Head of operations and exploit early-year Red flags HELEN CRAIG funding window. Australia and New Zealand are not [email protected] n Tier-2 remains only source of yet out of the pandemic woods, but Chief executive Australian major-bank supply. the health and economic situation SAMANTHA SWISS n Long dates and GSS format are early- [email protected] is looking good on a relative and, year SSA Kangaroo bright spots. increasingly, an outright basis. We n Suncorp print hints at better times Design consultant would do well to avoid too much back ahead for bank senior issuance. HOBRA (www.hobradesign.com) slapping, though – and not just as an n Columbus and Resimac go big for Photography ongoing social-distancing precaution. DAVID SMYTH PHOTOGRAPHY (SYDNEY), Australia’s first RMBS deals of 2021. BEDFORD PHOTOGRAPHY (SYDNEY), n Consistent demand for Charter Hall TIM TURNER (MELBOURNE), THE PHOTO LWR and Aurizon. (WELLINGTON), GALEXIA STUDIOS (MIAMI), ROUNDTABLE GEORGE ARCHER (LONDON), TIGER TIGER n AusNet hybrid kicks off international (AUCKLAND), IRWIN WONG PHOTOGRAPHY AUSTRALIAN MARKET (TOKYO) Australian corporate issuance for 2021. n Buy now, upside later for Afterpay’s CONTINUES TO ORBIT convertible bond. KangaNews, ISSN 1751-5548 (PRINT); THE RBA’S SUN ISSN 2207-9165 (ONLINE), IS PUBLISHED SIX n New Zealand Sovereign upgrade puts KangaNews hosted its annual TIMES A YEAR BY BONDNEWS LIMITED AND in rare air. DISTRIBUTED FROM SYDNEY, AUSTRALIA. roundtable discussion for Australia’s PRINTED IN AUSTRALIA BY SPOTPRESS, FOR, n NZDM Demand remains in place for leading bank fixed-income AND PUBLISHED BY, BONDNEWS LIMITED, despite good-news headwinds. LYNTON HOUSE, 7-12 TAVISTOCK SQUARE, strategists just as a new round of n Kauri LONDON WC1H 9LT, UNITED KINGDOM market open and demand market speculation on the path of building. © BONDNEWS LIMITED 2021. RBA stimulus was kicking off. The REPRODUCTION OF THE CONTENTS OF THIS n Arvida relaunches New Zealand strategists remain convinced that MAGAZINE IN ANY FORM IS PROHIBITED corporate issuance. WITHOUT THE PRIOR CONSENT OF THE the Australian market will continue PUBLISHER. to revolve around the gravitational 18 pull of the central bank. NEWS FEATURE Pre-emptive rates sell off may be a phantom CAB average net distribution 3,240 for six-month period tantrum ending 30 September 2020. Market participants say a bond sell-off that began in late February appears to reflect expectations of higher inflation and an interest-rate hike before the RBA’s forecast of 2024. But there is evidence that this is not being backed by substantial repositioning activity. 47 Contents 44 Q+A SUBSCRIBE ESG TAKES AN EQUAL 34COPUBLISHED ROLE AT NIKKO ROUNDTABLE Nikko Asset Management has TODAY USPP support stands revamped its environmental, social and up despite quieter governance process by splitting it out Australasian year of the credit function. Each corporate The annual USPP roundtable and bank issuer the investor looks at must now satisfy separately assessed hosted by KangaNews and MUFG found that lower issuance in 2020 ESG and credit criteria rather than had nothing to do with lack of having the decision tied up in a central support from the investor base area. and hopes remain high for future primary supply. Investors also say ESG will play a greater role in 58 future. EVENT REPORT New Zealand debt KangaNews is a one-stop market gets back information source on 22 on track anything relevant to FEATURE Australian and New In December 2020, the KangaNews Zealand debt markets Activity review: a year New Zealand Debt Capital Market – including in- and for the record books Summit took place as an in-person outbound issuance. event in Auckland, bringing the local Transaction data from the KangaNews industry together for the first time Each issue provides all deal database highlight a year of many since the COVID-19 crisis. There the information market firsts in the Australasian debt market. was no shortage of talking points at participants need to From skyrocketing sovereign and semi- the event, which for the first time keep up to date with government issuance to major banks’ added international perspectives via the deals and trends absence from the senior-unsecured videoconference to the traditionally making headlines in the space and a strong rebound for strong domestic agenda. markets, in-depth issuer corporate issuance – 2020 was a year and investor insights, and like no other. deal and league tables. 70 KangaNews is published KANGANEWS AWARDS six times a year, with 26 regular reports and Q+A 2020 winners KangaNews Awards 2020 yearbooks adding to AUSTRALIAN UNITY The reflect the suite of printed DEBUTS MCI FORMAT the reality of an unprecedented year, offerings. Subscribers recognising the houses, transactions also have access to email Australian Unity issued Australia’s and individuals that best coped with updates on breaking first-ever mutual capital instrument in the devastating impact of COVID-19. deals and news from December 2020, marking a new phase At the same time, many houses that the have established longstanding records KangaNewsAlert in funding and capital-management service, as well as for issuers in the mutual sector. of success maintained their positions priority invitations to even in this most challenging year. Adam Vise, Australian Unity’s group KangaNews events treasurer, discusses the impetus for and and full access to the mechanics of a transaction that could www.kanganews.com be a game-changer for mutual entities. website.

To subscribe or request a free trial please contact Jeremy Masters [email protected] +61 2 8256 5577 Our idea is to boost yours.

As the state development agency, we continue to support one of Europe’s strongest regions: Baden-Württemberg. Find more information at www.l-bank.de/ir

az_008-09_210x280_ILove_Gluehbirne_international.indd 1 03.09.20 16:04 MARKET NEWS

TRANSACTION ANALYSIS TCV and QTC exploit early-year funding window Treasury Corporation of Victoria (TCV) and Queensland Treasury Corporation (QTC) printed new benchmark deals in late January, for aggregate volume of A$5.5 billion (US$4.3 billion). At the time of pricing the issuers reported robust demand and positive pricing outcomes.

Issuer: Treasury Corporation of Victoria CHART 1. TCV AND QTC DEALS GEOGRAPHIC DISTRIBUTION Issuer rating*: AA/Aaa Australia EMEA Asia North America Pricing date: 20 January 2021 100 4

10 Maturity date: 20 November 2025 8 80 18 Volume: A$2.5 billion 32 Book volume at pricing: >A$6.5 billion 60

Margin: 32bp/EFP 40

(PER CENT) 70 Indicative margin: 31-34bp/EFP 58 20 Geographic distribution: see chart 1 PROPORTION OF BOOK Distribution by investor type: see chart 2 0 TCV QTC

Lead managers: Citi, SOURCE: COMMONWEALTH BANK OF AUSTRALIA, QUEENSLAND TREASURY CORPORATION Commonwealth Bank of Australia (CBA), JANUARY 2021 Westpac Institutional Bank « CHART 2. TCV AND QTC DEALS DISTRIBUTION BY INVESTOR TYPE Issuer: Queensland Treasury Corporation Bank treasury Asset manager Official institution Trading Hedge fund Middle market Issuer rating: AA+/Aa1/AA 1 100 4 Pricing date: 29 January 2021 6 12 80 13 10 Maturity date: 20 August 2032 9 23 Volume: A$3 billion 60 Book volume at pricing: A$5.8 billion 38 40 Margin: 41bp/EFP (PER CENT) 54 20

Indicative margin: 40-43bp/EFP PROPORTION OF BOOK 31

Geographic distribution: see chart 1 0 Distribution by investor type: see chart 2 TCV QTC SOURCE: COMMONWEALTH BANK OF AUSTRALIA, QUEENSLAND TREASURY CORPORATION Lead managers: ANZ, Citi, CBA JANUARY 2021 * Rating at issue.

ISSUER INSIGHTS

PAUL KELLY JOSE FAJARDO HEAD OF MARKETS EXECUTIVE DIRECTOR, TREASURY CORPORATION OF VICTORIA FUNDING AND LIQUIDITY QUEENSLAND TREASURY “The market was running CORPORATION very tight into Christmas and “We heard of some selling there were some indications of mid-curve semi- of fatigue so it was not government paper early in surprising to see a quieter the year. But overall flows open in 2021. However, we were confident were fairly mixed and sentiment certainly conditions had remained conducive. We have turned around later in January, including strong executed deals in early January in the past and demand signals in the secondary market found it a good time to get the ball rolling.” particularly around 8-10 year maturities.”

4|KANGANEWS FEB/MAR 2021 TRANSACTION ANALYSIS Tier-two remains only CHART 1. ANZ TIER-TWO DEAL GEOGRAPHIC DISTRIBUTION source of major-bank UK/Ireland 19% Benelux 18% supply Germany/Austria 17% France 17% Two of Australia’s big-four banks printed tier- Asia Pacific 11% two deals in January as the subordinated Nordic 6% Switzerland 1% format remained the only source of supply Southern Europe 1% from this sector. ANZ Banking Group Other 10% expanded its UN Sustainable Development Goal (SDG) programme with a euro transaction while Westpac Banking Corporation returned to SOURCE: ANZ 2 FEBRUARY 2021 the domestic market for its deal. CHART 2. WESTPAC AND ANZ TIER-TWO DEALS DISTRIBUTION BY INVESTOR TYPE Issuer: Westpac Banking Corporation Issuer rating: AA-/Aa3/A+ Asset manager/insurance Bank Middle market Central bank/official institution Other Issue rating: BBB+/Baa1/A- 1 100 2 1 4 Pricing date: 21 January 2021 18 Call date: 29 January 2026 80 2

Maturity date: 29 January 2031 60

Format: tier-two 93 40 79 Volume: A$1.25 billion (US$978 million) (PER CENT) 20

Book volume at pricing: A$1.55 billion PROPORTION OF BOOK

Margin: 155bp/3m BBSW 0 Indicative margin: 165bp/3m BBSW Westpac ANZ Geographic distribution: Australia 91%, SOURCE: ANZ, WESTPAC BANKING CORPORATION FEBRUARY 2021 Asia 8%, EMEA 1% Distribution by investor type: see chart 2 ISSUER INSIGHTS Number of investors in book: 60 GUY VOLPICELLA Lead manager: Westpac Institutional Bank MANAGING DIRECTOR « AND HEAD OF STRUCTURED FUNDING AND CAPITAL WESTPAC BANKING CORPORATION Issuer: ANZ Banking Group “Relative pricing for major bank tier-two deals Issuer rating: AA-/Aa3/A+ has been in a tight range since the start of the Issue rating: BBB+/Baa1/A- year. Our jurisdiction choice was also based on Pricing date: 27 January 2021 our call profile. We had a nice gap at five years Call date: 5 May 2026 and the Australian dollar market remains one of Maturity date: 5 May 2031 the preferred jurisdictions for 10NC5 tier-two.” Format: SDG tier-two Volume: €750 million (US$906.4 million) SIMON REID DIRECTOR, GROUP FUNDING Book volume at pricing: >€2.1 billion ANZ Margin: 112bp/mid-swap “Our first pricing run through a dealer suggested Geographic distribution: see chart 1 labelled use-of-proceeds bonds in the euro tier- Distribution by investor type: see chart 2 two market will get a result 5 basis points tighter Lead managers: ANZ, Barclays, BNP Paribas, than vanilla comps. That is what this deal felt like.” Deutsche Bank, HSBC, UBS

5 MARKET NEWS

MARKET ANALYSIS Long dates and GSS format provide rare early- year SSA Kangaroo bright spots

A slow start to the year for supranational, CHART 1. SSA KANGAROO ISUANCE sovereign and agency (SSA) Kangaroo deal flow saw January-February volume lagging around Jan-Feb Rest of year the lower end of the typical range for the 35 sector (see chart 1). Issuers were able to find 30

success with long-dated deals and transactions 25 in green, social and sustainability (GSS) format – which between them accounted for well over 20 21.2 11 22 half the supply of larger SSA deals at the start of 12.8 15 14.3 10.5 the year (see table 1). 18.9 13.3 13.9 VOLUME (A$BN) 10 13.7

11 10 ransaction highlights include a large benchmark from 5 9.6 8.9 7.6 7.8 5.5 5.9 6.1 European Investment Bank and a rare foray into ultra- 3.7 4.2 4.4 1.1 long-dated Australian dollar issuance from Province of 0 T 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Alberta. The latter was by far the longest-duration deal ever printed in the SSA Kangaroo sector (see table 2). SOURCE: KANGANEWS 9 MARCH 2021

TABLE 1. SSA KANGAROO DEALS OF A$200 MILLION OR MORE, JANUARY-FEBRUARY 2021 PRICING ISSUER VOLUME (A$M) TENOR AT ISSUE GSS FORMAT LEAD(S) DATE (YEARS) 5 Jan 21 European Investment Bank 1,250 6.5 Climate-awareness bond ANZ, RBC, TD 15 Jan 21 Asian Development Bank 200 10 None JPM, Nomura, RBC 19 Jan 21 European Investment Bank 300 10 None JPM, Nomura, RBC 22 Jan 21 Inter-American Development Bank 300 7.5 None JPM, Nomura, TD 9 Feb 21 European Investment Bank 200 15 Climate-awareness bond Nomura 12 Feb 21 KfW Bankengruppe 200 5.5 None Nomura, TD 19 Feb 21 Asian Development Bank 350 7 None Nomura, RBC, TD

SOURCE: KANGANEWS 9 MARCH 2021

« Issuer: European Investment Bank Number of investors in book: 50 Issuer rating: AAA/Aaa/AAA Lead managers: ANZ, RBC Capital Markets, Pricing date: 5 January 2021 TD Securities Maturity date: 15 July 2027 « Format: climate-awareness bond Issuer: Province of Alberta Volume: A$1.25 billion (US$978 million) Issuer rating: A+/Aa3/AA- Volume at launch: A$300 million Pricing date: 3 February 2021 Book volume at pricing: >A$1.4 billion Maturity date: 16 February 2046 Margin: 26bp/s-q swap Volume: A$100 million Indicative margin: 26bp/s-q swap Margin: ND Geographic distribution: see chart 2 Coupon: 2.4725% Distribution by investor type: see chart 3 Lead manager: Daiwa Capital Markets

6|KANGANEWS FEB/MAR 2021 ALDO ROMANI TABLE 2. LONGEST-DURATION SSA KANGAROO DEALS AT PRICING HEAD OF SUSTAINABILITY FUNDING ORIGINAL ISSUER TENOR INITIAL OUTSTANDING EUROPEAN INVESTMENT BANK PRICING AT ISSUE VOLUME VOLUME (A$M) DATE (YEARS) (A$M) “We are pleased to see EIB’s 3 Feb 21 Province of Alberta 25 100 100 approach to sustainability 6 Apr 20 International Finance 15 200 800 Corporation and transparency resonate 23 Jan 20 NWB Bank 15 50 50 with investors. EIB can be 24 Sep 19 Province of Alberta 15 170 320 taken as a test case. Not 16 Feb 18 International Finance 15 50 75 Corporation only has it stated ambitious green financing

SOURCE: KANGANEWS 4 FEBRUARY 2021 targets in support of the European Green Deal, it has also clarified that it will align its tracking methodology for green finance with the CHART 2. EIB 2027 KANGAROO GEOGRAPHIC DISTRIBUTION framework of the EU taxonomy regulation.”

ANTHONY RUSCHPLER SENIOR TREASURY SPECIALIST ASIAN DEVELOPMENT BANK Asia (ex. Japan) 41% Australia 24% “While US dollar pricing EMEA 19% remains favourable in Japan 8% Other 8% the intermediate part of the curve, the long-end Kangaroo market is fairly comparable and the duration and diversification is attractive for us.” SOURCE: EUROPEAN INVESTMENT BANK 8 JANUARY 2021

YURIY POPOVYCH CHART 3. EIB 2027 KANGAROO DISTRIBUTION BY INVESTOR TYPE DIRECTOR TD SECURITIES “Borrowers are looking closely at the Australian dollar market but the Real money 50% approach now is to execute Bank 36% Central bank/ 14% in the cheapest markets – official institution like US dollars and euros – first and then consider other options. However, if Australian dollar pricing lines up through basis-swap widening or secondary price tightening, SOURCE: EUROPEAN INVESTMENT BANK 8 JANUARY 2021 borrowers will be ready.”

OLIVER HOLT ISSUER INSIGHTS HEAD OF AUSTRALIAN DOLLAR SYNDICATE NOMURA ENRICO MASSI MANAGING DIRECTOR AND HEAD OF DEBT “More customers are willing CAPITAL MARKETS AND SYNDICATE DAIWA CAPITAL MARKETS to buy 10-year paper than has “Investors are obviously been the case at any point looking for yield and many in the past. Not everybody borrowers would love to is willing to buy it, though. meet the demand for long- While it is great that new investors are coming dated transactions, but a lot in, we still feel the ability to execute larger-sized of factors need to marry together to make such 10-year transactions is more sensitive to outright issuance work for all parties.” yield than more intermediate tenors.”

7 MARKET NEWS

TRANSACTION ANALYSIS Suncorp print hints at better times ahead for bank senior issuance Suncorp-Metway’s return to senior-unsecured Issuer: Suncorp-Metway issuance revealed the scale of pent-up demand Issuer rating: A+/A1/A+ for Australian financial-institution (FI) credit even Pricing date: 16 February 2021 at record tight pricing. After a period of virtually Maturity date: 24 February 2026 no senior bank issuance, Suncorp expects Volume: A$750 million FI issuance to pick up during 2021 as credit Book volume at pricing: >A$2 billion growth and savings drawdowns accelerate. Margin: 45bp/3m BBSW Indicative margin: 50bp/3m BBSW his was Australia’s first senior-unsecured bank deal since Macquarie Bank issued on 2 December 2020, and just Geographic distribution: see chart 1 T the third senior benchmark from an Australian-domiciled Distribution by investor type: see chart 2 bank since February 2020. Suncorp itself had not been active in Lead managers: ANZ, Commonwealth Bank the senior-unsecured market since July 2019, when it printed a of Australia, National Australia Bank, A$750 million (US$586.8 million) five-year, dual-tranche deal UBS, Westpac Institutional Bank at 78 basis points over three-month bank bills.

CHART 1. SUNCORP DEAL GEOGRAPHIC DISTRIBUTION CHART 2. SUNCORP DEAL DISTRIBUTION BY INVESTOR TYPE

Asset manager/insurance 56% Australasia 89% Bank 30% Asia 9% Middle market 8% UK/EMEA 2% Official institution 5% Other 1%

SOURCE: NATIONAL AUSTRALIA BANK 18 FEBRUARY 2021 SOURCE: NATIONAL AUSTRALIA BANK 18 FEBRUARY 2021

ISSUER INSIGHTS after the mandate announcement and more than 50 participated, which was a good signal. SIMON LEWIS We are consistent and transparent with deal size TREASURER SUNCORP so investors knew that if they put in a large bid it may Suncorp achieved very tight be scaled. However, they can also be confident on pricing on the new deal. What was performance. The fact that the deal performed on the the background? break indicates the bonds were put in the right hands. We received positive feedback [on Suncorp’s half-year results] from It has been assumed that senior-unsecured issuance equity and debt investors. This, plus by Australian banks is off the table for the foreseeable the strong but quiet primary-market backdrop and Suncorp’s future. Might this outlook be changing? own market absence presented a full set of green lights for Accelerating activity in the Australian housing market and deal execution. consumer spending in recent months are key factors, and I We thought 50 basis points area would engage investors expect Suncorp will not be an outlier among Australian and this proved correct though we had some initial concern banks in having a renewed debt-capital-market funding about the investor response at this [pricing] level. It is one requirement. We have seen extraordinary growth in thing to point to secondary marks but another thing entirely deposits and savings have been elevated. Hopefully we to execute there. However, we held an investor call shortly now see continued spending across the economy.

8|KANGANEWS FEB/MAR 2021 TRANSACTION ANALYSIS Columbus and Resimac go big for Australia’s first RMBS deals of 2021 Australian securitisation deal flow was quiet at the start of 2021 but the first two deals to print both achieved jumbo volume – equalling the record for a publicly placed Australian nonbank residential mortgage-backed securities (RMBS) transaction (see table).

esimac also included a US dollar tranche in its RMBS Pricing on top-rated AUD term tranche: deal, making it the only Australian securitisation issuer to 80bp/1m BBSW R access the currency in a public deal since the onset of the Pricing on USD tranche: 70bp/1m LIBOR COVID-19 crisis. Geographic distribution: 83% domestic,

RECORD VOLUME PUBLICLY PLACED AUSTRALIAN NONBANK 9% Europe, 6% US, 2% Asia SECURITISATION DEALS Distribution by investor type: PRICING ISSUER POOL NAME VOLUME DATE (A$M) 93% real money, 7% balance sheet 27 Apr 18 Liberty Financial Liberty Series 2018-1 1,500 Arrangers: Citi, NAB 10 Feb 21 Columbus Capital Triton Bond Trust 2021-1 1,500 Australian dollar lead managers: Citi, 3-4 Mar 21 Resimac Resimac Premier Series 1,500 2021-1 Deutsche Bank, MUFG Securities, NAB 23 May 19 Liberty Financial Liberty Series 2019-2 1,400 US dollar lead managers: Citi, 24 May 19 Firstmac Firstmac Mortgage Funding 1,400 MUFG Securities, NAB Trust No.4 Series 2-2019

SOURCE: KANGANEWS 10 MARCH 2021 ISSUER INSIGHTS TRITON BOND TRUST 2021-1 DAVID CARROLL TREASURER COLUMBUS CAPITAL Issuer: Columbus Capital “The deal received more Collateral: prime residential mortgages than A$3 billion of bids and Pricing date: 10 February 2021 all the investment-grade Volume: A$1.5 billion (US$1.2 billion) tranches were 2-4 times Volume at launch: A$500 million oversubscribed even at final Pricing on top-rated term tranche: volume. We were expecting strong demand 85bp/1m BBSW and for pricing to come inside pre-COVID-19 Geographic distribution: 58% domestic, levels but we were very happy with the final 42% offshore volume and pricing outcome.” Distribution by investor type: 51% real money,

49% balance sheet ANDREW MARSDEN GENERAL MANAGER, GROUP TREASURY Arranger: National Australia Bank (NAB) RESIMAC Lead managers: NAB, Natixis, Standard “We are aware of a growing Chartered, Westpac Institutional Bank bid for senior nonbank transactions from an array of « domestic accounts including RESIMAC PREMIER SERIES 2021-1 bank balance sheets and asset managers. The theme is also playing out Issuer: Resimac among offshore credit investors, which see Collateral: prime residential mortgages Australia outperforming the world in dealing Pricing date: 3-4 March 2021 with the COVID-19 crisis and now leading in the Volume: A$1.5 billion macroeconomic recovery.”

9 MARKET NEWS

TRANSACTION ANALYSIS Consistent demand buoys domestic outcomes for Charter Hall LWR and Aurizon Australia’s first two domestic corporate deals of 2021 – from Charter Hall LWR and Aurizon Finance – reinforced the robust state of demand in the local corporate market, including ongoing support at the 10-year duration point.

harter Hall LWR achieved the tightest-ever margin on a TABLE 2. LOWEST AUSTRALIAN DOLLAR MARGINS FOR A TRIPLE-B OR triple-B rated Australian dollar corporate deal at seven- LOWER RATED CORPORATE BORROWER AT 10-YEAR TENOR and 10-year tenor (see tables 1 and 2). PRICING ISSUER VOLUME COUPON MARGIN C DATE (A$M) (%) (BP/SWAP) Charter Hall LWR’s property portfolio is predominantly 22 Feb 21 Charter Hall LWR 200 2.787 120 leased to government, Australian Securities Exchange-listed and multinational tenants. It is diversified across industrial 20 Aug 20 Coles Group 300 2.10 137 and logistics, long-WALE [weighted-average lease expiry] 30 Oct 19 Coles Group 300 2.65 142 retail, office, telco exchanges and the agri-logistics sectors. As 16 Sep 20 Charter Hall Exchange 300 2.317 155 of December 2020, the portfolio was valued at A$4.5 billion Finance

(US$3.5 billion). SOURCE: KANGANEWS 23 FEBRUARY 2021 The new transaction is part of the group’s aspirations to issue frequently in the Australian dollar market and builds Issuer: Charter Hall LWR on the success of its two previous local deals. Charter Hall Issuer rating: Exchange Finance priced A$300 million in September last year, Baa1 quickly followed by a A$500 million 10-year print from CPIF Pricing date: 22 February 2021 Finance, the financing entity of Charter Hall Prime Industrial Maturity date: 3 March 2028 & 3 March 2031 Fund. Both deals were at 10-year tenor. Volume: A$300 million (US$234.7 million) Aurizon Finance is the financing entity of Aurizon & A$200 million Operations and the deal is Aurizon Operations’ first debt capital Book volume at pricing: ~A$1.8 billion market transaction under its own name. It follows a A$500 Margin: 95bp/s-q swap & 120bp/s-q swap million 10-year transaction printed by Aurizon Network in Indicative margin: August last year. Aurizon Operations comprises the above-rail 120-125bp/s-q swap businesses of coal and bulk haulage while Aurizon Network & 140-145bp/s-q swap oversees the group’s regulated rail infrastructure. Geographic distribution: see chart 1 Aurizon acknowledges environmental, social and Distribution by investor type: see chart 2 governance (ESG) challenges in capital markets as well as Lead managers: National Australia Bank a more difficult rates-market backdrop during its execution (NAB), Westpac Institutional Bank window. Aurizon Operations derives roughly three-quarters of « its EBIT from its coal business and the remainder from bulk freight. Even so, the issuer reports a positive deal outcome. Issuer: Aurizon Finance Issuer rating: BBB+/Baa1 Pricing date: 2 March 2021 TABLE 1. LOWEST AUSTRALIAN DOLLAR MARGINS FOR A TRIPLE-B OR LOWER RATED CORPORATE BORROWER AT SEVEN-YEAR TENOR Maturity date: 9 March 2028 PRICING ISSUER VOLUME COUPON MARGIN Volume: A$500 million DATE (A$M) (%) (BP/SWAP) Book volume at pricing: ~A$930 million 22 Feb 21 Charter Hall LWR 300 2.086 95 Margin: 180bp/s-q swap 30 Oct 19 Verizon Communications 450 2.10 110 Indicative margin: 190bp/s-q swap 30 Oct 19 Coles Group 300 2.20 117 Geographic distribution: see chart 1 24 Oct 17 Ausgrid Finance 750 3.75* 122 Distribution by investor type: see chart 2

* Also included FRN priced at 122bp/3m BBSW. Lead managers: MUFG Securities, NAB,

SOURCE: KANGANEWS 23 FEBRUARY 2021 SMBC Nikko

10|KANGANEWS FEB/MAR 2021 CHART 1. CHARTER HALL LWR AND AURIZON DEALS GEOGRAPHIC CHART 2. CHARTER HALL LWR AND AURIZON DEALS DISTRIBUTION DISTRIBUTION BY INVESTOR TYPE

Fund manager Government Money market Private bank Australia Asia New Zealand EMEA Bank Insurance Other

100 6 100 2 1 5 9 3 9 10

3 3 1 11 8 6 9 80 31 80 13

60 60

95 40 80 40 85 84 (PER CENT) (PER CENT) 68 60 20 20 PROPORTION OF BOOK PROPORTION OF BOOK PROPORTION OF BOOK PROPORTION OF BOOK

0 0 Charter Hall 7yr Charter Hall 10yr Aurizon Charter Hall 7yr Charter Hall 10yr Aurizon

SOURCE: NATIONAL AUSTRALIA BANK, WESTPAC INSTITUTIONAL BANK FEBRUARY 2021 SOURCE: NATIONAL AUSTRALIA BANK, WESTPAC INSTITUTIONAL BANK FEBRUARY 2021

ISSUER INSIGHTS

PHIL SCHRETZMEYER HEAD OF TREASURY AND GROUP “Aurizon Operations has a 50-50 split between PLANNING CHARTER HALL thermal and metallurgical coal. We see a long “Corporates’ ability to future for metallurgical coal demand, given rely on longer-tenor its centrality to steel production. Thermal coal domestic-market liquidity is more challenging over the long term but is the primary reason why Australian thermal coal is the highest quality in Charter Hall has redirected the world.” its funding focus toward the Australian dollar market – having previously issued extensively “There is also growth potential in the bulk in the US private placement market.” side of Aurizon Operations, which is exposed to copper, nickel, lead, zinc and grain. “The timing was right because we had just Revenue for bulk increased by 8 per cent in H1 released our half-year results and could see 2021.” that there is a lot of demand for high-quality corporate paper out there. We observed this in “Our customers have been able to redirect coal the secondary market as well as through our that would normally head to China to other engagement with investors through the deal markets. Not all of it has been redirected, but roadshow.” our December quarter results show that more CHRIS VAGG than half the decline in Chinese exports has GROUP TREASURER AND HEAD OF INVESTOR RELATIONS found a new home elsewhere.” AURIZON “The intention has always been to increase leverage in Aurizon Operations over time. We have been doing this for several years through bank debt and this is our first foray into capital markets to term out some of that bank debt.”

11 MARKET NEWS

TRANSACTION ANALYSIS AusNet hybrid kicks off international Australian corporate issuance for 2021 AusNet Services Holdings printed a euro hybrid deal on 2 March that exceeded demand and pricing expectations. The borrower has a strong presence among euro investors that allowed the focus during execution to be on deal specifics rather than issuer credit – and paved the way for a jumbo book, leads say. has remained strong. We wanted to use this window of he €700 million (US$846 million) 60-year non-call 5.5- opportunity,” he explains. year deal had BNP Paribas, Citi, HSBC, Morgan Stanley Watson says AusNet considered a range of markets T and Westpac Institutional Bank as leads. AusNet also for its latest transaction but decided euros offered the best printed a A$650 million (US$508.6 million) hybrid transaction combination of volume and pricing. He says the swapped-back in September last year. level is similar to what could be achieved in Australian dollars The company has focused on hybrid issuance but demand for hybrid securities is much deeper in euros. to support its credit rating as it embarks on a capex The borrower’s name recognition in Europe, where it has a programme. Ampol and Scentre Group also issued hybrid well-developed senior curve, was also a factor in market choice, capital in H2 2020 as the instrument’s relevance picked up according to lead managers. Ian Campbell, Sydney-based, amid high levels of borrowing and low interest rates. managing director and head of debt capital markets Australia There is also a refinancing element for AusNet. Its euro and New Zealand at Citi, says AusNet’s outstanding euro curve hybrid transaction comes ahead of two hybrid call dates in made for straightforward pricing comparisons with other utility Q3 2021 – for Singapore and US dollar deals executed in companies’ senior and subordinated spreads. 2016. Alastair Watson, AusNet’s Melbourne-based treasurer, Demand for the deal was clearly strong. Joel Morton, says the decision to execute was based on market conditions. director, DCM at Westpac in Melbourne, says early “Rates markets have been in flux in recent weeks but credit momentum was generated by investors that indicated interest ahead of initial price thoughts immediately entering bids when CHART 1. AUSNET HYBRID DEAL GEOGRAPHIC DISTRIBUTION the deal launched. There was €4.1 billion of bids at launch price leading to a price tightening of 37.5 basis points, after Germany 23% which the book continued to grow to final volume of €5.5 France 20% billion. Deal statistics show fund managers and continental UK 19% Europe as the primary sources of demand (see charts 1 and 2). APAC 13% Rest of Europe 10% The deal attracted a broad set of investors, including Benelux 7% AusNet’s core euro investor base as well as a larger universe of Switzerland 5% accounts attracted by the higher yield on offer, according to Other 3% Andrew Duncan, HSBC’s Sydney-based head of debt capital markets Australia and New Zealand. The end of Q1 and beginning of Q2, after February SOURCE: WESTPAC INSTITUTIONAL BANK 8 MARCH 2021 reporting, is typically a busy period for large Australian corporates seeking to execute offshore transactions. Leads say CHART 2. AUSNET HYBRID DEAL DISTRIBUTION BY INVESTOR TYPE they are anticipating further issuance following AusNet’s deal. Market conditions mean borrowers have plenty of options. Campbell says the euro market is showing pricing on average 15-25 basis points wide of the Australian dollar market for Fund manager 71% some credits. However, he adds that AusNet’s deal shows how Agency 13% Insurance/pension fund 11% momentum can be generated in deals and compress pricing Bank/private bank 4% outcomes while maintaining the ability to take large volume. Other 1% According to Duncan, the euro and US dollar markets have opened 2021 confidently and investors are looking for opportunities in both currencies. He says the recent rates move in the US dollar market caught attention globally, but technical SOURCE: WESTPAC INSTITUTIONAL BANK 8 MARCH 2021 demand factors remain positive. •

12|KANGANEWS FEB/MAR 2021 TRANSACTION ANALYSIS

transactions in Australian dollars have in particular been a rarity Buy now, upside later given the asset-class’s natural investors tend to be based in the US and Europe. for Afterpay’s The last flurry of convertible-bond issuance from Australian companies began in early 2018 driven by convertible bond expectations of rising interest rates that never came to pass. More recently, the disruption of COVID-19 has led some Afterpay printed a blockbuster convertible corporate treasurers to consider a wider range of funding bond on 26 February with a zero coupon options than traditional debt and equity. and 45 per cent discount to the conversion This manifested in the return of corporate subordinated price. Afterpay’s leads say issuance of issuance from mid-2020 and now the frequency of convertible- convertibles by Australian companies has been bond issuance has also picked up. Australian dollars appear to in a relative purple patch and the latest deal be available in the convertible format to a greater degree than should further stimulate interest – though they was historically the case (see table). do not expect a convertible-bond deluge. Jared Baker, managing director at Goldman Sachs in Sydney, tells KangaNews: “Traditionally the perspective has fterpay’s A$1.5 billion (US$1.2 billion) five-year deal been that Australian issuers had to denominate deals in US was led by Citi, Goldman Sachs and J.P. Morgan. It was dollars or euros for the best pricing on a convertible bond. A upsized from launch volume of A$1.25 billion on the The Afterpay deal demonstrates that this is not the case, with back of excess demand. KangaNews understands the deal was no pricing penalty for local currency.” several times oversubscribed. Deals since mid-2020 have come from a diverse set of The 45 per cent conversion premium is at the top end of borrowers. Some, like Webjet and Flight Centre, had share the 35-45 per cent range above the reference share price. The prices that were hit hard by the COVID-19 crisis. Others, like initial conversion price is A$194.80 and the reference price Xero and Afterpay, are in high-growth sectors. Leads say the use is A$134.40. At the close of Australian trade on the day of of convertible bonds will remain a case-by-case consideration pricing, Afterpay’s share price was A$119.50. rather than a sector play. However, they are optimistic Afterpay will use the proceeds to fund an agreement with that Afterpay’s result brings credibility and a compelling early investors in its US expansion via a tender offer to eligible example. participants under its Afterpay US 2018 equity-incentive “Convertible bonds can make sense in a wide range of plan. These will increase Afterpay’s underlying interest in its cases,” Beattie says. “The format can be adjusted in many ways US subsidiary to approximately 93 per cent from 80 per cent. to suit issuers’ needs. The coupon, conversion premium, tenor Remaining proceeds will be used for general corporate purposes. and currency are all flexible.” More than 150 accounts came into the orderbook for Potential growth Afterpay’s transaction, according to Beattie. Baker adds that Duncan Beattie, managing director, financial institutions demand came predominantly from outright credit investors and group at J.P. Morgan in Sydney, says: “The zero-coupon and dedicated convertible-bond funds. conversion-premium outcome was a strong one for Afterpay. The book was primarily offshore, despite the issuance It has garnered attention domestically and offshore and should currency. Leads say domestic investor interest in convertible stimulate interest among Australian corporates.” bonds is increasing but participation remains limited. Convertible bonds have historically been a relatively A delta placement – where existing shares are sold short for little-seen funding tool in corporate Australia. Benchmark convertible-bond investors to hedge positions – was included in the transaction at a zero per AUSTRALIAN COMPANY CONVERTIBLE BOND DEALS 2019-21 cent discount to Afterpay’s last PRICING ISSUER VOLUME MATURITY COUPON INITIAL CONVERSION closing price, reveals Beattie. DATE (PER CENT) CONVERSION PREMIUM PRICE (A$) (PER CENT) This placement included some 13 Mar 19 Dexus A$425m Jun 26 2.30 15.05 20 shares sold by the company’s 2 Jul 20 Webjet €100m Jul 27 2.50 4.092 20 co-founders. Beattie says 11 Nov 20 Flight Centre A$400m Nov 27 2.50 20.04 31 investors had no concerns 25 Nov 20 Xero US$700m Dec 25 0 134.7246 35 around this as the volume 22 Jan 21 WHS Pattinson A$225m Jan 26 0.625 34.99 25 was relatively small and the 26 Feb 21 Afterpay A$1,500m Mar 26 0 194.822 45 proceeds were attributed to a SOURCE: AUSTRALIAN SECURITIES EXCHANGE 2 MARCH 2021 charitable trust. •

13 MARKET NEWS

MARKET ANALYSIS Sovereign upgrade puts New Zealand in rare air New Zealand became the only sovereign rated by S&P Global Ratings to be upgraded since the beginning of the COVID-19 crisis, on 22 February. The one-notch upgrade – to AAA – was driven by the country’s effective response to the pandemic and also improves the rating of related government agencies and local councils.

long with the local currency upgrade, S&P also strategist at BNZ in Auckland, says the shrinking pool of upgraded New Zealand’s foreign-currency rating by triple-A rated sovereigns has taken away some of the importance A one notch, to AA+. Two government agencies, one investors ascribe to the rating. state-owned enterprise, six councils and one council holding “Investors need a realistic opportunity set so there are not company were also upgraded. The local-currency rating many around the world that have mandates for only triple-A upgrade makes New Zealand just the 12th country to hold the securities. Consequently, the New Zealand upgrade is likely to highest rating from S&P. It also has a Aaa rating from Moody’s have only a marginal effect on investor demand. Nonetheless, Investors Service and is rated AA+ by Fitch Ratings. it is an unambiguously positive endorsement and could put New Zealand’s response to COVID-19 has been widely New Zealand and its agency borrowers on the radar of more lauded for heralding a quicker return to normality than many international investors.” peers. The benefits are beginning to be reflected in economic Kim Martin, acting director, capital markets at New data such as unemployment and GDP forecasts. Zealand Debt Management, the Treasury in Wellington, adds: In a webinar on 24 February, S&P’s Melbourne-based “We have been really encouraged by investor engagement in associate director, sovereign and public finance ratings, Martin the NZGB [New Zealand government bond] market over the Foo, said this was the main driver of the upgrade. “New past year, during challenging times globally. A sovereign’s credit Zealand’s near eradication of COVID-19 has allowed the rating is only one aspect an investor considers when choosing to economy to open much faster than its peers. From an economic invest in any particular market. However, we have had feedback and fiscal perspective this is important because the worst-case that the upgrade provides investors with an endorsement of a scenarios have not played out, there is little evidence of labour- relatively positive outlook they had already been following with market scarring and GDP is rebounding.” interest.” Foo added that while New Zealand’s fiscal trajectory, like The primary drivers of demand for NZGBs and most sovereigns, is unavoidably negative, its government debt relative rates will remain the global environment, economic trajectory is outperforming its peers and S&P anticipates it will fundamentals, future rate expectations and the relative supply stabilise at a relatively low level. and demand of bonds, says Smyth. As such, the rating upgrade The rating agency expects New Zealand to achieve is unlikely to quell the recent move wider in NZGB yield. widespread COVID-19 vaccination by Q3 2021 and this Given the importance of central-bank policy in this context, in turn will give an ongoing tailwind to economic recovery. market watchers were closely monitoring the Reserve Bank of Downside risks remain, including New Zealand’s external and New Zealand (RBNZ)’s monetary-policy committee meeting private-sector debt, and rapidly rising property prices. on 24 February. It appeared to reach similar conclusions to S&P S&P also applied the rating upgrade to Kāinga Ora – on the state of the New Zealand economy. As such, further Homes and Communities, New Zealand Local Government stimulus that would suppress NZGB yields appears unlikely. Funding Agency and Transpower New Zealand due to the The RBNZ struck a dovish tone by stating it will maintain likelihood of these entities receiving support from the sovereign its monetary-policy settings until inflation is sustained above 2 in a stress scenario. per cent, which it expects will require “considerable time and Meanwhile, S&P upgraded six councils and WRC patience”. It also signalled that changes to its policy settings are Holdings based on a methodology factor. On the same webinar, not currently required despite the improvement of the domestic Rebecca Hrvatin, associate, sovereign and international public economy beyond expectations. finance at S&P in Melbourne, said: “The six councils previously An ANZ research note added: “The RBNZ finds itself had standalone credit profiles of AA+ but were capped at AA somewhat at a delicate juncture. The economy does not require because of the sovereign rating.” any more stimulus, but the reserve bank is not yet certain that employment and inflation are on a sustainable path to Market reaction target. And it reiterated that it would rather take the chance on The global trend for sovereign ratings has been negative since overshooting than undershooting targets, given the challenges the 2008 financial crisis. Nick Smyth, senior interest rate inherent in adding more stimulus from this starting point.” •

14|KANGANEWS FEB/MAR 2021 TRANSACTION ANALYSIS Demand remains in CHART 1. NZDM DEAL GEOGRAPHIC DISTRIBUTION place for NZDM despite good-news headwinds New Zealand 51% Europe/UK 16% New Zealand Debt Management (NZDM)’s Asia 13% North America 11% return to mid-curve syndication priced shortly Australia 9% after a local labour-market data print that surprised the market on the up side leading to a bond-market sell-off. Despite this and other recovery-driven headwinds, NZDM says SOURCE: NEW ZEALAND DEBT MANAGEMENT 5 FEBRUARY 2021 issuance conditions were relatively conducive and supported a good transaction outcome for CHART 2. NZDM DEAL DISTRIBUTION BY INVESTOR TYPE its latest syndication.

Issuer: New Zealand Debt Management

Issuer rating*: AA+/Aaa/AA+ Balance sheet 37% Pricing date: 4 February 2021 Asset manager/central bank 31% Maturity date: Trading book 20% 15 May 2026 Hedge fund 12% Volume: NZ$3.5 billion (US$2.6 billion) Volume at launch: NZ$2-4 billion Book volume at pricing: NZ$7.5 billion Margin: 16bp/April 2025 NZGB Indicative margin: SOURCE: NEW ZEALAND DEBT MANAGEMENT 5 FEBRUARY 2021 14-18bp/April 2025 NZGB Geographic distribution: see chart 1 Distribution by investor type: see chart 2 Lead managers: Commonwealth Bank, Deutsche Bank, UBS, Westpac * Rating at issue.

ISSUER INSIGHTS

MATTHEW COLLIN maximise liquidity in the new line and allowing HEAD OF PORTFOLIO MANAGEMENT NEW ZEALAND TREASURY the bond to perform well in the secondary “The first week of February market.” looked to be the optimal “The very strong labour-market data issuance window given sparked a significant repricing of our curve coming public holidays as the market adjusted to new expectations in Asia and the RBNZ’s for domestic interest rates. This volatility monetary-policy committee meeting on 24 created a slight headwind for our transaction February.” but overall we were still comfortable with “We felt issuing NZ$3.5 billion struck the right participation and the pricing outcome we were balance between ensuring enough was issued to able to achieve.”

15 MARKET NEWS

MARKET ANALYSIS Kauri market open and demand building The Kauri market opened for 2021 in the final week of January with two transactions – a tap by Kommunalbanken Norway (KBN) followed by a new line from Asian Development Bank. Both came at tenor longer than the New Zealand market’s traditional five-year sweet spot and intermediaries say there is plenty of local demand, but relative pricing remains challenging for further supply. demand during 2020. KBN established its 2030 line in July BN kicked off deal flow with a NZ$125 million 2020 with a landmark NZ$500 million deal. The tap brings (US$91.1 million) increase to its July 2030 line on 27 total outstanding to NZ$625 million – a substantial volume for K January, led by BNZ. ADB followed on 29 January, a Kauri line still with 9.5 years to maturity, says Faville. establishing a new seven-year line with a NZ$700 million deal Meanwhile, ADB’s transaction is the largest-ever single led by ANZ, Commonwealth Bank and TD Securities. tranche priced for a Kauri with tenor of seven years or longer. Similar to the Kangaroo market, lead managers agree It was distributed primarily to bank investors in Australia and that so far in 2021 the Kauri option has struggled to achieve New Zealand. Popovych tells KangaNews a solid number of pricing competitive with the US dollar and euro markets. In offshore investors participated in ADB’s transaction but with Australia, this has meant what deal flow has come to market relatively small bids. has been limited to supranational, sovereign and agency (SSA) Danny Keene, director, debt capital markets at borrowers with the largest funding tasks and thus a desire for Commonwealth Bank in Auckland, tells KangaNews demand diversification sufficient to justify paying for it. for high-grade spread product is being driven by the Reserve The group of SSAs that actively issue in New Zealand is Bank of New Zealand (RBNZ)’s large-scale asset purchase already smaller and therefore the effect of the relative pricing programme. “RBNZ buying has continued in recent months dynamic is potentially magnified. Yuriy Popovych, director while there has been limited high-grade supply, so spread at TD Securities in Singapore, says regular Kauri names product has been moving tighter. Meanwhile, bank balance are watching the market closely but pricing dynamics are sheets have had cash to invest and have been looking further out precluding most from issuing. on the curve for opportunities.” Even so, the aggregate NZ$825 million raised by KBN and Faville says the bulk of latent demand for Kauris is still ADB is only somewhat less than the 2016-20 January mean weighted toward five-year tenor but, with pricing in line for Kauri volume of just more than NZ$1.1 billion. issuers at 7-10 years and plenty of cash in the New Zealand Mike Faville, Auckland-based head of debt capital markets system, he expects investors to remain supportive of longer- at BNZ, tells KangaNews the problem is not insufficient tenor deals. demand. Rather, local market pricing for SSAs has not been The sense among intermediaries is that SSA Kauri able to keep pace with tightening in major markets. “Every time transactions may remain sporadic for the foreseeable future. New Zealand dollars tightens by a few basis points, US dollars However, the potential for each deal that does come to market has tightened by a few basis points more,” he says. to attract higher-than-average volume, especially at longer tenor, Leads say there is somewhat more opportunity in the 7-10 is greater than ever. year part of the Kauri curve than in the market’s traditional New Zealand dollar SSA redemptions totalled more than five-year sweet spot. Glen Sorensen, director, syndicate at ANZ NZ$2.6 billion in January, according to KangaNews data. in Wellington, says the steepness of the New Zealand dollar-US Popovych says this could further support Kauri demand. dollar basis-swap curve was a significant contributor to ADB’s Domestic high-grade supply is about to ramp up again, tenor outcome. “As long as this curve shape prevails, longer- though – potentially taking some money off the table. NZDM tenor Kauri is likely to remain the most competitive against priced a NZ$3.5 billion 2026 transaction on 4 February (see euros and US dollars,” he adds. p15). The sovereign issuer, New Zealand Local Government Popovych explains that US dollar funders are currently more Funding Agency (LGFA) and Kāinga Ora – Homes and likely to find New Zealand dollar pricing compelling than euro Communities will be offering an aggregate of around NZ$2 names. For example, he says ADB’s deal swapped to a level in billion per month via tender from February. line with the supranational’s US dollar curve. However, NZDM and LGFA also have an aggregate of NZ$12.7 billion due to mature in May. Combined with the Demand holds up RBNZ commencing its funding-for-lending programme in The KBN and ADB books suggest a continuation of the December, it is unlikely that local high-grade supply will be development seen in long-tenor New Zealand dollar SSA enough to crowd out potential demand for SSA issuance. •

16|KANGANEWS FEB/MAR 2021 TRANSACTION ANALYSIS Arvida relaunches New Zealand corporate issuance after congested end to 2020 New Zealand domestic corporate issuance kicked off for 2021 with a debut from Arvida Group. Deal sources say COVID-19 and a crowded market in the second half of 2020 delayed a transaction that had been planned for last year, but that conditions remain receptive in the new year even for an unrated name like Arvida.

Issuer: Arvida Group UNRATED CORPORATE DEALS IN NEW ZEALAND, H2 2020 – H1 2021 Issuer rating: NR PRICING ISSUER VOLUME TENOR COUPON MARGIN DATE (NZ$M) (YEARS) (PER CENT) (BP/MID- Pricing date: 12 February 2021 SWAP) Maturity date: 22 February 2028 21 Aug 20 Investore Property 125 7 2.40 200 11 Sep 20 Summerset Group 150 7 2.30 200 Volume: NZ$125 million (US$91.1 million) Holdings Volume at launch: NZ$75-125 million 9 Oct 20 Oceania Healthcare 125 7 2.30 200 Margin: 180bp/mid-swap 16 Oct 20 Argosy Property* 125 7 2.20 195 Indicative margin: 180-200bp/mid-swap 10 Dec 20 Ryman Healthcare 150 6 2.55 200 12 Feb 21 Arvida Group 125 7 2.87 180

Arranger: ANZ *Green-bond deal

Lead managers: ANZ, Craigs Investment SOURCE: KANGANEWS 16 FEBRUARY 2021 Partners, Forsyth Barr, Jarden Securities Market conditions rvida develops, owns and operates retirement villages Issuing into a market that had not yet seen corporate issuance in New Zealand. The healthcare sector has provided in 2021, Arvida was able to take advantage of a clear issuance A significant supply in New Zealand’s debt capital market window and strong investor demand carrying over from the end of late: in the second half of 2020 alone, Summerset Group of 2020, Patrick Mullins, director, debt capital markets at ANZ Holdings, Oceania Healthcare and Ryman Healthcare all in Auckland, tells KangaNews. printed transactions. On the other hand, the yield curve has steepened Arvida was formed in 2014 as an amalgamation of 18 significantly on the back of positive economic data. This retirement villages. It has since increased the number of villages meant Arvida’s deal offers a higher coupon – 2.87 per cent – it owns to 33, a portfolio that includes two new greenfield than several unrated corporate deals from the latter part of 2020 villages currently under construction. despite also achieving a lower credit margin (see table). Jeremy Nicoll, Auckland-based chief financial officer The relatively higher coupon was supportive of strong at Arvida, tells KangaNews the company was preparing its bond- retail and institutional investor demand for the credit, Mullins market debut in February 2020. “We were planning to diversify says. He observes in particular that institutional demand was our funding sources and extend the tenor of our debt. When “notably greater” than in other recent issues. COVID-19 reared its head we put this on pause and established Arvida plans to be a regular issuer in the domestic market, a NZ$100 million facility with our banking syndicate for 18 Nicoll says, with a funding strategy to have 20-50 per cent of months to see us through the pandemic.” its debt set via bond lines. “We will have NZ$125 million in Arvida picked up the issuance process again in August with bonds under a total debt limit of NZ$500 million once this a view to issuing in December following its interim results. deal settles. There is room to come back to the market again But it elected to hold off until the new year given the crowded and we see ourselves continuing to grow, so we expect to issue primary corporate market, Nicoll adds. again in the next couple of years,” he adds. •

“We were planning to diversify our funding sources and extend the tenor of our debt. When COVID-19 reared its head we put this on pause and established a NZ$100 million facility with our banking syndicate for 18 months to see us through the pandemic.”

JEREMY NICOLL ARVIDA GROUP

17 NEWS FEATURE

Pre-emptive rates sell off may be a phantom tantrum Australian fund managers, strategists and traders say a bond sell-off that began in late February appears to reflect expectations of higher inflation and an interest-rate hike before the Reserve Bank Australia’s forecast of 2024. But there is some evidence that this is not being backed by substantial repositioning activity. Nonetheless, the price action induced the reserve bank to flex its asset purchases and put more cash into the market.

BY MATT ZAUNMAYR

eserve Bank of Australia (RBA) policies remain plank of the RBA’s unconventional policy to go, potentially as to target a cash rate and three-year Australian early as Q3, after the planned June termination of the term- Commonwealth government bond (ACGB) funding facility (see p47). yield of 0.1 per cent, and to purchase ACGBs Market users are floating multiple reasons for the sell off, and semi-government bonds at regular intervals including the exposure of long-end rates to global central-bank to the tune of A$200 billion (US$156.4 policy and the positive COVID-19 vaccine news that has billion). It announced in February that an emerged since the end of 2020 putting a tailwind behind global initial A$100 billion programme will be followed immediately by economic-recovery narratives. Ra second of the same volume. On the day before its March board meeting, the RBA showed INFLATION DOUBTS it is willing to be flexible at least in the incremental volume of its ne hypothesis that has received significnat attention is bond purchases. It bought A$4 billion of ACGBs on 1 March that ongoing, substaintial stimulus combined with a instead of the regular A$2 billion, to quell accelerating volatility in O faster-than expected recovery could cause an inflation bond yields. shock and require tighter policy sooner than expected. RBA governor Philip Lowe’s March statement confirms However, Australian strategists continue to pour cold water on that these purchases were brought forward rather than added the idea that inflation is likely to outstrip expectations and force to the overall programme. They are, however, part of the first the hands of central banks – as do many local investors (see p29). QE package rather than the ongoing yield-curve control (YCC) Commonwealth Bank of Australia’s weekly strategy research programme. Bonds purchased for YCC do not count toward the note, published on 22 February, says: “It is a strange world when QE1 or QE2 total and there is no fixed limit on the scale of YCC the collective view of markets goes from lower forever and no time activity. value of money… to linear upward yield moves and the threat of Yield widened, especially at the long end, in the run up to the the greatest breakout of inflation in decades. All in the space of a March RBA meeting on the back of rising inflation expectations. few months.” Despite the noise, the RBA appears confident market function The note continues: “While there can be conjecture around was not threatened. Nor is it apparently phased by the outright the February 2024 date for the RBA’s current commitment, there level of long-end yield. is a lot of wood to chop before the RBA hikes interest rates in just The inflation-rate forecast for five years’ time implied by over a year. This particularly stands out against the RBA shifting market pricing was around 2 per cent by the time the RBA board in 2020 to saying it would only hike when actual, not forecast, met in March – the same as it was in 2018, when the central inflation was sustainable inside its 2-3 per cent target.” bank began tipping toward easier rather than tighter monetary Policy will certainly be easy for the medium term. The RBA conditions. Nonetheless, ACGB and other bond yields have is also set to extract more ACGBs from the market each week marched higher since the beginning of 2021 – quite dramatically than are issued at least over the course of this financial year – since mid-February (see chart). and possibly beyond, given expectations for QE3 and a lower Three-year ACGB yield has drifted above target and only government borrowing programme in financial year 2022. responded to the RBA’s latest direct purchases to some extent. The view that the market may be getting ahead of itself on Market watchers have predicted that YCC will be the second inflation and interest-rate expectations seems to be reinforced by

18|KANGANEWS FEB/MAR 2021 19 trading flows. Ian Ravenscroft, director, rates trading at ANZ in monetary-policy decision – which kept the official cash rate Sydney, tells KangaNews customers were asking the ANZ trading on hold and left the large-scale asset-purchase programme and desk about flow drivers that may not be in play to the degree price funding-for-lending programmes untouched – reaffirmed the action suggests. need for protracted stimulus. “The macro global themes are similar to [early year] and the “The committee agreed to maintain its current stimulatory flow themes are also not dramatically different,” he reveals. “We monetary settings until it is confident that consumer-price inflation have seen offshore selling in the Australian dollar mid-curve for will be sustained at the 2 per cent per annum target mid-point, the whole spectrum from ACGBs to credit, but we are also seeing and that employment is at or above its maximum sustainable level. offshore buying of 10-year ACGBs. Neither of these are new.” Meeting these requirements will necessitate considerable time and Ravenscroft continues that the driver seems to be a patience,” RBNZ governor, Adrian Orr, said. combination of positioning and liquidity. “Dealer liquidity If anything, the reserve bank is laying the ground for further provision has pulled back dramatically, particularly in the futures support. Orr added: “The committee agreed that it remains market. This has meant heightened volatility, increased liquidity prepared to provide additional monetary stimulus if necessary and premium and lower two-way flow dynamics. The result is a highly noted that the operational work to enable the OCR to be taken irrational market.” negative if required is now completed.” KangaNews understands the RBA does not currently view higher bond yield away from the YCC point as in and of itself a FLUID STATES source of concern, precisely because it reflects the positive turn in ustralian pimary-market supply has not seized up in economic outcomes. If the central bank has a concern it is with response to the rates backdrop. Credit deal flow was intraday volatility, which can lead to dealers pulling liquidity from A robust in late February and into March, with little the market and cause sharp spikes on limited trading. impact on pricing. Leads on the Charter Hall Long WALE The experience in New Zealand is illustrative here, too. After a REIT transaction priced on 22 February told KangaNews the huge GDP print of 14 per cent for Q3 2020 and vastly improved rates sell off had little or no influence over the deal, for instance. employment data, attention started to focus on the potential Meanwhile, Western Australian Treasury Corporation easing of central-bank stimulus – especially in the context of a (WATC) – the state borrower with seemingly the least need to local housing-affordability crisis that was exacerbated by a house- enter choppy markets – printed a A$1 billion deal on 25 February price rise of approximately 20 per cent nationwide. within, though toward the wider end of, its price-guidance range. The New Zealand government is applying pressure on the Vince Cinquina, head of financial markets at WATC in Perth, RBNZ to take housing affordability more into account in its says although there had been some volatility and yield had risen, policy decisions, suggesting that ultra-stimulative settings are the borrower received good feedback from investors through the helping inflate a speculative bubble. “There is a crisis when it syndicate group that a well-supported transaction was possible. comes to the housing situation right now in New Zealand,” said “We launched the trade after a couple of reasonably stable minister of finance, Grant Robertson, in February. sessions. In this particular transaction a substantial component There is little sign of a sustainable inflation surge beyond the was swapped to floating rate,” he comments. housing market, however – and the exuberance of the recovery He continues: “On day two of the transaction we opened has already eased to some degree. The RBNZ’s 24 February with just more than A$2 billion across the price-guidance range. This fell to A$1.7 billion at the final price. It was very positive AUSTRALIAN COMMONWEALTH GOVERNMENT BOND YIELD to see almost all the investors remain in the transaction given the increase in volatility on the second day. Significantly more than 38 Three-year ACGB target ACGB Apr 24 ACGB Apr 26 ACGB Dec 30 per cent was allocated to offshore investors.” 2.0 Most of the near-term issuance was mandated before volatility 1.8 spiked, but the completion of rates and credit deals suggests 1.6 an underlying theme of comfort among investors with cash to 1.4 deploy, says Ravenscroft. However, he adds that it is difficult to 1.2 see a new pipeline of primary issuance building in the immediate 1.0 term, at least until the market stabilises. 0.8 Volatility is likely to be an ongoing feature of markets as 0.6 central banks confront the paradox of maintaining extremely loose YIELD (PER CENT) 0.4 policy while economies rebound strongly. 0.2 “The theme for this year will be markets questioning central 0 banks’ resolve. We may see more frequent periods of illiquidity than we are used to. The market will ultimately revert to stability Jan 21 Oct 20 Feb 21 Dec 20 Nov 20 Mar 21 but questions about central-bank policy measures will be more SOURCE: YIELDBROKER 8 MARCH 2021 prevalent this year,” says Ravenscroft. •

18|KANGANEWS FEB/MAR 2021 19 FROM THE EDITOR COLUMN

LAURENCE DAVISON [email protected] Red flags Australia and New Zealand are not yet out of the pandemic woods, but the health and economic situation is looking good on a relative and, increasingly, an outright basis. We would do well to avoid too much back slapping, though – and not just as an ongoing social- distancing precaution. The tectonic pressure of economic inequality has only been intensified by COVID-19.

he data on inequality in INEQUALITY OUTCOMES ACOSS research says the average wealth Australia and New Zealand Income inequality in Australia was on of the top 20 per cent of Australians was during the pandemic era are a worsening trend prior to the events of 90 times that of the bottom 20 per cent of course far from complete. 2020, according to research published in 2017/18, at A$3.3 million (US$2.6 We are yet to find out the by the University of New South Wales million) compared with A$36,000. Textent to which improving economies will Social Policy Research Centre (SPRC) and offset the withdrawal of direct income the Australian Council of Social Services PANDEMIC IMPACT support by governments – a withdrawal (ACOSS). Using Australian Bureau of The good news is that the COVID-19 that is more or less guaranteed even as Statistics (ABS) data, the report Inequality pandemic does not appear to have we are still figuring out how robust or in Australia 2020: part 1 – overview says worsened the situation in the near term. otherwise the recovery Research published in September will be. 2020 by the University of There seems to be THE IMPACT OF THE PANDEMIC Canberra’s National Centre for much less fear that “the HAS BEEN GREATEST ON PEOPLE Social and Economic Modelling bridge” will run out before WHO DO NOT OWN PROPERTY. (NATSEM) found that Australia’s we reach the other side. WHEN THE TEMPORARY SUPPORT Gini coefficient – another But what if the chasm we MEASURES DISAPPEAR, THE ONGOING standard measure of income are crossing is not the same BENEFITS OF STIMULUS – PRIMARILY inequality, calculated on a scale width for everyone? CHEAP CREDIT – WILL PRIMARILY of zero to one – actually fell by One thing we know ACCRUE TO PEOPLE WHO DO. 0.03 in 2020, meaning income for sure is that income inequality dropped slightly. inequality was already elevated in Australia the top 20 per cent of income earners This research attempts to provide and New Zealand, by most normal made more than six times as much as the insights with much less lag than measures, ahead of the pandemic. The bottom 20 per cent in 2017/18, up from traditional economic data allow for. It first research to emerge covering the five times just two years prior. uses “nowcasting” economic simulation COVID-19 period specifically suggests The UN publishes a similar figure techniques based on “near real-time that direct government support measures on a top 10 per cent-bottom 10 per cent data” from the Australian Bureau of were the only thing that prevented of income earners basis. Australia and Statistics (ABS), monthly labour-force a further deterioration during 2020. New Zealand both recorded multipliers survey results, weekly payroll statistics for Meanwhile, the recovery so far has once of around 12 for this measure before February-June 2020, and biannual income again been characterised by asset values – COVID-19, compared with around and housing surveys. in particular housing – rebounding way five for Japan, six for the Scandinavian NATSEM also analysed the impact of ahead of wages. countries, seven for Germany, nine for JobKeeper, JobSeeker and the COVID-19 Taken together, we are looking at an France and Canada, 14 for the UK childcare-subsidy payments. The economy that was already experiencing and 19 for the US. The closest major paper’s lead author, professor Jinjing Li, high and growing inequality, in which economies to Australia and New Zealand concludes: “The story behind these figures temporary measures were the only thing on this measure are Italy and Russia – not is that without government intervention, that prevented a dramatic worsening of obviously ideal company to be keeping in disposable incomes would have plunged this picture during 2020, and where the this context. considerably, with severe consequences for future looks set to reinforce divergent The situation is if anything even more income inequity and poverty levels.” prospects for asset owners and those acute when it comes to asset ownership There can be little doubt that the locked out of asset ownership. rather than income. The same SPRC- pandemic disproportionately affected

20|KANGANEWS FEB/MAR 2021 21 FROM THE EDITOR COLUMN

LAURENCE DAVISON [email protected] people in lower-income and less secure According to the ABS, there were 173,000 rental sector, underpinned by favourable employment. The government-support new dwelling starts in Australia in 2019 tax provisions and a housing industry measures helped most of this group – a number that fluctuated from a floor now increasingly path-dependent on the through 2020. The open question is of about 150,000 to a peak of around private-rental sector,” the AHURI report whether the rebound will be sufficient to 230,000 over the past decade. There concludes. offset the withdrawal of these measures. are, meanwhile, about 10.4 million total I have been struck by how easy it is dwellings in Australia. A minimum- COURSE CORRECTION effectively to ignore non-asset-owners in to-maximum impact on housing I am using housing here as a proxy for our capital-market world. A particularly construction might be expected to see a wider economic inclusion. But I do not stark example was last year’s Australian little less than 1 per cent added to local think this is unreasonable given housing’s Securitisation Forum (ASF) virtual housing stock in a year, in other words. significance as a store of wealth – one to symposium, at which the local structured- Fundamentally, the benefits of rapidly which our tax system drives investment finance industry repeatedly noted – with rising house prices come down to the – and the fact that other indicators are some not unreasonable pride – just how wealth effect. But there is every sign that pointing in the same direction. Wage much better loan performance had been this increasingly reinforces inequality and growth has been sluggish for well over through the pandemic than was expected that the proportion of Australians and a decade, for instance, and automation going in. New Zealanders locked out of its warm hardly implies a positive outlook. An article by Natasha Vojvodic, embrace is growing. It is hard to imagine that a growing senior director and head of Australian A report published in May last year cohort of society being locked out of our and New Zealand structured finance at by Swinburne University’s Australian primary retail asset – home ownership Fitch Ratings in Sydney, published in Housing and Urban Research Institute – in an increasingly uncertain labour the ASF’s biannual Australian environment will have a Securitisation Journal, following positive impact on political the ASF event sums up the IT IS HARD TO IMAGINE THAT A outcomes. At the risk of situation.Vojvodic writes: GROWING COHORT OF SOCIETY BEING drawing too long a bow, we “Normally, unemployment LOCKED OUT OF OUR PRIMARY RETAIL were repeatedly told that the affects individuals from a ASSET – HOME OWNERSHIP – IN AN 2016 US election result was diverse range of industries… INCREASINGLY UNCERTAIN LABOUR the product of ‘economic This pandemic-led recession ENVIRONMENT WILL HAVE A POSITIVE uncertainty’. While I am has mostly disrupted customer- IMPACT ON POLITICAL OUTCOMES. inclined to suspect this is facing industries that are not the only driver behind directly affected by the lockdown and (AHURI) – Australian home ownership: grievance politics I am also happy to social distancing measures, namely past reflections, future directions – found assume that this type of outcome would tourism, hospitality and the arts. These that the relatively consistent rate of be much less likely in a more secure and industries have a disproportionate number home ownership in Australia from the equitable economic environment. of casual and younger employees, who mid-1970s to mid-2010s was largely It is interesting and potentially positive typically do not have a mortgage.” the product of an ageing population. to see developments like the New Zealand In other words, the impact of the The coming decades are likely to see government attempting to incorporate pandemic has been greatest on people deterioration. housing affordability more fundamentally who do not own property. When the The report predicts that Australian into monetary-policy formation. temporary support measures disappear, the home ownership will decline to around This move, and the government’s ongoing benefits of stimulus – primarily 63 per cent by 2040, from 67 per cent housing policy more broadly, have not cheap credit – will primarily accrue to in 2016 and 68 per cent in 1976. It also been entirely positively reviewed, to say the people who do. forecasts that the rate will fall to not much least. However, I feel the capital-markets more than 50 per cent – down from 60 world owes the concept at the very least a LOCKED OUT per cent in 1981 – for households in the fair hearing rather than just defaulting to Of course it is true that rising house prices 25-55 age bracket by the same point. old arguments about the wealth effect and have other benefits and that these produce “Declines in ownership seem likely by housing construction that are increasingly positive economic gains, for example by virtue of attributes of the Australian labour being rendered obsolete by the factors promoting housing construction and its market, continued issues of affordability… identified by the AHURI report. If we do consequent impact on employment. the proliferation of building forms not take inequality of income and wealth But this seems a curious transmission (apartments) more suited for rental than into account we will, sooner or later and mechanism for economic stimulus. ownership and the growth of the private one way or another, be made to do so. •

20|KANGANEWS FEB/MAR 2021 21 FEATURE

Activity review: a year for the record books Transaction data from the KangaNews deal database highlight a year of many firsts in the Australasian debt market. From skyrocketing sovereign and semi- government issuance to major banks’ absence from the senior-unsecured space and a strong rebound for corporate issuance – 2020 was a year like no other.

BY CHRIS RICH

ustralian syndicated issuance in 2020 soared to Kangaroo deal flow considerably lessened for the year, falling record volume of A$240.5 billion (US$188.2 to A$20.4 billion from A$31.1 billion the year prior to reach its billion), almost twice the previous year’s total lowest point in the past 10 years (see chart 4). and nearly A$100 billion greater than any An even more notable absence in the Australian dollar market preceding year (see chart 1). was the domestic big-four banks. With significant deposit inflows AThe key year-on-year change is a huge jump in government- and the Reserve Bank of Australia (RBA)’s term-funding facility sector issuance. Even excluding tenders and privately placed deals, (TFF) providing funding to authorised deposit-taking institutions semi-government issuance totalled A$42.6 billion – almost A$18 (ADIs) at an interest rate of 0.25 per cent, cut to 0.1 per cent in billion more than 2019’s record-breaking figure of A$24.7 billion November, the major banks have not had reason to call on debt – while the Australian Office of Financial Management shattered capital markets for senior-unsecured funding. its syndicated issuance record (see chart 2). Including issuance for capital purposes, the major banks only The total of A$118 billion of Australian sovereign debt printed A$14.4 billion in 2020, down from A$30.6 billion in printed via syndication eclpised the total of A$109.2 billion from 2019 (see chart 5). the past nine years combined. The AOFM executed A$84 billion Australia-domiciled banks outside the big four had a greater via syndication in the second half of 2020 alone as it funded the call on debt capital markets in 2020, however. Australian dollar federal government’s support of a battered economy. deal flow from nonmajor banks hit an all-time high with A$28.6 Excluding sovereign and semi-government syndicated deals, billion priced – just up from the previous record of A$27.6 billion however, the story of Australian dollar issuance is quite different. in 2019 (see chart 6). Volume from other issuers for the year was down significantly, Not since the European sovereign-debt crisis has the volume to A$79.9 billion from A$99.8 billion in 2019, and at its lowest of issuance by financial institutions been as low in the Australian since 2011 (see chart 3). This can be explained much slowed dollar market, nor the composition of the issuance as diverse. pace from two sectors: financial institutions and the Kangaroo Senior-unsecured supply fell to A$30.4 billion in 2020 from supranational, sovereign and agency (SSA) sector. A$46.6 billion in 2019, while covered-bond issuance reached

CHART 1. AUSTRALIAN MARKET SYNDICATED ISSUANCE CHART 2. AUSTRALIAN MARKET SOVEREIGN AND SEMI-GOVERNMENT SYNDICATED ISSUANCE 300 Sovereign Semi-government 180 250 240.5 160 200 140 42.6 120 150 100 146.8 139.8 108 122.8 124.6 80 114.9 100 106.9 111.2

VOLUME (A$BN) 118 90.7 60 VOLUME (A$BN) 50 40 16.4 19.8 19.9 14.6 13.1 20 16.1 28.4 15.2 13 19.2 18.7 24.7 12 14 9.5 0 0 3.3 4.2 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

SOURCE: KANGANEWS 4 JANUARY 2021 SOURCE: KANGANEWS 4 JANUARY 2021

22|KANGANEWS FEB/MAR 2021 A$8.3 billion from A$2.5 billion the year prior – the lowest and A further encouragement for true corporate issuance in the highest volumes seen since 2012 (see chart 7). Australian market is that triple-B, subinvestment grade and While COVID-19 delayed tier-two issuance for a few months unrated deal flow for 2020, at A$9.8 billion, did not drop off after March, banks were keen to get back on track for the ramp- from 2019’s record year despite heightened economic concerns up in total loss-absorbing capacity equivalent requirements with (see chart 10). A$6.7 billion issued, up from A$5 billion in 2019. This was the Like the corporate market, Australia’s securitisation sector saw highest volume of tier-two deal flow since 2012. a drop-off in issuance in H1 due to COVID-19 volatility before Conversely, Australian dollar issuance from the corporate rebounding to a level consistent with prior years (see chart 11). sector experienced its second-largest volume ever. After H1 Last year’s drop to A$34.3 billion of Australian dollar volume was fairly consistent with previous years, H2 2020 took securitisation issuance, from A$44.1 billion in 2019, is largely off for a total print of A$11.5 billion that almost reached the explained by the absence of ADIs in the space. With the inflow bumper A$12.6 billion H2 in 2017 (see chart 8). of deposits and the RBA’s TFF, ADIs only issued A$8.1 billion of Volatility in March and April 2020 pushed many corporate securitised product in 2020 versus an average of A$21.3 billion issuers’ capital-market borrowing intentions into the second half over the past nine years (see chart 12). Nonbanks had their largest- of the year, when the historically low interest-rate environment ever year in 2020 with A$26.2 billion printed, from the previous made for attractive issuance conditions. The need for yield with a peak of A$23.5 billion in 2019. low cash rate in place forced investors to look further out on the Australian dollar green, social and sustainability (GSS) bond credit and tenor curve for opportunities. issuance took a back seat during COVID-19, however, with Indeed, corporate issuance of 10-year or greater duration only A$7 billion issued versus 2019’s record A$10.2 billion (see reached a record high of A$7.9 billion in 2020 – up from A$3.6 chart 13). billion in 2019 and easily surpassing 2017’s breakout year of GSS product from SSAs was the main source of the drop-off A$6.1 billion (see chart 9). but the much talked about growth expectations of the corporate

CHART 3. AUSTRALIAN MARKET SYNDICATED ISSUANCE CHART 5. AUSTRALIAN DOMESTIC CREDIT ISSUANCE EXCLUDING AOFM AND LOCAL SEMI-GOVERNMENT ISSUERS Domestic big-four banks All other domestic credit issuance 120 80 70 100 102 101.3 99.8 60 93.4 90.5 89.7 22.7 80 83 85.7 32.7 79.9 50 37.8 38.1 30.2 72.2 27.8 26.5 60 40 29.5 43.8 30 22.4 40

VOLUME (A$BN) VOLUME (A$BN) 43.7 20 38.1 32.5 30.2 30.6 20 27.7 27.5 24.2 10 20.8 14.4 0 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

SOURCE: KANGANEWS 4 JANUARY 2021 SOURCE: KANGANEWS 4 JANUARY 2021

CHART 4. KANGAROO ISSUANCE CHART 6. AUSTRALIAN MARKET FINANCIAL-INSTITUTION ISSUANCE BY ISSUER TYPE H1 H2 Domestic big-four Other domestic International banks 45 banks banks (Kangaroo) 80 40 70 35 10 2.8 7 16.4 60 30 6.3 17.4 6.3 11.5 50 3.6 9.9 25 25 18.4 11.8 6.7 7.1 8.5 14.2 27.6 15.8 22.3 20 13.1 7.5 40 6.7 14.8 16.7 17.3 20.9 8.2 15 30 14 28.6

VOLUME (A$BN) 22.4 22.3 43.7 19.8 VOLUME (A$BN) 20 38.1 10 16.5 18.3 32.5 15.1 16.9 27.7 30.2 30.6 13.9 20.8 27.5 24.2 5 12.1 12.2 10 14.4 0 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

SOURCE: KANGANEWS 4 JANUARY 2021 SOURCE: KANGANEWS 4 JANUARY 2021

23 FEATURE

sector also failed to materialise. Financial institution and semi- requirements to combat COVID-19. New Zealand Debt government GSS issuance went some way to filling the gap. Management printed a record NZ$23 billion (US$16.7 billion) via syndication, up from the typical NZ$1.5-4.5 billion in NEW ZEALAND DATA previous years (see chart 14). he New Zealand domestic market in 2020 was, like Local subsovereign issuers executed NZ$5.2 billion of Australia, characterised by sovereign and subsovereign- syndicated issuance, up from the record high of NZ$3.3 billion in Tagency issuance in response to growing funding 2019. Financial-institution paper was also notably absent from the New Zealand dollar market in 2020, down by more than NZ$3 CHART 7. AUSTRALIAN MARKET FINANCIAL-INSTITUTION billion to NZ$1.4 billion from NZ$4.5 billion in 2019. Kauri ISSUANCE BY PRODUCT issuance hit an all-time high, however (see chart 15). Senior unsecured Covered bond T3 T2 AT1 New Zealand’s nascent GSS bond market grew in 2020, with 80 NZ$2.7 billion priced compared with NZ$2.1 billion in 2019 70 7.2 (see chart 16). Most of the growth achieved was in the agency 4 5.6 60 6.6 4.2 3.2 3.3 5.6 space but corporate issuance also increased, by NZ$125 million. 3.2 1.6 7 5.1 1.4 1.6 5 50 4.6 6.1 1.3 6.3 3.7 3.3 3.1 2.5 0.2 2 1.4 7.1 3.4 3.8 6.7 40 3.6 1 INTERMEDIARY LEAGUE TABLES 8.3 30 12.6 55.7 n KangaNews all-Australian dollar league table – which covers 48.7 48.3 46.6 39.5 40.2 42.4 all domestic syndicated deals, including sovereign issuance and VOLUME (A$BN) 20 36.4 26.1 30.4 the whole Kangaroo market but excludes self-led deals – ANZ 10 I 0 maintained its hold on the top lead-manager position for 2020. 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Just behind ANZ was UBS – which participated in almost all the AOFM’s syndicated deals throughout the year. SOURCE: KANGANEWS 4 JANUARY 2021

CHART 8. AUSTRALIAN MARKET TRUE CORPORATE ISSUANCE CHART 10. AUSTRALIAN MARKET TRIPLE-B, UNRATED AND SUBINVESTMENT-GRADE TRUE CORPORATE ISSUANCE H1 H2 Triple-B Subinvestment grade and unrated 25 12

0.1 20 10 1

15 12.6 8 1.5

6 11.5 10 8.1 0.6 1.4 1.2 8.9 9.7 7.8 7.1 5.5 6.4 4 2.9 7.1

VOLUME (A$BN) 5.6 4.3 1.9 5 VOLUME (A$BN) 2 4.6 0.8 0.8 7.9 2 4.2 3.9 4.6 4.2 4.7 4.7 4.6 4.3 5.4 4.5 2.5 2.3 2 4 1.4 0 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

SOURCE: KANGANEWS 4 JANUARY 2021 SOURCE: KANGANEWS 4 JANUARY 2021

CHART 9. AUSTRALIAN MARKET TRUE CORPORATE ISSUANCE, CHART 11. AUSTRALIAN DOLLAR SECURITISATION ISSUANCE 10-PLUS YEARS TENOR H1 H2 9 50 8 7.9 7 40 6 6.1 26.1 5 30 25.1 22.2 4 10.5 16.2 21.3 16.5 20 3 3.6 11.1 13.7

2 VOLUME (A$BN)

VOLUME (A$BN) 2.4 10 10.5 18.1 20.3 19 13.4 14.2 15.1 1 1.6 13.6 11.7 13 0.3 1 0.6 4.9 0 0.5 0.5 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

SOURCE: KANGANEWS 4 JANUARY 2021 SOURCE: KANGANEWS 4 JANUARY 2021

24|KANGANEWS FEB/MAR 2021 Commonwealth Bank of Australia (CBA), Westpac Institutional NZ) took second and third again, with UBS clinching fourth Bank and Citi took the next three places. ahead of Commonwealth Bank. The KangaNews league table for all domestic Australian dollar ANZ took back top position in the New Zealand domestic issuance – which excludes Kangaroo volume – contained an league table after being knocked off in 2019 for the first time since identical top five, while UBS and ANZ swapped positions in the 2014, with Westpac NZ winning out over BNZ for second. UBS local sovereign and semi-government league table. and J.P. Morgan took fourth and fifth place. ANZ also retained its National Australia Bank (NAB) maintained its top spot in position at the top of the Kauri league table. • the Australian dollar credit league table, which comprises local CHART 14. NEW ZEALAND MARKET financial-institution and corporate issuance, with ANZ a narrow SYNDICATED ISSUANCE BY ISSUER TYPE second followed closely by CBA and Westpac. NZDM Agency Financial institution Corporate In the Kangaroo league table, TD Securities wrested back first place from Nomura in 2020. Nomura finished second with NAB, 35 30 2.5 ANZ and RBC Capital Markets rounding out the top five. 1.4 NAB once again took out top spot in the KangaNews 25 5.2

Australian dollar securitisation league table, with more than 20 double the volume of Westpac in second place – A$7.6 billion 15 versus A$3.6 billion. CBA, ANZ and Standard Chartered 10 2.6 2.4 23 followed. 1.8 1.3 2.0 3.1 VOLUME (NZ$BN) 1.8 4.5 1.6 3.7 3.3 4.5 4.9 2.4 4.4 In New Zealand, ANZ retained top spot in the 2020 whole- 5 0.4 4.8 3.3 4.7 0.7 0.8 0.7 3.3 4.5 17.3 0.4 3.5 0.2 1.2 market league table, which includes sovereign syndications, all 0 1.7 2.5 2 1.5 2 2 other domestic bookbuilt supply and Kauri issuance. BNZ and 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Westpac Banking Corporation New Zealand Branch (Westpac SOURCE: KANGANEWS 4 JANUARY 2021

CHART 12. AUSTRALIAN DOLLAR SECURITISATION ISSUANCE CHART 15. KAURI ISSUANCE BY ISSUER TYPE H1 H2 Big-four bank Other bank Nonbank 7 100

4.6 6 3.7 7.5 9 7 1.2 1.6 0.9 80 10.3 21.1 5 2.3 3 23.5 1.4 19.3 60 12.6 26.2 4 14.5 17.5 15.9 11.8 6 3 5.1 1.5 40 4.7 4.9 18.3 1.2 (PER CENT) 13.6 4 7.1 2 3.8 3.5

VOLUME (NZ$BN) 1.1 20 10.3 9.4 10.5 12.5 4.2 1 1.1 8.8 1.6 1.9 3.2 7.2 5.9 7.1 1.2 PROPORTION OF ISSUANCE 3.9 0.7 0 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

SOURCE: KANGANEWS 4 JANUARY 2021 SOURCE: KANGANEWS 4 JANUARY 2021

CHART 13. AUSTRALIAN MARKET GSS BOND ISSUANCE CHART 16. NEW ZEALAND MARKET GSS BOND ISSUANCE (EXCLUDING SECURITISATION) BY ISSUER TYPE BY ISSUER TYPE

Semi-government Financial institution Corporate SSA Agency SSA Corporate 12,000 3,000

10,000 2,500 425

3,925 8,000 2,000 300 150 1,170 6,000 1,500 1,450 500 1,155 2,050 2,300 4,000 2,755 1,000 1,650 VOLUME (A$M)

945 VOLUME (NZ$M) 450 250 2,000 55 3,362 500 500 1,150 125 3,680 300 600 1,800 200 0 300 600 300 750 0 125 2014 2015 2016 2017 2018 2019 2020 2017 2018 2019 2020

SOURCE: KANGANEWS 4 JANUARY 2021 SOURCE: KANGANEWS 4 JANUARY 2021

25 ADAM VISE GROUP TREASURER AUSTRALIAN UNITY Q+A

AUSTRALIAN UNITY DEBUTS MCI FORMAT TO HELP IT EXPAND AND DELIVER ON PURPOSE Australian Unity issued Australia’s first-ever mutual capital instrument (MCI) on 24 December 2020, marking a new phase in funding and capital-management for issuers in the mutual sector. The A$120 million (US$93.9 million) perpetual security transaction nearly two years after enabling legislation passed in federal parliament. The deal launched in December last year initially seeking volume of A$105 million via arrangers Acacia Partners, Morgans and National Australia Bank. It offers a coupon of 5 per cent in a fully franked, retail-eligible format. The securities are classified as “preferred equity” in Australian Unity’s capital stack. Adam Vise, Australian Unity’s Melbourne-based group treasurer, discusses the impetus for and mechanics of a transaction that could be a game-changer for mutual entities.

hy did Australian Unity business that is focused on health, wealth undermining the mutual structure. The decide to move first in and care, the mutual structure has a very Australian parliament was united in this new market? long and strong market proposition. its support of the legislative change we This is a 180-year story. However, to deliver on expanding needed to allow this. There was a two- TheW idea of a mutual is an important the delivery of services and achieving our year process with a scoping study, led by part of our society – it is effectively purpose, Australian Unity has been very Greg Hammond, focusing on the ability a group of people sharing risk – and conscious of the value of having access of member-owned firms and mutuals to Australian Unity has been a mutual to expansionary capital. MCIs allow access capital. organisation for the past 180 years. mutuals like Australian Unity to retain Each mutual is unique and what Our corporate formula is working their status as a mutual entity while raising capital means for its constitutional well but the challenge has been that the raising permanent capital. mutual status is very complex – therefore formula does not allow for expansionary enabling legislation to allow mutuals to capital beyond retained earnings and What are the particular facets of raise capital without demutualising was debt. Our ability to scale and expand the MCI structure that deal with the required. The law changed early in 2019 the services we offer has previously been challenge of demutualisation risk for and by November 2019 several mutuals, subject to this. issuers? including Australian Unity, had changed It has taken 180 years to land on the The first and main element was a their constitutions to allow for MCIs to MCI formula in Australia. In the 1980s, legislative change that allowed us to be issued. some mutuals took a different approach: issue a share-like instrument that did The legislation is quite broad. Apart they demutualised and raised capital in not result in demutualisation. There was from some restrictions on voting rights ordinary equity. This had mixed results, an example of this in the UK, where and the dividends on MCIs having to be perhaps because it involved moving Nationwide Mutual Insurance Company noncumulative, it does not say what the from serving members to focusing on issued a similar instrument. instrument needs to look like – it just shareholders. What we needed was for the enables mutual organisations to issue it. We all know there are limitations government to back the mutual The MCI is technically a share, as this to a shareholder-led approach. For a sector’s ability to raise capital without was the most expedient way to introduce

26|KANGANEWS FEB/MAR 2021 27 Q+A

the reforms into the Corporations Act about a decade ago, it made a conscious Therefore, we knew it would be 2001. But the form of the instrument is decision to build a history of capital- most effective if we could speak to senior in fact quite unique. Each mutual can market behaviour that would increase investment officers in the funds. As a issue something a bit different to suit its its attractiveness to investors. I think result, we were able to have very fruitful needs. the trust we have built over this time discussions with industry funds and with was critical in being able to successfully a range of brokers. Speaking of the bespoke execute the MCI transaction. characteristics of MCIs, what are the In November 2019, the Business What was the investor response once specifics of the security Australian Council of Co-operatives and Mutuals the transaction was launched? Did Unity issued that made it work for the and several individual mutuals – demand come from any unexpected issuer? including Australian Unity, RACQ, areas and where did buyers fit it into Australian Unity’s MCI is a perpetual Credit Union Australia and Heritage their own portfolios? security. Capital holders are considered Bank – undertook a series of investor- Across my personal history in issuing our capital members and will receive education sessions to explain this new debt, equity and hybrids, this was the one vote at a general meeting, just like type of instrument to institutional most challenging transaction due to the other members do. However, they do investors and brokers. uncertainty about which investor class not get to vote on a demutualisation or Then, in June 2020, Australian would lead the transaction for such a a winding-up – because this is where Unity undertook a nondeal roadshow, novel instrument. divergence in interests may arise. this time virtually, further to introduce We knew it could be viewed as a This is the hardest element for Australian Unity, its purpose and fixed-interest security and also have people outside the mutual sector to its businesses to a broad range of support from investors that participate reconcile, but it ties back to what a investors. This enabled us to get a better in bank hybrid transactions. But we mutual really is – a group of people understanding of the kind of syndicate also knew it could be seen as a real asset getting together to arrange services that required as we did not have a complete because we have seen some industry

“Australian Unity’s MCI is a perpetual security. Capital holders are considered our capital members and will receive one vote at a general meeting, just like other members do. However, they do not get to vote on a demutualisation or a winding-up – because this is where divergence in interests may arise.”

involve the pooling of risk and capital to understanding of what the natural buyer funds participate in this type of deal. We support the provision of these services. base would be. also thought it could be of interest to It is democratic, stakeholder capitalism, On the back of this predeal process, traditional equity funds. where everyone gets one vote as a we appointed our syndicate and We started with a very broad list stakeholder rather than based on the conducted a number of confidential then went through the comprehensive amount of capital they provide. deal roadshows as we approached the education process. In the end, some We now have voting members who transaction launch. We spoke with a lot fixed-interest credit accounts got close are service members, employee members of institutions on a confidential basis and but it did not quite fit their mandates. and capital members. They each get one this enabled us to build solid cornerstone The old-school hybrid accounts were vote, so it is stakeholder capitalism in a support. very supportive as it is reminiscent of pure form – which works to balance the We were particularly focused on the perpetual hybrid-capital instruments interests of the various parties. seeking support from industry super they have invested in historically. funds. The instrument is novel and we Several brokers and industry super funds Bringing a new product to market were therefore conscious that it may loved the structure as they saw it as a always comes with challenges. How not fit neatly into an existing asset class. low-volatility, long-duration asset with much deal marketing was necessary We knew there would be issues with attractive yield. to convey the intricacies of the MCI specialist asset managers around whether One interesting investor was structure and get investors on board? an MCI would fit narrower investment HESTA, which sought to take about 20 It has been a long year and a half. When mandates and be considered under an per cent of the broker-firm allocation Australian Unity began issuing bonds, equity or a fixed-interest allocation. through its social-impact investment

26|KANGANEWS FEB/MAR 2021 27 Q+A

hits a magic cost-of-capital number for other mutual banks to consider it. We “Across my personal history in issuing debt, also believe many other types of mutuals equity and hybrids, this was the most challenging could be thinking about issuing MCIs transaction due to the uncertainty about which and that MCIs are an attractive source of investor class would lead the transaction for such capital. a novel instrument.” KangaNews spoke with Greg Hammond – who originally trust managed by Social Ventures the changes required from Basel II and proposed the MCI security – around Australia. Basel III over many years to recapitalise a year ago and he mentioned that They undertook a thorough process, the banking system, and Morgans is a investors could see MCIs as a good reflecting the novel characteristics of the traditional stockbroker that understands environmental, social and governance security. In future, I imagine that this equity but is also an expert on bank (ESG)-style investment. Was this type type of investment will become easier as hybrids and fixed interest for the mum- of demand evident in Australian the larger industry super funds start to and-dad retail market. Unity’s deal? manage underlying assets directly. This We raised A$120 million in total It was. We did not seek to wrap the should allow the MCI to fit naturally under the offer, but the labour of the deal as a social or impact investment in their portfolios on a mean-return- syndicate and the treasury team was but Australian Unity has an established correlation basis. unlike anything I have experienced measurement framework based on before. wellbeing. We believe wellbeing is the Do you expect it to become easier best measure for determining social for investors if there is greater take Do you expect to see more impact and that the social component up of MCIs from mutual banks and institutions bring MCIs to the market? of ESG is otherwise not well measured nonbank institutions? Yes. One of the things we did during at all. Inevitably. Once there is a history of the cornerstone process was to speak to We were having this conversation asset-class behaviour and investors can other mutuals about their willingness with HESTA 18 months ago. It valued see how it performs, it is easier for them to support the transaction – and this our wellbeing model greatly and we to assess the risk-return profile. When support was incredibly positive. strongly believe this provided further no-one knows how an instrument Many mutuals include funds- impetus for HESTA’s participation. will behave or the market participants management businesses and they were Furthermore, many of our employees that will gather around it, issuers able to look at the deal from a fiduciary are members of HESTA and a lot of need to spend a lot of time discussing investment perspective as well as the these are care workers, for whom we have with investors what the market might development of a market that should ambitious targets around offering full- look like. This is why it was such a be advantageous to them. A number time employment. challenging transaction, but it has been a of these investors participated in the A big part of HESTA’s participation very rewarding process to be a part of. transaction, which indicates the value was that this becomes a major impact- The syndicate we put together they place on developing the market for style equity transaction. This MCI included people that I have worked MCIs. issue will help us to achieve our with for 20 years, including on unique For mutual banks, the cost of MCI purpose, which is aligned to HESTA’s transactions. Acacia Partners works with capital compared with organic capital membership achieving full-time very novel issues all the time, National may initially be a challenge. It will be employment for care workers and to Australia Bank worked through all of interesting to see whether our transaction Australia having a better model for care provision. While the deal is not accredited as a “We did not seek to wrap the deal as a social or social or impact investment, I think the impact investment but Australian Unity has an reality of Australian Unity’s purpose is established measurement framework based far more important and this is a great example of capital flowing to a business on wellbeing. We believe wellbeing is the best to help it achieve a purpose. In this case, measure for determining social impact and that the purpose is social benefit. Investors can the social component of ESG is otherwise not assess this on its merit rather than needing well measured at all.” accreditation, but they will continue to hold us to account regardless. •

28|KANGANEWS FEB/MAR 2021 [COVER STORY]

AUSTRALIAN CREDIT CHANGES SHAPE

29 COVER STORY

The Australian dollar credit market It is therefore somewhat surprising to find that fund managers say the market ructions of the last year have not drastically altered has been reshaped in the wake of their credit strategies. COVID-19, largely as a consequence STATE OF PLAY of Reserve Bank of Australia market he RBA’s bond buying, particularly since it added intervention. A supply-demand pure QE to its YCC and market-function mandates in imbalance is evident and could T November 2020, has created a technical tailwind for high-grade bonds. potentially bring risk, but fund Tim van Klaveren, head of Australian fixed-income portfolio managers express a degree of comfort management at UBS Asset Management in Sydney, says RBA intervention is at the margin forcing investors out along the yield on the basis that their approach curve and down the credit spectrum. “The margin for semi- to allocation has not yet needed to government and SSAs [supranationals, sovereigns and agencies] over ACGBs [Australian Commonwealth government bonds] in change dramatically. any shorter-dated line is razor thin. For semi-government bonds, you need to go beyond 10 years to get a pickup.” RBA buying has aligned with the gradual reduction to the BY MATT ZAUNMAYR committed liquidity facility (CLF) available to bank asset-liability management (ALM) books, adds Tim Hext, portfolio manager at Pendal in Sydney. With more government and semi-government bonds – Australia’s only qualifying high-quality liquid assets – on issue, banks are expected by regulators to hold more of these securities for their ALM needs. Hext says this growth has virtually matched the increase in semi-government funding requirement. More issuance does not necessarily mean more free float of bonds, however. Hext says the RBA’s extension of QE, announced in February, means it will likely be buying more government bonds from the market over the next eight months than the government will supply. For investors traditionally weighted toward the high-grade sector, this environment has provided opportunities. Nikko Asset he Reserve Bank of Australia (RBA) implemented Management’s Sydney-based head of Australian fixed income, the first phase of its emergency response to the Darren Langer, tells KangaNews there are more opportunities COVID-19 crisis in March last year. Its interventions for fund managers to find relative value in the semi-government have directly influenced the whole Australian dollar market now than has been the case for many years. fixed-income market. Government-bond purchases – whether for yield-curve T CHART 1. AUSTRALIAN DOLLAR CREDIT ISSUANCE INC. SECURITISATION control (YCC), market function or QE purposes – have supported a record-smashing level of sovereign issuance, while Bank credit Nonbank and corporate Credit as proportion of (LHS) credit (LHS) total volume* (RHS) on the other hand the term funding facility (TFF) has essentially eliminated the primary source of Australian dollar credit: senior- 140 70 unsecured supply from domestically domiciled banks (see p22). 120 60 41.6 37 The headline result has been a decline in aggregate credit 100 28.9 50

supply in the Australian dollar market and, factoring in the 18 18.9 sovereign-sector issuance boom, an even bigger fall in the credit 80 42.1 40 proportion of total issuance (see chart 1). 60 30

The raw numbers do not tell the whole story of a profoundly VOLUME (A$BN) 84.3 86.1 85.9 40 76.8 79.3 20 reshaped market. For example, the volume of government and 59.5 semi-government bonds taken out of the market by the RBA – 20 10 0 0 A$134.5 billion (US$105.2 billion) by 19 February 2021 – is PROPORTION OF MARKET (PER CENT) not reflected in the figures, nor are moves made by investors in 2015 2016 2017 2018 2019 2020 response to the all-time-low rates environment, for instance out in * Volume includes AOFM tenders but not other tendered volume. tenor or down the credit spectrum. SOURCE: AUSTRALIAN OFFICE OF FINANCIAL MANAGEMENT, KANGANEWS 19 FEBRUARY 2021

30|KANGANEWS FEB/MAR 2021 “We expect the scarcity of bank paper to last into 2022. However, markets are forward-looking and if credit growth begins to pick up it is possible that banks will be back in the market, particularly given where credit spreads are at the moment.” TIM HEXT PENDAL

If banks and the RBA are structurally set to absorb There are some preliminary signs that senior-unsecured incremental sovereign and semi-government supply – especially as supply may return to some extent in 2021 – perhaps to a greater these issuers’ funding needs start to subside once more – it would degree than was expected even at the end of 2020 – as surging seem inevitable that the skinny state of credit supply will pose a housing demand and household savings drawdowns point to an challenge to local investors. economic rebound and bank-credit growth. The latter rocketed Demand for credit deals has indeed been very strong since the to nearly 20 per cent in early 2021 from 6 per cent in the June return of primary issuance in the second half of 2020, particularly quarter last year. The RBA also confirmed in February that the so in the deals that have come so far in 2021. TFF would end as planned on 30 June. Columbus Capital’s residential mortgage-backed securities The outlook remains unclear, though. For one thing, bank (RMBS) deal on 10 February, Suncorp-Metway’s senior- issuers themselves have repeatedly emphasised that they do not unsecured transaction on 16 February and Charter Hall Long expect their wholesale funding tasks to rebound to anything like WALE REIT’s senior-unsecured deal on 22 February all printed the pre-pandemic level even when the TFF is no longer available. with tight margins – the latter even as the 10-year ACGB A quicker-than-expected credit-growth rebound could change this widened by around 15 basis points on the day. picture but investors say they are not working on the basis that the The trend for well-bid credit deals looks set to continue as banks will be back in size in the short-to-medium term. long as the RBA maintains its QE programme. “If the RBA buys Hext says: “We expect the scarcity of bank paper to last another A$100 billion of bonds this needs to be recirculated into 2022. However, markets are forward-looking and if credit somewhere. This is pushing investors into credit or into equities growth begins to pick up it is possible that banks will be back if they have multiasset funds. Corporate and financial-institution in the market, particularly given where credit spreads are at the borrowers will be the beneficiaries,” explains van Klaveren. moment.” With bank issuance likely to remain subdued in the near CREDIT CONUNDRUM term, adding credit to portfolios may be difficult. Corporate eallocating investable funds away from the safe haven and nonbank issuance rose in 2020, but in nothing like of government debt and into higher-yielding credit sufficient volume to offset the absence of senior bank supply. In R instruments is an intended consequence of any central- fact, nonbank credit issuance arguably outstripped reasonable bank asset-purchase programme. The specifics of Australian QE expectations. Cash-rich, asset-hungry banks are competing – particularly the existence of the TFF – potentially cause some hard with the capital market for new supply in an economic problems for investors, though. environment that was far from supportive of widespread capex. The TFF and a surge in bank deposits sparked by Instead, after a period in which borrowers turned to their COVID-19 have eliminated most banks’ needs for senior- banks first to shore up liquidity against the incoming crisis, the unsecured funding – traditionally the largest source of credit in second half of 2020 was busy in corporate and nonbank funding. the Australian dollar market. Suncorp’s February deal was just In the Australian dollar corporate market, busy years the third benchmark in the format from an Australian domiciled are often followed by leaner ones as many borrowers front- bank since February 2020. load refinancing to take advantage of benign conditions. In

“For most investors, any change in currency allocation requires approval and documentation change. It is probably easier for most to remain in Australian dollars and look at different asset classes.” PAULINE CHRYSTAL KAPSTREAM CAPITAL

31 COVER STORY

EYES ON INFLATION Central banks, including the Reserve Bank of Australia, have reinforced commitments to QE and ultra-low official rates for the foreseeable future. However, in 2021 theoretical discussions about inflation risk have turned into somewhat louder rumblings (see p18), leading investors at least to consider what central-bank policy tapering might herald.

Australian Commonwealth sooner than expected at the For inflation to shock an It is clear, though, that volatility government bond (ACGB) start of 2021. economy, surging demand is likely to be an ongoing or and other government must catch supply by surprise. at least a recurring feature bond yields have inexorably Australian major-bank Hext says the last time this of markets as central banks marched higher since the strategists are pouring occurred in Australia was confront the paradox of beginning of 2021 – the cold water on the idea that 15 years ago, when mining maintaining extremely 10-year by around 70 basis inflation could rudely outstrip investment began to boom loose monetary policy while points from early January to expectations and force the after a long period of public economies rebound strongly. late February. Furthermore, as hands of central banks (see and private underinvestment. of late February the overnight p47). The environment is very Pauline Chrystal, portfolio indexed-swap curve was different in 2021. manager at Kapstream Capital, predicting a cash-rate increase Fund managers seem to agree. says the environment is to 0.25 per cent in late 2022. Tim Hext, portfolio manager Another key component of leading to caution. “We are at Pendal, cites 2013 market investor confidence is that seeing tight valuations in an There are multiple drivers, expectations that the US QE has not been successfully economy that is still reliant including the exposure of long- Federal Reserve would hike exited anywhere it has been on fiscal stimulus and where end rates to global central- several times as comparable. tried. Once deployed, the markets are reliant on QE. We bank policy and positive The Fed was unable to hike at temptation to keep using QE are protecting the portfolio COVID-19 vaccine news since all in 2013. as a market tamer is strong – and building up cash instead of the end of 2020 putting and so far this has not led to chasing yield. Strong technicals a tailwind behind global “It is fair enough that some runaway inflation. mean issuers are able to go for economic recovery. in the market are concerned longer tenors, but this brings about inflation but it is hard Chris Rands, portfolio a lot of risk if another sell-off One hypothesis gaining to see the conditions where manager, fixed income at event occurs.” momentum is that the inflation runs sustainably Nikko Asset Management in quantum of stimulus injected above the RBA target. It is Sydney, says while the major Rands adds that with credit into the global system over probably correct that inflation central banks maintain their spreads tight and curves the last 12 months, combined creeps higher in the near term, policies, the RBA likely has steep it is a challenge to work with reopening of economies, possibly briefly hitting 2.5 per little choice but to join them. out which allocations make could cause an inflation shock cent underlying as commodity “As long as monetary-policy most sense. But he also says and possibly lead to central prices rise. It is just hard to conditions remain easy, we signals are emerging that banks raising interest rates see it sustainably at that level,” are comfortable with the rates could indicate how various or tapering QE programmes Hext says. environment,” he says. sectors will perform from here.

securitisation, the larger, programmatic nonbanks will need to pricing marks and general functionality. Perhaps of even more fund, but the busy finish to 2020 has likely contributed to a fundamental concern is the chance that substantial volume of slow start in 2021. Furthermore, competition for mortgages Australian dollar investment funds will migrate offshore if it intensified during 2020, potentially putting pressure on cannot find sufficient supply of suitable assets at home. nonbanks’ origination growth. However, fund managers say they are comfortable on both All this means the theme of demand outstripping supply in issues – so far. Langer says a primary-market focus is nothing new the credit sector is likely to continue. Pauline Chrystal, portfolio for the Australian market, for instance. manager at Kapstream Capital in Sydney, tells KangaNews the Meanwhile, foreign-currency allocation is certainly an option dynamic is clearly evident in the secondary market. “Secondary for fund managers but not one many expect to take up widely liquidity is very good when we are selling but not when we are due to the process of approvals typically required. “For most buying. We have not bought much in the secondary market – we investors, any change in currency allocation requires approval and are waiting for primary supply.” documentation change. It is probably easier for most to remain in Australian dollars and look at different asset classes,” Chrystal tells RISKY BUSINESS KangaNews. However, she adds that Kapstream itself expects to he potential risks for the Australian credit market are use a greater proportion of its funds internationally. twofold. First is the impact of an increasingly primary- Van Klaveren points out that offshore credit markets are not T market, buy-and-hold environment on reliability of necessarily a better option at this point in the cycle, despite their

32|KANGANEWS FEB/MAR 2021 “We are looking at single-name opportunities. These are typically within sectors that were more affected by the COVID-19 crisis and have yet to fully recover but should do as the economy picks up again.” ADRIAN DAVID MACQUARIE INVESTMENT MANAGEMENT

depth. “We are less keen on offshore investment-grade credit second half of 2020. The gap may be closing. The 10 February because of the longer duration of these indices in a rising interest- deal from Columbus printed at 85 basis points over one-month rate environment. US investment-grade index duration is around bank bills, significantly tighter than the equivalent tranche in nine years – much longer than the Australian credit market.” Resimac’s 4 December deal, at 120 basis points over bills. Asset For now, fund managers appear more concerned with managers say there is still value in securitisation despite a degree of watching the near- and medium-term risks of inflation, interest correction in 2021, though. rates and QE tapering. To put this in perspective, on 22 February UBS Australia launched a five-year senior-unsecured deal with indicative price POSITIONS NEW AND OLD guidance of 55 basis points over swap and BNP Paribas began espite the challenging supply environment, record tight marketing its own senior nonpreferred transaction with a 5.5-year credit spreads and a still-uncertain economic backdrop, call date at 100-105 basis points area. On the same day, major- D fund managers tell KangaNews they are not applying bank senior bonds were marked at around 38 basis points over radical changes to their allocation strategies. Chrystal points out swap on Yieldbroker ratesheets. that tight credit spreads is not a new phenomenon. The market Some investors have also diffused into other parts of the was having a similar discussion at the start of 2020, and all that financial-institution market. For example, Hext says it has been a has really changed is that valuations are now even tighter and happy coincidence for banks that, despite the suboptimal macro the macro backdrop weaker. circumstances, their senior-funding needs have evaporated while Langer adds that the composition of the Australian dollar they are taking on a much-increased tier-two task. bond index has been trending toward a very heavy weighting of “Tier-two bank paper has become almost akin to what the government bonds over credit for several years. He says Nikko’s senior bank market was before COVID-19. It has the greatest weighting to credit has remained consistent and it has not had volume of new supply and secondary turnover, because investors problems gaining exposure, though he acknowledges that the that previously would not have looked at it are now forced to,” situation may be more challenging for larger accounts. Hext explains. Even some of Australia’s biggest credit managers say the Meanwhile, Chrystal says Kapstream’s strategy has involved market is still functional, though. Adrian David, division director cycling through the various parts of the financial-institution at Macquarie Investment Management in Sydney, says his firm market, including to regional banks from major banks, and then is still able to be selective on a sector and name basis. “We are into international bank senior and subordinated paper where a looking at single-name opportunities. These are typically within substantial pickup to major-bank paper and somewhat frequent sectors that were more affected by the COVID-19 crisis and have supply are still available. yet to fully recover but should do as the economy picks up again,” Chrystal says the result of Kapstream’s strategy is that its he explains. overall allocation to financial institutions is lower but not Several investors name securitisation as a sector that retains drastically so, at around 30 per cent now compared with 40 per value. Senior bank and nonbank RMBS margins lagged cent a year ago. The rest is invested in different currencies and significantly behind the tightening of other credit spreads in the asset classes, including corporate paper and RMBS, she adds. •

“We are less keen on offshore investment-grade credit because of the longer duration of these indices in a rising interest-rate environment. US investment-grade index duration is around nine years – much longer than the Australian credit market.” TIM VAN KLAVEREN UBS ASSET MANAGEMENT

33 COPUBLISHED ROUNDTABLE

USPP SUPPORT STANDS UP DESPITE QUIETER AUSTRALASIAN YEAR he US private placement (USPP) market has long been a happy home for Australasian issuers. The annual USPP roundtable hosted by T KangaNews and MUFG found that lower issuance in 2020 had nothing to do with lack of support from the investor base and that hopes remain high for future primary supply. USPP investors also share perspectives on the rapid growth in significance of environmental, social and governance (ESG) analysis in their market.

PARTICIPANTS n Peter Brooks Director, Private Placements MUFG n Matthew Carr Managing Director and Head of DCM, Australia and New Zealand MUFG n Diane Crossley Treasurer VICTORIA POWER NETWORKS n Michael Jones Senior Vice President PRICOA PRIVATE CAPITAL n Violeta Kelly Director, DCM and ESG Finance MUFG n Karl Spaeth Vice President, Delaware Investments MACQUARIE INVESTMENT MANAGEMENT n Patrick Manseau Managing Director, Global Infrastructure Debt BARINGS n Michael Momdjian General Manager, Treasury, Tax and Insurance SYDNEY AIRPORT CORPORATION n Yeou-Herng Shaw Assistant Treasurer TRANSURBAN

MODERATOR n Laurence Davison Head of Content and Editor KANGANEWS

Davison We will start with a review of the key The lack of volume from foreign borrowers was made up themes in the USPP market during 2020. for by a pick-up in some domestic industries. The energy sector n BROOKS The USPP market showed great resilience in 2020, was particularly active for corporate and project finance in considering the majority of market participants spent most of renewables, and oil and gas. The REIT sector was also busy. the year working from home. Volume for the year was roughly n JONES We observed a significant decline in Australian and flat, at around US$100 billion. But a look under the hood New Zealand issuers going to the USPP market – issuance shows a number of unexpected themes amid the COVID-19 volume was down by 40-50 per cent. Many US issuers went to backdrop. the market for liquidity but this simply was not the case for a Credit spreads started the year in the low-100s basis points lot of Australian market participants. over US Treasuries for the triple-B index. In March and April, n BROOKS This is exactly right. Australian issuers have they reached as high as 300-400 basis points over Treasuries historically made up anywhere from 10-13 per cent of total with elevated new-issue concessions. Since that period of USPP volume. Last year, it was 4-5 per cent with total volume volatility, we saw consistent spread compression throughout the of US$4-5 billion. A lot of the difference was made up by remainder of the year and the triple-B index ended 2020 close issuance into the Australian and New Zealand domestic to where it opened in January. markets. It is worth noting that the USPP market never closed, n CARR For Australasian corporate issuers, you can quite neatly although at these high spread levels there was a short-term pull divide 2020 into halves – and then the first half in half again. back from issuers. In the first quarter of last year, as demonstrated by the Last year saw less foreign-borrower issuance, at around 35 Sydney Airport and Vector USPP transactions, we saw a per cent of total volume compared with the average of around continuation of what had been happening in the back end 45 per cent. This was driven by various factors but certainly of 2019. For Australasian borrowers, particularly in the in part was due to local public capital markets in the UK and infrastructure sector, the USPP market was delivering globally Australia performing well compared with the US. competitive outcomes.

34|KANGANEWS FEB/MAR 2021 “When there is a sharp move lower in US Treasury yield, the USPP market typically sees a slight pullback in demand from investors or a short-term increase in new-issue concessions. These elevated new-issue concessions are usually short-lived as investors quickly become underinvested in the asset class.”

PETER BROOKS MUFG

With the onset of COVID-19, there was a backup in n SPAETH Overall volume was shaky in the first half of the spreads and – certainly from this part of the world – a pause year but the second half was very robust. According to some on new USPP issuance. The local market was on hold as well, sources, 2020 volume exceeded 2019 volume by a little in the which lasted through the second quarter. USPP market. We did see corporates securing liquidity, particularly larger The idea that the USPP market is always open largely held borrowers. When there was a lot of market uncertainty these intact. We did a lot of deals during March, April, and May. companies went to the big public offshore markets for liquidity. Obviously, this was on a selective basis. But a lot of issuers They knew it would be there, albeit at wide spreads. were looking for liquidity, short-term or otherwise, to shore The conversation in Q2 as far as Australasian borrowers up their positions, or the perception of their positions, as we were concerned was really about securing liquidity when needed entered the COVID-19 lockdown and all the uncertainty that rather than the price of credit. A number of issuers in certain went with it. sectors were also looking at waivers and amendments. One of the sectors I cover is utilities. There was a In the second half of the year, the dominant theme was very tremendous sell off in public credit and equities so a lot of much on the home front. Once the Australian dollar capital names were doing deals not necessarily because they needed the market had shown signs of repair, we saw Australian corporates money but just to shore things up. favouring the domestic market on the basis of the pricing and It was not always a question of pricing although the tenor outcomes it was delivering. markedly wider spread levels of this period were mostly offset This is borne out by the statistics. We track Australasian by extremely low US Treasury yield. As a result, lots of deals we corporate global issuance on a US dollar equivalent basis and we saw had attractive spreads but the all-in coupon was not much saw around US$3.9 billion of USPP volume in 2020 compared more than what issuers had been paying over the preceding with US$7.9 billion in 2019. three years. The market absolutely was open, nonetheless. I do not want to oversimplify the message, but issuance One noteworthy trend is that we saw several issuers in the in the Australian dollar market in 2020 was US$10.5 billion USPP market that broadened the reach of investors. Some equivalent versus US$6.5 billion equivalent in 2019. I am not issuers that had only done smaller deals went wider and in this trying to suggest there is a one-for-one substitution, but the way we gained access to some new names. numbers bear out that issuers that may typically have used Another trend is that we saw smaller companies that had the USPP market pivoted and pointed in the direction of the not issued in the USPP market before deciding this would be a home market. good time to widen their group of creditors. These were coming from within the US, in our experience. Davison How do investors view USPP market n JONES There was a big divergence in volume between the US performance? In Australia, we tend to regard and other international USPP markets. I believe it was one of USPP as a market that never closes, but the better years for domestic USPP issuance. There did not obviously there were some challenging times in seem to be the same amount of urgency to secure liquidity from Q2 2020. How did it play out? Australian and New Zealand companies.

“The USPP market is never shut – it was just a pricing call for us. Traditionally it has been a very competitive market and last year was the first time that the Australian dollar and euro markets were both well inside USPP.”

DIANE CROSSLEY VICTORIA POWER NETWORKS

35 COPUBLISHED ROUNDTABLE

AMENDMENTS AND CONSENT IN 2020 The events of 2020 hammered revenue in a clutch of corporate sectors. The US private placement (USPP) market, with its traditionally strong covenant structure, saw significant flow of requests for amendments as a result. Market users say the market was able to respond quickly and sympathetically with its typically long-term eye. DAVISON Last year was a USPP amendment process. n JONES It was definitely time- Issuers come to our market very busy one for issuers These processes generally consuming. But I think one of because we are long-term renegotiating debt facilities, went smoothly, with investors the benefits of the USPP market relationship-oriented investors especially with bank acting in good faith and is the relatively small universe and we have an understanding lenders, to secure liquidity understanding that COVID- of investors. Having a group of their businesses. As a group, in the face of economic 19-related credit implications of investors an issuer can stay we recognise that these are shutdowns. USPP is the were out of issuers’ control. in close contact with can drive the types of opportunities for most ‘bank-like’ debt capital the amendment process. I which we have to step up and market – so how significant Looking back through April, May think this is critical and helpful demonstrate our support. was the flow of covenant and June, we saw a significant for achieving outcomes in waiver requests especially number of amendment and a timely manner and in a DAVISON Was it reasonably from March into the second waiver processes come through way that suits the issuer. easy to achieve unanimity quarter? How receptive to the market. This corresponded across investor groups? Did renegotiation requests was with a slowdown of issuance as There was a significant it feel like the market was the USPP investor base? investors worked through their uptick in the level of activity at consensus on appropriate credit-committee processes. during 2020 but I think this is courses of action? n BROOKS MUFG represented While the process was time- something the USPP market several of its Australasia-based consuming for investors, it was prepared for given its n JONES There are many clients during this period, was comparable to what was experience through prior institutions and of course some helping them through the happening in the bank market. cycles. It is a two-way street. of them have different views

“ISSUERS COME TO OUR MARKET BECAUSE WE ARE LONG- TERM RELATIONSHIP-ORIENTED INVESTORS AND WE HAVE AN UNDERSTANDING OF THEIR BUSINESSES. AS A GROUP, WE RECOGNISE THAT THESE ARE THE TYPES OF OPPORTUNITIES FOR WHICH WE HAVE TO STEP UP AND DEMONSTRATE OUR SUPPORT.”

MICHAEL JONES PRICOA PRIVATE CAPITAL

I think this can be partially attributed to the government for issuance during 2020 – the focus on liquidity and Reserve Bank of Australia stepping in to ensure banks – have any impact on tenor? had good access to liquidity, which they then offered to their n JONES A lot of issuers were looking for shorter term, of 5-7 institutional borrowers. There seemed to be a general trend of years, simply because of where pricing was. We would have borrowers getting shorter-term revolving facilities to tide them liked to have gone longer but there was a tendency for shorter over. In the US, there was more of a tendency to issue into the tenor given where spreads were at the time. USPP market opportunistically given the experience borrowers had during the global financial crisis. Davison The other big volatility event of 2020 n MANSEAU One thing I think is worth noting is that we was the US election. What impact did this have were about flat, year-on-year, in commitment volume but on the USPP market? our credit quality went up about one rating notch. We went n MANSEAU The US election was more of a headline risk in toward A- from BBB+ credit on average as a portfolio – and it 2020. I focus on infrastructure and every four years I’m asked to takes a lot of credit-quality improvement to move the needle opine on the results of the election on infrastructure-investment when we are investing multiple billions each year. I think that opportunities. In this election cycle there was a lot of focus on is a result of it being easier for higher-quality credits to access the potential effect of the “green new deal”. the market in 2020. However, at the end of the day, federal policy in the US is very limited in its near-term effect on capital decisions and Davison The USPP market traditionally offers investment opportunities in infrastructure. Renewable-energy duration out to 20-30 years. Did the motivation investing occurred under the Trump administration and will

36|KANGANEWS FEB/MAR 2021 RELATIVE APPEAL and motivations. It takes some best interest of running their time – and this is why we day-to-day operations, which sometimes have a steering is at the end of the day what Davison We have heard that economics last committee to help guide and is best for them and for us. year favoured the Australian domestic market, figure out the best solution which has not always been the case. Is this that balances the needs Certainly from my experience, a structural change or will relative pricing of investors and issuers. every single company that approached us for some type between markets continue to fluctuate? DAVISON How did investors of a waiver broadcast it ahead n MOMDJIAN Relative pricing between the USPP and domestic draw the line between of time and modifications to market has fluctuated and always will do so over time giving issuers the liquidity the original ask were generally depending on outright spreads, the basis swap, swap costs and support they needed in the offered up to make investors – more generally – differences in investors’ understanding of near term and giving up happy through the process. the covenant protections By and large, it was a positive credit, particularly in the current environment. investors have worked hard experience. I do not think we As a large and frequent corporate borrower, execution risk over many years to secure? gave up anything over the in the domestic market is no longer an area of concern for us. longer term – and I do not We are now able to issue sizeable bonds at attractive tenor of n SPAETH We tried to get think we were being asked to. ahead of this by being 10 years or perhaps even longer. However, better pricing and proactive. We identified DAVISON How significant access to ultra-long tenor has actually seen us further expand companies and sectors was the need across the our presence in the USPP market. that might experience Australasian borrower We receive indicative pricing feedback from more than 15 dislocation. I went through complex to go into a number of these and, amendment processes – banks on a monthly basis and this has shown elevated domestic by and large, although not and how challenging was it pricing relative to offshore markets throughout 2020 and into all investors agreed they to get the right outcomes? 2021. It is worth noting that this pricing dynamic may vary by were very constructive. sector, particularly as we have seen a number of other corporates n CARR From the visibility choosing to issue in the domestic market. In my opinion, we did not we had across corporate n experience a whittling Australasia, it was not a CROSSLEY We started January 2020 with a very different down of our protections. I widespread requirement. It strategy for what we thought we would do in individual do not think we gave away was quite focused on certain markets. For Wellington Electricity, we were poised to do a anything – because this was sectors, and even then only USPP transaction and then the world blew up – all of a sudden a temporary event. The goal certain issuers within those was to give issuers a runway sectors. My observation we went from one swapped-back level to another that was where they could get through of the process is similar to nearly 100 basis points wider. this period without being what the investors have We needed to pivot so we turned to the bank debt market affected by things that might outlined – it was entirely – putting in short-term funding as a bridge. We were hoping it not be necessary, or in the pragmatic, to put it succinctly. would be a temporary blip but obviously it lasted a lot longer. Unfortunately, we could not come back to the USPP market last year for Wellington Electricity, which ended up continue under the Biden administration – even without a being termed out in short-tenor bank debt. We are probably green new deal. only now getting back toward USPP levels that we would have The more relevant policy driver this year is an incredible liked last year. But we had to put other funding in place, so that focus from our clients, as well as borrowers, on ESG door has closed for the moment. [environmental, social and governance] issues. It was talked However, as has been mentioned, the USPP market is about as a focus in the past, but there was a real shift in client never shut – it was just a pricing call for us. We still love interest, demand and investment decision-making beginning on the USPP market and its potential terms, such as delayed 1 January this year. This is more of a policy phenomenon – it is settlement, and we also appreciate the investors. Traditionally somewhat political but it is not tied to the US election. it has been a very competitive market and last year was the first

“Maybe we have called it something else in the past, but we are very much a bottom-up shop – and concepts of ESG and social responsibility have always been there. This said, we are now honing how we talk about it and it is becoming more important to the investment process.”

KARL SPAETH MACQUARIE INVESTMENT MANAGEMENT

37 COPUBLISHED ROUNDTABLE

“Each market has its own sweet spot. Perhaps at the slightly shorter end of the curve, the Australian dollar market is inside the USPP in pricing. But the USPP market will always offer tenor, which is a unique proposition.”

YEOU-HERNG SHAW TRANSURBAN

time that the Australian dollar and euro markets were both demand from investors or a short-term increase in new-issue well inside USPP. concessions. Minimum coupons were also a big part of the We were pretty light on funding requirements for VPN discussion in May and June last year, especially given US [Victoria Power Networks] and UED [United Energy Treasury yield stayed at an all-time low even when spreads Distribution]. For VPN it was a similar story to Wellington declined significantly from the peak. These elevated new-issue Electricity: we did some bridge financing just to stop the gap concessions are usually short-lived as investors quickly become and increase liquidity. underinvested in the asset class and the competitive efficiency of At the back end of the year, private placements in Australian the market returns. dollars were very attractive, assisted by demand from Asia. This is what we saw throughout the second half of 2020 Pricing was probably 50 basis points inside the swapped back and certainly in the first two months of 2021. New-issue level USPP was showing at the time. The update I am getting concessions were slightly elevated in the second half of 2020 now suggest spreads in the USPP market have started to tighten but have now compressed to a more normal level of 10-20 basis and catch up. points over US dollar public comparables. n SHAW My experience of pricing during 2020 was similar. The n SPAETH There were definitely conversations about minimum Australian market has become a lot more attractive in recent coupons in late February and early March 2020. At that point months. But we will need to see whether this shift is temporary US Treasury spreads had tightened but there had not yet or structural. been much market dislocation. This abated rapidly as several This is a good dynamic for issuers as it provides the benefit large public corporate issuers came to the market with very of an additional market to consider. This is not to say the substantial new-issue concessions. USPP market has gone away – I think each market has its There have been conversations around coupons in periods own sweet spot. The Australian dollar market is perhaps inside of temporary disruption but I agree that generally, in my USPP in pricing at the slightly shorter end of the curve. But experience, they have not lasted long. the USPP market will always offer tenor, which is a unique proposition. ESG TO THE FORE

Davison On pricing, all things being equal Davison Patrick Manseau mentioned earlier the Australian major banks being absent that he has noticed a profound change in from US funding markets should make the engagement with ESG in the USPP market. cross-currency basis swap more favourable Has there been a big uptick in the USPP for Australian dollar funders going to the market’s engagement with green, social and USPP market. But this does not seem to have sustainability bonds or is it more about ESG been a game changer in 2020. What factors themes more generally? counterbalanced a favourable basis? n KELLY COVID-19 has had a transformational impact on ESG n CARR You are absolutely right that, on paper, a narrower basis factors across the board. For example, the ESG ETF index is swap should be positive for the prospects of USPP issuance by outperforming the S&P 500 index by 6 per cent. To be sure, Australasian issuers. This was borne out through the second half ESG factors will play a critical role in rebuilding the post- of 2020, when the basis was at a 2-3 year low, by the pricing COVID global economy. relativities of the euro and US dollar public markets. The way in which the fixed-income community has The overarching factor for the USPP market, though, responded varies around the world. We all know ESG-labelling was the low-yield environment and the impact this had on on debt products has been driven by the European market and minimum yield. It meant outright pricing made the USPP has been influencing other markets around the world. It is now market less attractive notwithstanding a narrow basis swap. garnering a lot of focus in Australia. n BROOKS When there is a sharp move lower in US Treasury It will be very interesting to see how the USPP market yields, the USPP market typically sees a slight pullback in responds. As Patrick Manseau says, the ESG agenda was

38|KANGANEWS FEB/MAR 2021 “US investors tend to look through cycles. This means they can potentially understand a transition story more clearly than domestic investors – they are actually taking a view on transition over its full time horizon.”

VIOLETA KELLY MUFG

there pre-COVID-19 but the pandemic has brought it to the for a pricing premium. While this may be more structural than fore. There is ESG-labelled product in fixed income but the opportunistic, it presents a commercial challenge as it effectively general ESG theme is gaining momentum too. It is not just removes the incentive for borrowers to drive improvements in about labelled bonds and loans, in other words. It is about sustainability. what a company is doing with respect to sustainability, its It was therefore an easy choice for us to at least test the environmental impact and social perspectives. waters in issuing sustainability-linked product in the USPP These themes are playing out in all fixed-income markets. market. Interestingly, from receiving few questions on ESG For example, we were involved in an oil-sands transaction in the from USPP investors in the past, we had a large number of US 144A market that was not labelled but had a lot of investor investors join the briefing call on which we introduced the SLB pushback because of ESG concerns. concept. Interest is very much there.

Davison We saw some commentary last year INVESTOR ESG TAKE about the ability of Australian coal-adjacent borrowers to get funded in the USPP market Davison Can we hear more from the investors after looking at but not finding what they on ESG in their portfolios – and specifically the needed in the domestic market. This seems extent to which its role is growing? to have created a perception that the USPP n MANSEAU I am not an ESG expert but it is apparent to me market will fund assets that are becoming more that it is a growing force and will continue to be important difficult to fund elsewhere. Is this correct? in the market. In 2020, particularly in the US, many n KELLY US investors tend to look through cycles. This means factors pushed ESG concerns to the forefront in corporate they can potentially understand a transition story more clearly boardrooms. than domestic investors – they are actually taking a view on We had a social-justice awakening in the US. The wildfires transition over its full time horizon. in California heightened the environmental focus, for instance. n CARR The USPP market has shown an ability to be very These events served as a catalyst for capital-markets actors and innovative over the last couple of decades, for instance corporations wanting to signal to their customers, investors and with the development of foreign-currency availability and shareholders that they are aware of what is happening. delayed draw. This innovation was on show through Sydney Boardrooms set goals, and they want to measure and hit the Airport’s transaction last year. This was the first-ever two-way metrics associated with them. As a result of this, we are seeing sustainability-linked bond (SLB) and highlights the ability of innovations like the two-way pricing mechanism on Sydney the market to be receptive to ESG products and innovative as Airport’s deal and some flexibility around pricing. well. Previously there was a view that issuers could label a green bond but investors were not willing to change what they pay Davison What convinced Sydney Airport to for it. Some are now willing to entertain a pricing concession to undertake its SLB deal in the USPP market? show to their chief investment officers that they have delivered n MOMDJIAN Investors in the USPP market are open to bespoke on something promised to the board of directors. and novel deal structures. Our 2020 deal had a combination Fundamentally, ESG is part of credit underwriting anyway of delayed draw, three currencies, ultra-long tenors and a – from a sustainability of business standpoint. The biggest area sustainability-linked tranche with two-way pricing. It is my where we are seeing this in the US, and which we are coming understanding that there is yet to be a sustainability-linked deal to terms with in the USPP market, is in hydrocarbon-based with two-way pricing in any public bond market. assets. We have seen US insurers pull out of the coal sector and It is worth noting that in speaking with public bond market financing of coal has been scaled back over a number of years. investors on the topic, most if not all find it challenging to I suspect companies are trying to figure out their own digest the potential of rewarding issuers with a pricing discount policies. The investment opportunity set and ESG goals need to but are very much on board with incorporating the potential overlap. A big thing we are all talking about is energy-transition

39 COPUBLISHED ROUNDTABLE

policies generally favourable. BUY-SIDE PERSPECTIVES AND We also like the companies. CREDIT CONSTRUCTIVENESS We understand last year’s undercurrents but it was Australasian issuers tended to find domestic capital-market conditions disappointing to us that we appealing relative to global offerings in the second half of 2020. But did not see more volume out of the region in 2020. the experience is not universal – and the long-term value proposition Even so, we can say we also of US private placement (USPP) issuance is not going away. understand and appreciate the importance of USPPs in the DAVISON It is interesting domestic option is more We saw strong sponsor make-up of New Zealand and that we have heard slightly consistent nowadays. support for Australian airports, Australian capital markets. different perspectives which was true in the US as on relative economics One specific that I think is well. In both countries, the We are mindful of this between markets from worth noting – and it is quite sector entered the COVID-19 relationship and that these various borrowers. Is curious to me – is that the pandemic with a lot of markets are tremendously this reflective of a wider offshore view of the Australian liquidity. This played into positive for our clients’ asset dynamic – that relativity is airport sector seems to be the themes of our investing: diversification, so we take more movable nowadays? more constructive than the borrowers that needed care to foster constructive domestic investor view, as liquidity but were high quality, engagement. We feel that the n CARR The domestic market expressed by pricing relativity. like airport issuers, generally companies we have worked has been demonstrably the had no problem getting it. with, by and large, reflect this most efficient in volume and MUFG banks most of the attitude as well. It is still a pricing for many corporates airports and airlines in the Going forward, the question good symbiotic relationship. through the past 6-9 months. region and what Michael for airports will be the ramp up However, relativities will Momdjian describes is a of passengers. But everyone n JONES Going back to ebb and flow according to fairly consistent state of play. believes it will come eventually the conversation around a number of moving pieces, Offshore markets – whether and we take a long-term view. competitiveness between the including the basis swap and that be euro, US 144A or USPP Australian and USPP markets, outright spreads offshore. – would, on paper at least, CARR Is there perhaps there was no issuance in the deliver a more competitive a psychological point Australian market for almost A lot of issuers will have outcome for the local airport of difference among four months during the first half observed a period of relative sector than the Australian offshore investors that of 2020. During the worst of the strength over the past 6-9 dollar market right now. stems from how Australia pandemic, when there was the months, in which the domestic and New Zealand have most uncertainty, the Australian market has performed well. n MANSEAU For Australian managed COVID-19 market was shut while the They will now be looking to airports, one of the things we compared with their own USPP market was open and see, whenever there is a experienced in our portfolios domestic experiences? active for issuers – including wobble in offshore markets, if during 2020 was a slew of some that are quite cyclical. the domestic option remains amendments and waivers. This n SPAETH Our view of New resilient and open. This can was generally a constructive Zealand and Australia continues We also take a longer-term view only be substantiated by the process reflecting the fact that to be very positive. We like and look to be supportive of test of time, but certainly we have a longer-term view the market dynamics and issuers. Often, we have known the experience over the last of these assets. Perhaps this the legal constructs, and find the companies for a long time nine months suggests the applies to pricing as well. the respective government because they are regular issuers

“A LOT OF ISSUERS WILL HAVE OBSERVED A PERIOD OF RELATIVE STRENGTH OVER THE PAST 6-9 MONTHS, IN WHICH THE DOMESTIC MARKET HAS PERFORMED WELL. THEY WILL NOW BE LOOKING TO SEE, WHENEVER THERE IS A WOBBLE IN OFFSHORE MARKETS, IF THE DOMESTIC OPTION REMAINS RESILIENT AND OPEN.”

MATTHEW CARR MUFG

strategy. Meanwhile, companies and investors are making net- The feedback I give to issuers is that there is usually zero carbon pledges. Reporting and metrics are important here. appetite for investment if they are a good, cash-flowing We want to know issuers’ strategies for reducing their impact business and in a sector that is not going away any time soon. on the environment. However, issuers need to be able to explain their transition

40|KANGANEWS FEB/MAR 2021 some signalling but I think there is also real movement and into the USPP market. This is n SHAW One of the benefits important: issuer frequency of the USPP market is the fact substance. gives investors a lot of comfort that we are able to spend n SPAETH I am glad to hear it said that ESG has always been because they understand from more time with investors to part of the credit underwriting process. Maybe we have called experience how management peel back the layers and hone it something else in the past, but we are very much a bottom- teams will respond through in on the fundamentals of a up shop – and concepts of ESG and social responsibility have challenging periods. credit story. I think this is an important factor, especially always been there. This said, we are now honing how we talk This is one reason why pricing during this cycle of the market. about it and it is becoming more important to the investment is probably more attractive for process. Australian airports in particular For instance, given our We have invested in several green bonds where there was no – simply because we know experience across various their track records. We also assets we have seen state price concession. It was still a bottom-up process and we were see the trends around how governments take different happy to do those deals. quickly domestic passenger actions to manage the health We also invest across the entire Australian utility space. volume recovers as well as issues related to COVID-19. We are well aware that a number of the big gentailers are very the diversification benefits The characteristics of the USPP heavy on coal. We look at this as a structural facet of the current a lot of these airports have, market mean that if we were which is not necessarily the exploring the credit for one of state of affairs in Australian power markets. Assuming the case in other markets. our assets we would be able gentailers return to the USPP market, our focus will continue to draw out this differentiation, to be on the specifics of how they are managing these assets. We We look at each asset which is important given appreciate that these companies cannot just take all that power individually and try not to our experiences across paint them all with the same various geographies. offline in a very short period. But we will be asking a lot of brush. This is a key distinction: questions about the future. we take the time to evaluate n CROSSLEY Our business n JONES We have a similar theme – ESG has always been a core each asset individually rather is very insulated from the part of our underwriting. The big difference over the last 12-18 than just looking at a broad- impacts of the pandemic. For based sector approach. instance, energy consumption months has been disclosures and reporting on various ESG risks. in Melbourne CBD was As an investor group, the USPP market aims to be DAVISON Does Sydney down considerably over supportive of energy-transition strategies. A lot of issuers know Airport find USPP the course of the year but USPP investors can help guide and support an issuer through investors are more we are on a revenue cap its transition. ESG has certainly changed a lot. There is more bullish on its name than so we were not materially Australian investors? affected. This was not a appetite to support green bonds and other structures. negative story for us, even n BROOKS The flexible traits the USPP market is known for can n MOMDJIAN USPP investors though what was happening also be applied to ESG-related borrowing. The market provides are highly sophisticated and in Victoria was pretty bad. two primary avenues for companies looking at green finance: can see through a crisis. They understand our fundamentals Having said this, investor standard green bonds, which are asset-backed or linked to a extremely well and take a engagement continues specific green use of proceeds, and ESG-linked bonds, where pragmatic view on credit – in over the course of a year pricing is tied to certain ESG factors. The ESG criteria can be fact we were able to issue 30- – whether it is from USPP, rated or unrated. year USPP debt shortly after domestic or other investors. Sydney Airport’s ESG-linked transaction, for example, was the pandemic hit our shores. Everyone wants to know what When speaking with domestic is happening, whether it is rated by Sustainalytics. However, we are preparing to launch investors, many questions are to do with relief packages, a USPP transaction where the ESG component is purely KPI- focused on understanding consumption or – as was driven. These notes do not have an external rating, just KPI- near-term performance the case early in 2020 – based pricing – which is more in line with what can be done in and crystal-balling around that assets had not been recovery projections. touched by the bushfires. the bank market.

DAVISON Do other There is always something Davison Another differentiator for the USPP issuers share the view going on in the business. market has always been its ability to assess that investors in some The ongoing engagement credit without formal ratings. Is it the same with jurisdictions – specifically we have with investors USPP, of course – are more is vital and important, ESG – that investors are less reliant on third- constructive than others? and we encourage it. party ESG scoring? n BROOKS I think the USPP market follows banks in ESG. We can replicate bank documentation and sustainability-linked- strategy and ESG stories. This is being included in investor loan (SLL) terms and conditions and then put these into our decks a lot more often. purchase agreement with different pricing mechanisms. It is not just talk anymore. Investors want to see real I think we will continue to follow the bank market on this. action rather than just greenwashing with a label. There is If banks are willing to accept KPI-driven price changes, we have

41 COPUBLISHED ROUNDTABLE

“Execution risk in the domestic market is no longer an area of concern for us. We are now able to issue sizeable bonds at attractive tenor of 10 years or perhaps even longer. However, better pricing and access to ultra-long tenor has actually seen us further expand our presence in the USPP market.”

MICHAEL MOMDJIAN SYDNEY AIRPORT

seen this reflected in USPP documentation – so an external bond investors to bake in any sustainability-related pricing rating may not be needed. concessions on offer as doing so would remove the incentive for n KELLY Looking at the USPP market in the context of global borrowers to drive improvements in sustainability. markets, it is deeply invested and now it is reorganising to assess In fact, we made sure explicitly to highlight the possibility ESG-labelled products. Each capital market will have its own of a pricing discount or premium by establishing the 20-year requirements and certain asset classes will make more sense to sustainability-linked tranche alongside a 20-year vanilla tranche USPP investors. – the base coupon being the same across both tranches. It is true that USPP investors do a lot of work to understand credit through the cycle. The analysis is deeper than in some Davison I think it bears asking how big an public markets and, as a result, USPP can be more flexible with incentive pricing is when an issuer is thinking structural features like the two-way coupon step employed by about sustainability-linked or otherwise labelled Sydney Airport, for example. These investors are motivated and debt. Does the sustainability-linked format thinking about credit from a different perspective. answer this question because it bakes the price n MANSEAU I don’t necessarily want or need to do all my own change into the initial terms? ESG analysis without support from third-party services. In fact n CROSSLEY If we issued two different formats we would end up it would be nice if there were agreed-upon standards. The issue with two different curves. Maybe they are the same, maybe they right now is that we are still working out the commonly agreed are different. But as soon as we go down the route of saying standards – I compare it to the days of VHS versus Betamax one option is greener, does it mean our older lines are not green during the videocassette era. anymore and thus become less sought after? Different clients of ours are asking for different metrics and I would like to think that all our debt is green, but there is no unified view of what they should be. Some that we obviously USPP investors make up their own minds as to how consistently see are tonnes of carbon displaced and gigawatts of green we are. We have lots of very good stories internally and one type of energy versus another – for instance gas-fired power for this reason alone we would like to keep these metrics and plants versus solar generation. not just say that they are to be baked into documentation. But how do we measure the ESG metrics for the type of I read a report from Bloomberg based on an analysis assets Transurban, with its toll roads, has? If it is installing between green bonds and non-green bonds in Europe. It electric-vehicle charging stations this may be more qualitative said there was a 5 basis points differential between the two. than quantitative at this stage. Everyone wants to count Clearly, European investors have buckets into which they statistics so there is demand for quantitative analysis, but we are only allowed to place green bonds. But is this something cannot do it unless there is agreement on a set of metrics for that is going to be widely found in the US going forward – to each type of asset. the extent that demand for anything green is only going to Everyone wants to be able to say how much carbon they increase? have eliminated and the number of people they have served. If n BROOKS Currently, classifying a new transaction as ESG- ESG rating agencies could standardise metrics it would make it linked may have the benefit of garnering additional demand a lot easier for all of us to row in the same direction. from the market. However, besides a few select deals like Sydney Airport I do not think we have seen ESG-linked or ESG PRICING green bonds specifically getting significantly better pricing. Attracting additional demand into a transaction will Crossley How would the USPP price have ultimately lead to better pricing down the road. But right now, changed for Sydney Airport had it not included given the way the market currently sits, it is hard to define that the sustainability tranche? difference. n MOMDJIAN Similar to our SLL, we made sure to progress the n KELLY If we take the comment from earlier – that USPP SLB concept once we were sure vanilla tranche pricing was as investors often take their lead from the bank market – it is tight as it could possibly be. There is no point for bank and noteworthy that we have seen the emergence of SLLs in the

42|KANGANEWS FEB/MAR 2021 “ESG was talked about as a focus in the past, but there was a real shift in client interest, demand and investment decision-making beginning on 1 January this year. This is more of a policy phenomenon – it is somewhat political but it is not tied to the US election.”

PATRICK MANSEAU BARINGS

loan market. It is really interesting to see the delta differential of perhaps, recognition that we are seeing a reversal to a more margin discounts and premia across the globe. normal level of rates. It is going to take some time to play out Not surprisingly, in Europe the delta now is around 10-20 but there continues to be a lot of fiscal-policy support, which basis points. In Asia this is sitting around 5 basis points. Australia should continue to drive growth in the US and may lead to is around this level too – although we anticipate this to be flexed higher rates. over time – and in the US it is lower, around 2-4 basis points. It has been a very positive story across Australia. Listening I guess the question for all of us is whether the US will to management teams discuss their recent half-year results and match Europe. My personal view is maybe not. I think outlooks certainly makes it seem that there is a pretty positive European investors are running toward a different agenda. This outlook. Our hope is that this will create opportunities for more said, when we were talking about this four or five years ago companies to come to our market to issue debt for growth there was no delta or premium for ESG-labelled products – purposes now the worst is hopefully behind us. they priced flat. But corporates like Sydney Airport demonstrate that development is happening in this space. Brooks Is the rates environment having any As liquidity comes to the fore, I think we are going to see impact on how investors are looking at the more and more USPP investors starting to allocate capital in asset class? this format and, potentially, we will see larger price breaks. n MANSEAU I do not think so. Our clients use the spreads we To me, this is what is most exciting and interesting – how the bring them for asset-liability duration matching. They use US market develops given it is pretty much untapped when it other products to hedge against inflation – specifically with comes to ESG finance. investments in real assets. How trillions of dollars of capital is reallocated in this The issue underlying everyone’s concern is watching the format will be the next conversation we have. We know what switch from the COVID-19 discussion back to the pre- is happening in the European market, we know what has COVID-19 discussion. Are we at the top of the market? Is happened in Australia, and Asia is trying to catch up. I think there going to be an economic correction? I do not know the the big shift is yet to come in the US. answer. The primary things we are focused on in a rates context is NEW MARKET VOLATILITY refinancing risk and issuers’ exposure to it through increased cost of debt. This is a piece of underwriting credit that we Davison In the last couple of weeks we have always do, though, so I do not think it is changing how we act seen markets taking the view that economic very much. improvement is coming quicker than might n SPAETH The rate of change in Treasury markets over the last have been expected and as a result effectively few years has been dramatic, but we are largely rates agnostic taking on central banks. This has not had a when it comes to how to invest. Our clients also asset-liability major impact on credit so far, but what are match so what we do ties into their business. We need rates investors’ outlooks on US and Australian rates that work for them. The USPP market is seen as an asset- and the economic trajectory, and how does diversifying place to invest. I do not anticipate our flows being this feed into a view on the USPP market as we interest-rate driven this year. move through 2021? n JONES The rates environment certainly has not changed our n JONES There has certainly been a dramatic movement since view. We continue to have a lot of appetite for private credit the start of the year. The 10-year US Treasury started 2021 and USPPs, and seek to invest US$10-12 billion annually in at around 0.9 per cent and is now sitting at 1.5-1.6 per cent. the asset class. Treasury rates increasing and spreads coming Last year was pretty volatile, too, so I am not going to make a in have hopefully made the market more competitive so a few prediction – because inevitably I will get it wrong! more opportunities will materialise in the near term. We are I think these dynamics are challenging some views on the positive and hopeful that more Australian issuers will come longer-term outcome, whether it will be lower for longer or, back to our market this year. •

43 DARREN LANGER HEAD OF AUSTRALIAN FIXED INCOME LINDA LUO CREDIT ANALYST, FIXED INCOME CHRIS RANDS PORTFOLIO MANAGER, FIXED INCOME

ESG TAKES AN EQUAL ROLE AT NIKKO Nikko Asset Management has revamped its environmental, social and governance (ESG) process by splitting it out of the credit function. Each corporate and bank issuer the investor looks at must now satisfy separately assessed ESG and credit criteria rather than having the decision tied up in a central area.

hy did Nikko elect a business. We effectively created a Why is the new approach focused to revamp its ESG distinct framework to consider business only on banks and corporate credit? process and how long longevity. The new process also enables In particular, was any consideration did it take to plan and us to ascertain how a company is given to incorporating high-grade implement?W addressing ESG issues – for example, issuance? n RANDS This has been a substantial whether it has set appropriate goals and n LANGER For the most part, piece of work that we started half-way is achieving them. supranationals and sovereigns already through 2020. It took six months to One could argue that this is already have robust ESG credentials. By and work through thoroughly, by sector and part of the credit process. But we large their modus operandi is to do social issuer, to overhaul our existing process wanted further to draw out ESG issues good and most have specific social or entirely. and assess how companies are thinking green bonds. ESG is not a contentious There were two main end objectives. about things like active engagement and area for this issuer set. We wanted to separate the ESG decision managing stakeholder concerns. Our focus is on portfolio risk. With a from the credit decision, thereby n LANGER It is clear to me from having remote chance of default on government enabling us to focus more directly on the been in the market for many years that or quasi-government bonds, there is ESG elements and ascertain their impact some market participants continue to very little downside risk. In addition, on the fund. ESG has always played into view ESG as a gimmick. I wanted to governments do many different things our credit processes but it was previously ensure the people driving and shaping and it is hard to separate what they do tied up in credit decisions, making it our new ESG process really cared about well from what they do poorly – and, hard to see where the credit decision it – which was my reason for picking in reality, trying to do so adds very stopped and ESG came in. Linda and Chris for the work we did little value. The value is very much in We also wanted to ensure we last year. the default space, and this is what our were placing an appropriate level of This is purely a fixed-income process is helping us avoid. importance on each individual issuer. development: our equities team has its n RANDS Because the index is 90 per Sometimes appreciation for a credit own process and ours is unique to our cemt comprised of government bonds, can cause one to overlook some of its part of the business. we think making an allocation to blemishes. We wanted to be able to pull n RANDS Most of the teams across Nikko the index is effectively allocating to apart what we liked about the credit globally are incorporating ESG into government bonds. To screen these out from its ESG factors. their processes in their own ways. The would be counterintuitive. n LUO One of the fundamental research for fixed income shows different components of the new process is outcomes from equities. Fixed income Is it fair to describe the ESG analysis thinking about the sustainability of needs to be different. approach itself as a negative screen?

“One of the fundamental components of the new process is thinking about the sustainability of a business. We effectively created a distinct framework to consider business longevity as well as ascertaining how a company is addressing ESG issues.”

LINDA LUO

44|KANGANEWS FEB/MAR 2021 Q+A

If so, how does Nikko’s approach n RANDS Now we are scoring these by default mean that it has all its ESG integrate with other ESG strategies, companies, high ESG scores are quick components lined up as well. for example positive screening and and easy for us to see. While we might n LANGER It is not always company the role labelled product plays in not screen only for positive companies, a specific. Quite often the factors are portfolios? strong underlying credit with a positive industry or sector specific. A company n RANDS It is fair to say that our ESG overlay and a valuation that stacks might have strong credit fundamentals approach is an enhanced negative screen. up is credit that is ticking all our boxes but may also be in a poor sector. We are working to ascertain whether and one that we would want to put in This was another reason to remove a company stacks up on ‘E’, ‘S’ or ‘G’ the fund. the emphasis from looking purely at concerns and screening it out of our company credit in our process. We universe if appropriate. There is a lot of talk about investors wanted to examine at sector level first, to There are two reasons for this. integrating ESG in the credit process support a more comprehensive decision The funds we run are not labelled as and that ‘ESG risk is credit risk’, around a company’s inclusion. sustainable or ethical so, unless we have yet Nikko’s approach is formally to a valuation concern, we do not have a separate ESG and credit analysis What has end-client feedback to natural bias for positive ESG companies. rather than integrating them. On the the new approach been, and how We are trying to avoid negative ESG other hand, presumably the goal for much uniformity is there in client factors and companies that are clearly Nikko is to enhance the significance preferences in this space? behind the eight ball. of ESG in the overall process. Is the n LANGER The process is predominantly The second part is that we use Nikko approach unique or unusual, for our client-facing unit trusts, although the negative screen to ensure we are and why does it make sense to do it we have extended it to our mandates. identifying companies with poor this way? Most clients will have their own views on practices and benefiting the fund n RANDS Without a doubt the goal is to ESG and we can incorporate these into by avoiding them. Our investment enhance the significance of ESG in the this process. We tend also to use negative criteria require strong credit quality overall process. Our aim is to focus on screens in this instance and we will and adequate or good ESG practices – the components that matter and give carve out some sectors for clients where and anything that does not meet these each the attention it deserves. We have there is a specific preference to avoid criteria will drop out of our investment done what we think makes sense. them. However, it still comes down to universe. A standard approach elsewhere a discussion with each individual client. n LUO We do not incorporate positive appears to have been to roll ESG into Clients have unique views, and we try to screening but we are making a point credit risk. But our view is that there are accommodate these as best we can. of looking to see whether a company times where this is not necessarily the best is positively addressing negative ESG approach. A good example is tobacco Is it a hard yes or no screen or is there practices. We are particularly supportive companies, which may have strong credit a price for ESG risk? of issuers with a positive ESG trajectory metrics but could also have very weak n RANDS This was a point of much and will view more favourably issuers ESG profiles. Our process is designed to discussion through the process. It is a that are aware of ESG issues and screen out these types of companies. hard yes or no with a negative screen that addressing them appropriately. The idea is not to take ESG says there is no price at which we would In the context of COVID-19, completely out of the credit decision. participate – avoiding the possibility of a social issues like labour management or If the credit team spots a credit issue company adding a factor down the line health and safety have become forefront owing to an environmental concern, this that we just don’t think stacks up. considerations for all businesses. As such would still be noted in the credit analysis. it makes sense for us to home in on these However, the credit team deciding that What impact will the new approach types of factors as well. a company is a positive issuer does not have on Nikko’s investible universe?

“We still very much believe in active decision-making and management, but we also believe in using quantitative tools more easily to facilitate the decision-making process. Our ESG process follows the same philosophy – it is all about using data to make better decisions, not using data to make decisions for us.”

DARREN LANGER

45 Q+A

“We spent six months collating information, from central sources and from issuers themselves. Now I find comparisons far easier to make. While handling the data may become more onerous, we will have extra time for the qualitative part of the decision-making process – which is the more important bit.”

CHRIS RANDS

n RANDS As of early 2021, we are starts at the sector level and gives us the n LANGER We still very much believe screening out about 5 per cent of issuers flexibility to go deeper if necessary. in active decision-making and from the credit universe. Credit is at n LUO Using this approach through a management, but we also believe in present a relatively limited component company’s response we can see how using quantitative tools to facilitate the of the Bloomberg Composite Bond serious it is about addressing an issue. decision-making process. Index because there is a high volume of We will keep this in mind as we look at Our ESG process follows the same semi-government issuance. This means each name. philosophy – it is all about using data that when we screen out 5 per cent of to make better decisions, not using credit issuance it becomes 0.5-1 per cent Where is the data Nikko uses coming data to make decisions for us. It is also of the index. from and how much qualitative about having a framework. Once the My view is that we can screen out overlay is involved? framework is in place, decision-making companies without appropriate ESG n RANDS At the moment, most of our becomes a lot easier. criteria because we can still construct data come from MSCI and Bloomberg. n RANDS We spent six months collating a strong portfolio when we are only We aim to compare standardised data information from central sources and removing such a small percentage of the – whether a score or a rating – and look from issuers themselves. Now I find investible universe. for outliers. If we see that a company comparisons far easier to make. While is ahead in governance but behind in handling the data may become more Companies’ sphere of influence is environmental score, we will raise this in onerous, we will have extra time for the becoming a focus in ESG finance. How our next meeting. qualitative part of the decision-making far does Nikko’s ESG analysis go in If a company is scoring highly across process – which is the more important this respect? Does the firm look at the board, we may still do our own bit. supply chains, investments and the additional research. But it will likely like – ‘scope three’ emissions, as they be less than for a company with poor Is it possible to provide any live would be called in the environmental scores where one or more elements are examples – of themes, even if it is space? clearly lagging. not possible to mention specific n LUO We concentrate on the more n LUO It was a considerable process to issuer names – where the new Nikko pertinent issues within a sector. For start with. But we have now completed process has already been used example, with a supermarket chain the bulk of the work across sectors and effectively to benefit its fixed-income modern slavery is currently a big concern specific issuers so adding a new name or funds? and a key focus for our research. In revising the score line is not as onerous as n RANDS In the past six months we some industries, though, the data is it may seem. have seen some universities in the news inconsistent and we need to take a step n LANGER This is where our new because of wage underpayment. Our back to understand how each company process is absorbed into our standard ESG process has enabled us to look has responded. credit processes. If our credit team has for issues in other sectors and gather n RANDS For each sector we typically issuer-specific questions, Linda can some credible data – for example, the aim to look as deeply as we can where it oversee these – meaning a much more percentage of total wages and how makes sense to do so. If we are talking direct line of approach because we go it compares across sectors and data about an energy company, we will into meetings knowing exactly what providers – to make a comparison consider its response to scope-two and information we want. relative to other companies we have seen. scope-three emissions concerns. In the n LUO Then in our subsequent supermarket space, we are more focused It sounds like the dashboards Nikko conversations with universities we will on modern slavery and what the supply has built help to automate much raise this issue. It would raise a red chain looks like. We do not want to of what might otherwise be a time- flag for us if their response was to skirt adopt a blanket approach, but one that consuming process. around the problem. •

46|KANGANEWS FEB/MAR 2021 ROUNDTABLE

AUSTRALIAN MARKET CONTINUES TO ORBIT THE RBA’S SUN angaNews hosted its annual roundtable discussion for Australia’s leading bank fixed-income strategists in February – just as a new round of K market speculation on the path of Reserve Bank of Australia stimulus was kicking off. The strategists remain convinced that Australian QE is set for some time, however – and that the market will continue to revolve around the gravitational pull of the central bank.

PARTICIPANTS n Ken Crompton Senior Fixed Income Strategist NATIONAL AUSTRALIA BANK n Damien McColough Head of Australian Dollar Rates Strategy WESTPAC INSTITUTIONAL BANK n David Plank Head of Australian Economics ANZ n Martin Whetton Executive Director and Head of Bond and Interest Rate Strategy COMMONWEALTH BANK OF AUSTRALIA

MODERATORS n Laurence Davison Head of Content and Editor KANGANEWS n Chris Rich Staff Writer KANGANEWS

RECOVERY OUTLOOK Consumers are in a strong position to respond given the current savings ratio. This is the major component – along with Rich Economic data are all pointing to a solid housing, which is on a tear at the moment – and it should be rebound in the domestic economy. How very supportive throughout 2021. confident should we be of a smooth path out of Our unemployment and inflation forecasts are not the COVID-19 economic crisis? significantly different from what the RBA [Reserve Bank of n MCCOLOUGH I am pretty confident. Our growth forecast is Australia] has in place for 2021. These rest on the basis of a 4 per cent for 2021 then 3 per cent next year. This is based on vaccine rollout proceeding without many hiccups. This has how consumers respond to the removal of JobKeeper and other already not started as quickly as we thought it might but we will support measures. know more about progress quite soon.

47 ROUNDTABLE

“We are starting to see the government think about the need for ongoing fiscal support. Its recent messaging is that it is focused on the cost of debt, so it strikes me that the government is positioning itself for the next stage. This is well ahead of what it indicated in the budget last year.”

DAVID PLANK ANZ

n PLANK We also have a positive outlook for this year and next, The macro risks arguably are more likely to come next although the starting point is well below the pre-COVID-19 year, given the timeline for managing the reopening of level of GDP. Similar to the RBA, we think GDP will return to international borders. Public attitude will need to adjust to its pre-COVID-19 level in Q3 2021. It could be earlier, given this because clearly at the moment people are jumpy about the positive surprise in Q4 GDP. COVID-19 coming in from overseas. How this evolves in a Most core outlooks are pretty similar so the key question vaccinated world will be interesting. really is the risks. There are substantial positive risks, like a n WHETTON We expected the RBA to revise its numbers in downside to unemployment. ANZ job ads data and the NAB February, which it did. We thought it was a bit conservative in [National Australia Bank] survey both point to the possibility unemployment and growth. We are looking for 4.2 per cent that unemployment could fall to less than 6 per cent in the first growth in 2021 and 4 per cent in 2022. half of this year, which would be well ahead of forecasts. We agree that the QE programme is driven by the The end of JobKeeper will have some impact, which is expansion of central-bank balance sheets offshore. An extended why we are not as optimistic on unemployment as some of the period of weakness will play into the RBA’s decision on how to leading indicators suggest. We have fingers crossed that the slow down stop QE. picture improves more quickly, though. We see some risk that the RBA goes for a third QE The next questions will be about what happens to policy. programme. We are not sure whether this would involve a We have seen the RBA give some mixed messages on this shift in the mix of government and semi-government bonds or front. It signalled some policy tightening in the first week of in where the RBA buys on the curve, though. In a speech last February – but just a few sentences after saying it was too early year, RBA governor [Philip] Lowe noted the relative spread of to consider tightening policy. 10-year bonds. While this is not a benchmark for borrowers it is Even if we get unemployment below 6 per cent ahead of meaningful for Australian capital flows. expectations, I think the cash rate will remain on hold given Domestically, the numbers we see on CBA lagging wages and the need for the unemployment rate to be [Commonwealth Bank of Australia]’s lending book are lower still. The RBA is signalling that it could tighten other encouraging. These are faster than system growth, aspects of its policy, though. and broadly we are seeing strong consumer lending. Business n CROMPTON We are reasonably confident in the recovery this lending is still quite weak and remains a risk for the economy if year, underpinned to a large extent by the positive signs in the it does not pick up. labour market. Our forecast for year-end unemployment is 5.7 Wages and salaries going into CBA bank accounts cover per cent. Our macroeconomics team is particularly encouraged around 35 per cent of wages in Australia. These numbers are by the extent to which hours worked and job ads have been growing steadily even with fewer people on JobSeeker and strong from late last year onwards, particularly since the end of JobKeeper. This is a good sign for how the economy is faring in the Victorian lockdown. real time. We have similar growth numbers to everyone else: around 4 per cent in 2021 and 2 per cent in 2022. Rich Last year was characterised by a lot of The RBA’s decision to extend QE was a surprise to our risk variability. To what degree are potential house view but the risk was always that QE would be extended outbreaks of COVID-19 still causing uncertainty? rather than tapered even a tiny bit. The way we have taken this n MCCOLOUGH Relatively light-handed measures, whenever message is that QE is now largely determined by offshore they have been needed, along with quarantine measures have central-bank actions rather than domestic outcomes. The RBA prevented any serious spread of COVID-19 in recent months. has backed away from talking about QE in the context of the We have learned a lot of lessons and as a result we are not unemployment rate, for instance. particularly concerned about the pandemic having a major It will be interesting to see how the roll of the yield-curve negative influence in 2021. target is managed. The RBA wants to ensure the market does n CROMPTON We are hoping lessons have been learned during not get carried away with pricing this year. and since the big outbreak in Victoria last year. States now seem

48|KANGANEWS FEB/MAR 2021 “We are hopeful that the record Japanese demand we saw last year, of around A$50 billion, can be sustained this year – particularly because we have the highest fixed-rate curve in the G10. Australia is an attractive place for hedged offshore investors.”

MARTIN WHETTON COMMONWEALTH BANK OF AUSTRALIA

to be relying on short, sharp lockdowns that prevent widespread n WHETTON Another significant downside risk is further outbreak. We do not have allowances in our forecast for escalation of Australia-China trade tensions. Right now, there another one so it would be a risk to our forecast if it were is a huge tailwind for the Australian economy from iron-ore to happen. sales as China looks to stimulate its economy. This has been The evolving nature of policy response will be important very helpful for Australia and, for now, it is an undamaged part over the next year, especially once international borders of the relationship. If things change, either through tariffs or open. Attitudes may need to change but vaccines will help even just if China slows its purchases of Australian iron ore, with this. Our assumption is that reopening goes smoothly, it will create a headwind. underpinned by vaccine rollouts. This is a significant assumption built into our forecast. ECONOMIC CHALLENGES But health assumptions are critical given the extent to which stimulus and support factors helped the economy get through Rich The talk about a quicker-than-expected the last year. rebound seems to gloss over that the n PLANK The nature of economic forecasting is that events like Australian economy was underperforming a pandemic or a flood can only be assumed to happen or not prior to the pandemic, with chronically weak happen. We cannot assume half a pandemic or half a lockdown. wage growth, low inflation and spare capacity The market reflects expected outcomes for things like in the labour market the main issues. Fiscal interest rates, so it can be partially priced for the chance of and monetary stimulus has been overlaid on a lockdown. This is the key difference between economic these challenges but in response to a different forecasting and how a strategist might assess things. problem – the impact of the pandemic. Does n MCCOLOUGH One major downside risk is fiscal policy. stimulus help or hinder response to the longer- We are coming to the end of some of the government’s term challenges? support packages and everyone will be closely watching what n PLANK I think wages will be slow to respond even if happens in the May budget – which is also potentially an unemployment falls faster than forecast because of the factors election budget. It is hard to calibrate what this might mean already in place, such as public-sector wage caps. for economic forecasts because there is also plenty of support One thing that is unclear is the extent to which closed coming on the monetary side. borders mean better outcomes in the labour market, which n PLANK From a credit perspective, we can ask what might could lead to wage pressure emerging faster. The release valve happen if there is another economic hit and whether fiscal of immigration is not there, so we could see a higher wage policy will respond. We are starting to see the government outcome. think about the need for ongoing fiscal support. Its recent For years, the conventional wisdom has been that high messaging is that it is focused on the cost of debt, so it strikes immigration does not depress wages because it creates both me that the government is positioning itself for the next stage. demand and supply. It could lead to an interesting policy This is well ahead of what it indicated in the budget last year. challenge over the next couple of years if this turns out to have

“The evolving nature of policy response will be important over the next year, especially once international borders open. Attitudes may need to change but vaccines will help with this. Our assumption is that reopening goes smoothly, underpinned by vaccine rollouts.”

KEN CROMPTON NATIONAL AUSTRALIA BANK

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ASSESSING THE EFFICACY OF THE TFF The Reserve Bank of Australia (RBA) introduced its term-funding facility (TFF) to support credit provision in the local economy by underwriting bank funding at a low, fixed rate. Strategists say the facility has worked – but its planned June withdrawal may be coming too soon.

DAVISON Has the TFF issuance, although it has also We could get lucky in because there are massive worked as it was intended taken away the diversity of Australia. But for now we think savings that need to be used. to and is withdrawal in funding. Commonwealth Bank businesses and households June the right decision of Australia is now 75 per cent are in a good position with DAVISON Will we be talking from the RBA? deposit funded, for instance. huge cash balances. The TFF about Japanification again? borrowing can roll off without n PLANK I think it has worked This will slip in time and a significant change to cost n WHETTON I do not very well. The unstated key access to funding will return, of funds for the end user. think it ever went away. aspect is the competitiveness not necessarily because the Japan has been the it brought to lending via a level bank needs it but because DAVISON Does this lead precursor for everything playing field for all banks. This it is good to keep diversified to the proposition that in markets and society. has been a powerful force at funding options open. Over stimulus may have the the front end of the curve and the Christmas period, the inevitable consequence of DAVISON The TFF has led for the pricing of mortgages. Australian banks went to inflating a housing bubble, to conversation in the We will see whether the the US dollar market for CP because banks need to nonbank lending sector timing of its removal is right. out to one year because deploy money and, with about an unfair funding I was surprised that the the basis was negative. businesses not investing, advantage coming to the RBA is prepared to dump it housing is one of the banks. How much of a completely in June – I thought it I am not sure on the business- only places for it to go? concern should this be? might be tapered in some way. lending proposition. The TFF drawdown for additional n WHETTON Probably. n PLANK The RBA can only n CROMPTON The nature business lending has been soft. Money is cheap everywhere achieve so much. It has of the banks’ use of the TFF APRA [Australian Prudential in the world at the moment not really talked about the has been interesting, in Regulation Authority] numbers so demand for real assets is competitiveness aspect of the that they have only taken for deposit-to-loan ratios strong, whether it is in equities, TFF and one of the reasons down funding at the end of and nonfinancial corporate infrastructure, property or land. is that it probably does not availability periods to preserve lending are at record highs, If this becomes productive, want to highlight that some options in the near term. so we think the banks do insofar as lifting confidence lenders are missing out. Any not really need the money. and getting ‘animal spirits’ policy will have pros and I agree that the levelling of the to return, maybe policy can cons, and ultimately I think playing field has been a key This goes back to the be normalised over time. the successes of the TFF factor. The number of fixed- conversation around downside outweigh the other effects. rate mortgages on offer at less risk. If we were to get a spot However, I think – around than 2 per cent has caused outbreak of COVID-19 leading the world – we are stuck n WHETTON If nonbanks a big increase in refinancing to a state-based shutdown, with gumboots in the mud. want to play on this field, activity, so it is flowing through the uncertainty means Central banks are front and they can pay the cost to to household balance sheets. businesses are not going to centre of our lives, driving become regulated as banks. borrow to invest even with policy outcomes – because Nonbanks are an important n WHETTON I think the TFF the ultra-low rates on offer. governments have been timid but ultimately small part absolutely has achieved its with fiscal policy in the past. of the lending market. aim of creating an effective This has been the case monetary-policy pass-through for a long time in many Because of this, central banks n MCCOLOUGH There has once the zero-lower-bound countries, even prior to the will maintain a large presence always been a difference interest rate was met. It has pandemic. Just because the for a long time to come. This between bank and nonbank removed the major banks’ cost of money is low does means asset bubbles probably funding levels, and I do not significant cost-of-funding not mean businesses are remain in place while the cost think it has increased by issue from foreign-currency encouraged to borrow. of money remains cheap, too much due to the TFF.

been wrong. This said, we still think material wage rises are a the pandemic will have made many of the drivers of low wage long way off even though we think the unemployment rate will growth, such as technology, go away. come down faster than forecast. But there is a view, particularly among the states, that the n MCCOLOUGH I agree. The RBA governor has mentioned that pandemic could be an opportunity for an economic reset. States 3.5-4 per cent wage growth would be necessary to get inflation have blown out fiscal spending with temporary and targeted sustainably into the 2-3 per cent target band. It has been a stimulus, and then in the next couple of years there are a lot of long time since we saw numbers like these and I do not think infrastructure and other reforms to come. New South Wales is

50|KANGANEWS FEB/MAR 2021 talking about land-tax reform, for instance. There are nascent n WHETTON We are bullish on the outlook for housing. The signs of a shift relative to the pre-pandemic economy. construction sector creates a lot of jobs and this is an easy way n CROMPTON There has also been discussion about the utility to get impact from monetary policy. The biggest factor for of writing cheques versus investment – this has come to the house prices is low interest rates. The fact that banks are lending forefront particularly with the proposed US fiscal-stimulus at less than 2 per cent for 3-4 years will encourage a lot of new package. In Australia, the states were already leading on homeowners to buy and existing homeowners to trade up. infrastructure investment and have further expanded capex Working from home is a big change that contributes to plans during the downturn. Hopefully, this has a longer-run this, and renovations are also important for the same reason. impact. People are not going back to the office full time and some Wage growth will be the key. When we were plumbing are not going back at all, so they will be less tolerant of small the depths trying to find NAIRU [nonaccelerating inflation annoyances at home. They will spend money to renovate if they rate of unemployment] a couple of years ago, we discovered can. it was lower than where we were even at sub-5 per cent We are hearing of big increases in input prices such as steel unemployment. and concrete. This could lead to some inflation, which will be a The RBA has flagged that NAIRU tends to rise during conundrum for the RBA. But it will probably not be a genuine a recession, but the nature of this recession – specifically a problem until next year. mandated pausing of activity rather than a natural slowdown Overall, we think the RBA will be okay with rising house – means NAIRU may not have risen as it otherwise would. prices. It prefaced questions on the subject in the February Perhaps we need to get to near 4 per cent unemployment to monetary-policy statement by noting that house prices had not find it. risen for a couple of years prior to the pandemic.

Davison The housing market is a focal point RBA IN DETAIL of the way the pandemic and the stimulus response have further entrenched economic Davison The RBA’s intervention was initially inequality. The RBA seems comfortable more about providing confidence to the market that housing-market growth is a positive than direct stimulus. It then evolved to ‘pure’ consequence of stimulus, but are there reasons QE over the course of 2020. What is the relative to worry about the housing market growing importance of the backstop-bid aspect versus well ahead of economic fundamentals and, in the straightforward volume of RBA purchases? particular, wages? n WHETTON The message has evolved over time. The RBA’s n PLANK The RBA views housing as a critical part of monetary- focus initially was on illiquidity in the market and the inability policy transmission. It is probably the cleanest one it has, and of banks to warehouse risk. It has moved to influencing lower it always works. One of the reasons core inflation was subdued rates relative to other countries and reducing the cost of funding for the last couple of years was that house prices were weak – for businesses and households, to create employment. which fed into construction and other costs. A stronger housing The relative rates story is certainly more of a factor now, market inevitably flows into higher inflation. with the focus being on making sure the currency does not rise I think we are a reasonable way from house-price growth as fast as others relative to the US dollar. being too much of a good thing. It will probably get there, but The liquidity story is less of an issue now, particularly with it will be more of an issue next year. the reduction to the CLF [committed liquidity facility]. The APRA [the Australian Prudential Regulation Authority] market can take down A$20 billion (US$15.6 billion) at a time may become more concerned later this year as we inevitably from the AOFM [Australian Office of Financial Management] see increasing credit growth. It could even reintroduce without any bumps. The confidence factor is still important, macroprudential policy before the end of 2021 given how though – which is why the signalling of a low cash rate for the strong the housing market is. years ahead has remained.

“I am okay with the break-even inflation level at the moment because I think we are a long way from inflation expectations getting out of control. Linking this to yield-curve steepness, it seems inevitable that the curve will remain steep – and could become steeper.”

DAMIEN MCCOLOUGH WESTPAC INSTITUTIONAL BANK

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“I think we are a reasonable way from house-price growth being too much of a good thing. It will probably get there, but it will be more of an issue next year. APRA may become more concerned later this year as we inevitably see increasing credit growth. It could even reintroduce macroprudential policy.”

DAVID PLANK ANZ

n PLANK I do not think the RBA had to do yield-curve control focus and the Bank of Japan can therefore more easily control (YCC). We said at the time it was implemented that it its 10-year rate. would not be sustainable. The objective of central-bank bond The proportion of offshore investors in the Australian dollar purchases should not be to buy as few as possible – it should be market means the volume of bonds the RBA would need to buy to use the balance sheet to force investors to buy other assets. I to set a 10-year target last year would have been impractical. think it took the RBA too long to realise this. I agree that it would have been preferable to see a The key policy at the front end was the TFF [term-funding traditional, volume-based QE programme implemented early facility] and in fact if the RBA had initially implemented QE on and across a broader part of the curve. With YCC, the RBA with the TFF we would have had the same outcome we have was limited to a three-year target. now. The TFF was the critical policy. I do not think YCC has n WHETTON Australia is a floating-rate, rather than fixed- had much impact other than being a useful signalling device. rate, market for most corporate and household liabilities – so The power of the TFF was twofold. It provided certainty keeping the three-year point is probably more important than of three-year funding cost and levelled the playing field for focusing on a 10-year point. banks. The latter has been an important dynamic for driving n PLANK The biggest problem with YCC is the exit strategy. down fixed-rate mortgages and is leading to a transformation of Every day the RBA has to maintain the credibility of the target, mortgage stock in Australia. whereas it does not have this problem with pure QE. n CROMPTON The RBA’s initial buying was particularly When it started to look like the RBA was going to important for confidence in the semi-government space. The introduce YCC, at the start of the crisis, we thought it would price widening and volatility in semi-government spreads was only do so at the front end – because the exit problem further nothing like previous shocks. Over time, banks have needed to out on the curve is enormous. Yield at 10 years is more sensitive buy semis for HQLA [high-quality liquid asset] requirements to the Fed [US Federal Reserve] than it is to the RBA. and there has been plenty of demand as a result. But the RBA The RBA still has an exit problem, though. We think it will buying certainly helped the market function in the early phase. shorten duration by simply not rolling the yield-curve target to With the broader QE programme, I am not sure how much the next bond. We think this will happen in August. marginal value is added by crunching 10-year spreads into Even if it does choose to roll to the November 2024, we still single digits. Continued buying is helping keep spreads tight think ultimately the most elegant way to exit YCC would be and knowing there is a backstop bid is a big confidence booster to fix it on a particular bond so it expires over time rather than for investors, though. abandoning it altogether. n CROMPTON This is our view too – that the April 2024 target Davison The YCC aspect of RBA intervention will roll down. has three-year government-bond yield as its sole target and has thus led to relative curve Davison The RBA has indicated it expects the steepness. Is a steep curve something market cash rate to be at 0.1 per cent until inflation participants should assume is baked in for the is sustainably within the target band, which foreseeable future? it does not expect to occur until 2024. At the n CROMPTON The curve should remain steep for as long as we same time, there are increasing rumblings have the three-year target in place and it remains credible. It has about the potential for inflation to pick up in been our view from the start that the RBA’s QE programme the near or medium term. What are strategists’ will keep the Australia-US bond spread tighter than it otherwise inflation forecasts? would have been, but it cannot generate a secular rally in n MCCOLOUGH As we all mentioned earlier, wages will be the Australian rates. key component of this and I am sceptical about wage growth I do not think a 10-year yield curve target would be an increasing quickly. Our forecast is for inflation to remain below achievable goal unless it was set conservatively high. Japan has the target band through 2021, at around 0.9 per cent, before 10-year YCC but its bond market has a much more domestic increasing to around 2 per cent next year.

52|KANGANEWS FEB/MAR 2021 “Hopefully by the end of this year the world is seeing interest-rate hikes on the horizon. The RBA does not want the market to get ahead of this, though – so I think it will stress the point that its focus is on actual inflation prints.”

KEN CROMPTON NATIONAL AUSTRALIA BANK

The governor has spoken about being reactive to inflation forward guidance. The reason these have changed and created when it is sustained within the 2-3 per cent band rather than confused messaging is because of the RBA’s own forecasts. These being pre-emptive based on inflation forecasts. We are probably forecasts matter because they influence the RBA’s confidence in 3-4 years away from this, which is the message coming from the forward guidance and its thinking around YCC. RBA as well. As an aside, the RBA will have an interesting It will be interesting to see how the market prices inflation. communication problem in the middle of this year when I am okay with the break-even inflation level at the moment headline inflation jumps above 3 per cent and potentially above because I think we are a long way from inflation expectations 3.5 per cent – but just as a short-term effect. getting out of control. Linking this to yield-curve steepness, it seems inevitable that the curve will remain steep – and could Davison What tapering of the RBA’s market- become steeper. support measures should we expect in 2021, n CROMPTON In market terms, the 10-year breakeven rate is and when and how will it come? priced at around 1.9 per cent. I have a recommendation that n WHETTON The TFF will go in June as scheduled. YCC is long on this, but it is more from a conviction around higher will possibly remain but the market is not testing this at the nominal yield causing the breakeven rate to move higher than a moment – the question really is around whether the April 2024 breakout in inflation. bond target rolls on to the November 2024. The RBA has not The divergence of views on inflation in our recent offshore made a final decision on this. client marketing has been amazing. Most believe the problems We have held the view since November 2020 that YCC will of low inflation that were plaguing the world a couple of years go in 2021. After the RBA’s February meeting we firmed on ago are still present. However, some think the massive amounts August as the most likely month for this decision. of fiscal stimulus and pent-up savings from the past year will be The bond-purchase programme will move into QE2 and released quickly once the world reopens. potentially into a third programme depending on the shape of I think normalisation could be slower than expected. The the curve and the need for it, relative to other central banks’ release of savings could be a short-term inflationary impulse but programmes. ultimately the long-term downward forces on inflation are still n MCCOLOUGH We think there is a chance the TFF gets there. extended beyond June but is recrafted to focus on business credit. This is not an official forecast but we think it could be Davison Does this suggest we may see some on the agenda. We see QE3 on the horizon and the removal of volatility between inflation prints but that overall YCC to become a focus next year rather than any time in 2021. the RBA will wait to be sure of a clear upward n PLANK The TFF decision announced in February trend and could even focus more on wages surprised me as a tightening signal at odds with some of the than CPI? other decisions. I had been thinking similarly to Damien n CROMPTON I am not sure it will look more at wages than McColough: that the TFF may be modified. Given what the CPI. But hopefully by the end of this year the world is seeing RBA has now said, I think it will end. interest-rate hikes on the horizon. The RBA does not want the On YCC, our view since January has been that by the time market to get ahead of this, though – so I think it will stress the of the August meeting the RBA will have a 2 per cent inflation point that its focus is on actual inflation prints. forecast for the end of 2023 – and as a consequence will not roll This is a big change from a few years ago, when the RBA YCC to the November 2024 bond. I do not think the RBA will giving a medium-term forecast of 2-2.5 per cent inflation would drop YCC completely because it is also providing signalling for have been a signal that it would move soon. It now wants to the cash rate, but I think it will be kept on the April 2024. move the market away from this mindset, and I think YCC is On QE, I think it depends on what other central banks part of this. are doing. If other central banks begin tapering the RBA will n PLANK The problem the RBA has is that it is using forecasts to follow, and likewise it will maintain QE while other central guide other aspects of its policy, in particular the YCC target and banks are using it.

53 ROUNDTABLE

RBA SAILING ON GLOBAL CURRENTS The Reserve Bank of Australia (RBA) has some capacity to taper or even withdraw stimulus measures over time. Ultimately, though, it will likely not be able to go fully in one direction if its international counterparts are heading in another.

DAVISON Is Australia more of a problem with QE3, the withdrawal of liquidity pros and cons either way. But essentially locked in to QE if it is indeed extended. can cause dysfunction. its programme can react more stimulus for as long as the flexibly to changes, whereas the bigger offshore central n WHETTON On bottlenecks, n CROMPTON I think the RBA is committed to A$5 billion banks are doing it? one observation we made a semi-government market is of purchases per week now. few months ago was that in already at risk of heading in n MCCOLOUGH If the RBA Japan the 10-year cash bond this direction. On this point, DAVISON At the start of is targeting the currency the does not trade anymore. the RBNZ [Reserve Bank of this year there was selling litmus test would be what would New Zealand]’s programme from Japanese investors and happen if QE were removed The RBA is talking about has some merit. It was one some suggested it would tomorrow. Given all the other owning 20 per cent of the of the most aggressive QE have been helpful if the RBA influences on the currency, market rather than 40 or 60 programmes in the world could have increased its we know it would move per cent. But if bond-purchase when it launched but its targets rate of purchases. Would a significantly higher. Therefore, programmes are large enough are much more flexible. more dynamic approach to the simple answer is yes: the that they take away liquidity, bond purchases have merit? RBA is locked in while the other and there is reliance on the RBNZ purchases are expected central banks maintain QE. central bank being the backstop to finish in mid-2022 at n PLANK It would make it bid for extra supply, we may the moment, and it has quite difficult for the RBA We are forecasting tapering see a dysfunctional market. straightforward caps on what to communicate what it is in QE3, with purchases down it can buy. New Zealand Debt doing. New Zealand had a to A$50 billion (US$39.1 This is not good in the medium Management has been in the 40 basis points sell off in billion). However, this has and longer term for issuers fortunate position of having its 10-year bond over the large risks to the upside. coming to market, because reduced issuance since the space of five days and I am they cannot get proper height of the pandemic. But not sure this is the route the The RBA will be looking at the price discovery or tension. the RBNZ has been able to RBA would want to take. volume it owns in any individual The market may become taper along with this and bond line and whether it is centred around new issues, is now outright tapering. Looking at the impact of QE, creating bottlenecks or shifting where investors will be keen studies show the signalling investor behaviour in the to participate for the new- The RBNZ did not go for rigid aspect is probably more market. This is likely to become issue concession. But overall buying targets, and there are important than anything

“THE RBA IS TALKING ABOUT OWNING 20 PER CENT OF THE MARKET RATHER THAN 40 OR 60 PER CENT. BUT IF BOND-PURCHASE PROGRAMMES ARE LARGE ENOUGH THAT THEY TAKE AWAY LIQUIDITY, AND THERE IS A RELIANCE ON THE CENTRAL BANK BEING THE BACKSTOP BID FOR EXTRA SUPPLY, WE MAY SEE A DYSFUNCTIONAL MARKET.”

MARTIN WHETTON COMMONWEALTH BANK OF AUSTRALIA

n CROMPTON We have a similar forecast. We think the TFF currency. We do not think the effect has been this large will roll off as expected. The RBA will need to decide on but, if the RBA believes it has been the barrier to lifting, it moving YCC to the November 2024 but we also expect it will is dramatically higher than we thought it was prior to the not do so. February meeting. We think there will be another A$100 There was one slight change in the RBA’s language in billion of purchases in a QE3 programme. February that we thought was at least moderately significant. This was that rather than saying the cash rate being on hold for MARKET SHAPE at least three years it is now on hold until at least 2024. At the moment this is the same thing, but it indicates that the three Rich Australia’s major banks have indicated years has now started. This signals that YCC moving to the that they are unlikely to revert to the pre-crisis next bond is not automatic. level of senior wholesale funding even after For QE, the RBA believes it has been effective so far – equal the withdrawal of the TFF. What consequences to around 30 basis points in the 10-year ACGB [Australian does this have for the Australian dollar credit Commonwealth government bond] and 5 per cent in the market as a whole?

54|KANGANEWS FEB/MAR 2021 have the option to go offshore and hedge to Australian dollars if else. If a central bank is than other markets will also they want to find a larger universe of credit to invest in. dynamic with a programme be a factor. If we are lower The banks will be in the market for tier-two paper in that goes up and down, the and foreign investors can market potentially does not find more attractive yield Australian dollars and foreign currencies, so they will have a know what is happening. elsewhere, we might see a presence. There may be some senior bank debt, but the issuers It can create confusion. wholesale move out of our are certainly not in a rush. market to other options. n MCCOLOUGH When the TFF first came in it was obvious that DAVISON Global markets This could create volatility. it would shift the issuance balance away from senior-unsecured now have more than a decade of experience One thing we can probably funding. This led to a view that there could be more diversity in with QE and, occasionally, agree on is that, if and the market because historically so much credit issuance has been central banks trying to when the RBA starts to hike from the major banks. step back from it. How rates, it will be at a very However, with so much cash around and banks wanting concerned should the slow pace. There is a limit to market be about taper how far the three-, five- and to lend it, most corporates have been able to get attractive tantrums and volatility 10-year parts of the curve funding through bank loans rather than by coming to capital when the RBA eventually move from the cash rate. markets. looks to ease support? The market is evolving but the search for yield is still as n MCCOLOUGH We also have it was before the pandemic. We have seen transactions such n WHETTON We could not looked too much into absolutely get some volatility. tapering given it is so far away. as Columbus Capital’s Triton [residential mortgage-backed It is not something we have But the real message from securities] deal in February, with pricing at 85 basis points over looked into much because the taper tantrum is that the bank bills. This demonstrates the extent to which the search for we think tapering is a direction needs to be credible yield is on and will remain in place for a while. long way from happening. according to where the Many factors that would economy is placed. This goes I do not think what is happening is a major positive for the determine this are just not back to the RBA wanting to see Australian credit market. Asset scarcity is a problem for diversity being communicated yet. actual outcomes in inflation, in portfolios but it helps keep credit spreads narrow. growth and unemployment. n CROMPTON We had seen the classic QE effect even before One story is that by the time QE was implemented. The assets that the central bank is the RBA is thinking about If the market does not think reducing its commitment it is credible, the question I buying are typically the first to crunch in, after which everyone to the market, we will be in would have is whether the buys everything else. This is exacerbated in Australia by the a period when the AOFM volatility is because it is the RBA disappearance of supply from the credit market. [Australian Office of Financial that is doing all the heavy lifting The next stage is further tightening in the semi-government Management] and the semi- with support for the market. government borrowers have If this is the case, the reserve market, which now looks stretched. Spreads around 10 years in much less to issue, and the bank has either done too much particular look uneconomic – but demand remains strong due committed-liquidity facility or removed support too soon. to the lack of options. reduction will be kicking further This is definitely not positive for the market and the point into gear – so demand should I think the market will show about corporates also not needing the public market means it still equalise with supply. natural progression from a fundamental economics is a circular problem. I am not entirely sure what the solution Whether we have a cash point of view – and this should be, but if investors begin to go offshore it could be rate that is much lower will provide the signal. interesting for the cross-currency basis.

Davison The lack of major-bank supply into n WHETTON The banks will be conscious of being absent for too offshore markets has led to a squeeze on long lest it lift the cost of their borrowing over time. However, Australian dollar basis-swap economics and there is now also a rarity value to their names that would offset made Kangaroo issuance difficult to justify for this. They do not need the money as they are in a very strong much of the last 12 months. Without major- position with deposit funding, especially while credit growth bank senior supply, the Australian dollar market remains subdued. is therefore likely to be very concentrated in Their absence from the market makes it tougher for local high-grade issuance. Does this pose any investors. Financial credit is typically more than 70 per cent of risks for its attractiveness as an investment the local market and it is unlikely that offshore banks will come destination? to market to the same degree they used to. They have been n CROMPTON It is certainly an interesting change in market much smaller issuers in Australian dollars in recent years and dynamics. In the sovereign space, hedged yields are stacking up the cross-currency basis swap is also working against them. for Australian dollars. Japanese investors were selling early in The corporate bond market is not growing much, either, so the year but according to some accounts this was due to legacy the overall size of the credit market will be reduced. Investors positions and buying has returned.

55 ROUNDTABLE

“We think there is a chance the TFF gets extended beyond June but is recrafted to focus on business credit. This is not an official forecast but we think it could be on the agenda. We see QE3 on the horizon and the removal of YCC to become a focus next year rather than any time in 2021.”

DAMIEN MCCOLOUGH WESTPAC INSTITUTIONAL BANK

Part of the RBA’s stated intent with QE is to have a We have seen signs from the AOFM suggesting that portfolio-rebalancing effect. In other words, if it buys a foreign liquidity increases in long-end bonds around the time it does a investor out of an ACGB position and that investor sells the big transaction. I wonder if this is starting to flag that there may currency and allocates elsewhere, this helps the RBA achieve its be a more sustained issuance programme into the long end. currency goals. There is certainly investor demand, mostly from offshore. The extent to which this is actually what happens is unclear At the same time, investors seeking spread pickup in semi- and the dynamic will change over time. But it also puts a cap government bonds also need to go beyond the 12-year point. on how effective QE can be in forcing yield here below US At the moment there is a massive trade-off with liquidity Treasuries. at that point, but this is less of a factor for some offshore n PLANK The big structural change for Australia over the last investors. few years has been the current account. We are no longer an Some of the semi-government borrowers are keen to meet importer of capital, so other things being equal we would long-end demand. Their challenge internally is a mismatch expect smaller capital flows across the board. There can still between the duration of funds their clients want versus the be large flows because a lot of money is being sent offshore by funding levels they can achieve at the long end. I get the superannuation funds. But it is a big structural change – and we impression the semis are keen to meet long-dated demand if think the current-account surplus will persist for a few years at they have demand internally. least. n WHETTON An investor might buy credit offshore but it will Davison Is it possible that, over time, we will be hedged back at the three- or six-month point rather than see supply-starved credit investors migrating to necessarily swapped to the full date. It is a rolling hedge and the semi-government space – and potentially therefore does not lift the term basis market. thus the development of long-end demand While 2020 was the worst year in SSA issuance for a from local investors? long time it has been much more dynamic so far in 2021. n WHETTON I think this would be a stretch. Credit investors Interestingly, the volume at tenor of 10 years and more is would need to get their mandates changed. There is also a almost equal to the amount that has been issued in the five-year whole world of credit out there so investors may just need to space – the first time this has been the case since 2016. be cleverer about buying and hedging it. Alternatively, they can We are of course early in the year but there is definitely a move into the private-credit market. shift caused by higher yield being attainable further out on the I think credit investors will remain as such because that is curve. At long tenor, the basis still works for the Washington their skill set. The semi-government market is a much lower- and European SSA names rom an all-in cost-of-funds beta environment and therefore returns are lower. perspective. Going to the long end is also difficult because it is a We are hopeful that the record Japanese demand we saw specialist market. The reason the semi-governments have never last year, of around A$50 billion, can be sustained this year issued much further out on the curve is because Australia is not – particularly because we have the highest fixed-rate curve in a long-dated, asset-liability matching market. We have defined- the G10. Australia is an attractive place for hedged offshore contribution rather than defined-benefit pensions. investors. In Europe, the US, UK, Japan, Korea and Taiwan, investors have to buy at the long end to match assets. The fact Davison Will the weight of government bond that hedging costs have made it much more attractive means issuance continue to come in longer tenors? If the semi-governments issued more than A$10 billion in 20-30 so, will this affect trading liquidity dynamics? year tenor from March 2020 onwards. This is far greater than n CROMPTON The AOFM has had curve extension underway we have ever seen. for a while now and this continued with the new 2051 line But I still cannot see credit investors buying these bonds. established last year. But fresh issuance is still rare beyond the They are still not attractive enough as a pick-up relative to the 10-year point. yield offered and investor mandates. •

56|KANGANEWS FEB/MAR 2021 Keep up to date with KangaNews on LinkedIn

www.linkedin.com/company/kanganews EVENT REPORT

New Zealand debt market gets back on track In December 2020, the KangaNews New Zealand Debt Capital Market Summit took place as an in-person event in Auckland, bringing the local industry together for the first time since the COVID-19 crisis. There was no shortage of talking points at the event, which for the first time added international perspectives via videoconference to the traditionally strong domestic agenda.

RACHEL KELLY ETHICAL AI BEN REID MEMIA We often hear about geopolitical The technology used for cryptocurrencies factors and their influence on currency could give central banks and fluctuations, as well as how currency governments the ability to issue their own and market rates are tied to traditional digital currencies, which would allow them commodities like gold or iron ore. I wonder access to very granular transactional whether responsible data use can be used data – effectively every transaction that effectively to contribute to commodity happens in an economy. This could or market value, for example weighting enable the use of AI to support granular company valuations based on the degree targeting of fiscal and monetary policy of trust around the data generated or used responses, for example lower interest by these companies to do their business. rates over property lending for small businesses.

58|KANGANEWS FEB/MAR 2021 MIKE FAVILLE BNZ SAM DIREEN KĀINGA ORA – HOMES AND COMMUNITIES By virtue of their mandates, high-grade We were pleased to launch our bond tender borrowers often need to be active in funding programme in December 2020 with dates and markets throughout the economic cycle and volume announced six months in advance but in all market conditions. This is now leading flexibility around the bonds we offer. We were to outcomes in New Zealand that have very happy with the inaugural tender and saw previously been seen elsewhere, such as this as a major step toward maturity as an large curve-extending trades. issuer.

KIM MARTIN NEW ZEALAND TREASURY NICK SMYTH BNZ Between mid-September and mid-October we We are nine months into QE and the RBNZ ran four nominal bond tenders in which yields owns almost 40 per cent of the nominal were negative. This was a small sample set and NZGB market and almost 35 per cent of it was difficult to discern any different investor our overall government-bond market. To behaviour, but bid-cover ratios were still give these numbers some context, the reasonably aligned to history. Ultimately, yield central banks with the largest ownership below zero is a psychological hurdle but the are the Swedish Riksbank and the Bank of world has been living with this for a long time Japan, both at around 50 per cent of their and investors make the same assessments they markets. The difference is that they have do with positive yields. been buying for years.

59 EVENT REPORT

ANDREA DORE WORLD BANK STEFAN GOEBEL RENTENBANK We are keen to extend the duration of our It is difficult to judge long-end liquidity in the debt portfolio. With the current low interest- euro secondary market but up to 30 years rate environment, we have seen enormous there are the purchasing programmes from interest in duration product. The curve is central banks to support it. This means there quite steep and investors are keen to pick up is strong bid-side liquidity. But on the other yield further out on the curve. side it can certainly be the case that, if bonds are well placed in the primary market and the purchasing programme takes up to 50 per cent of the issue volume, offer-side liquidity dries up very quickly.

CHRIS LAMERS HUMM If issuers do not have good, proactive relationships with regulators a crisis is not the time to try to build them. New Zealand’s nonbank sector in general has kept its head down with regulators and SIMON PANNETT HARBOUR ASSET MANAGEMENT as a result we have not built a strong relationship at all levels of government Nonbank originators were excellent in and educated them about our sector. their communication around the effect of We all felt this during the COVID-19 COVID-19 on their books, even compared crisis, where in Australia we saw the with the major-bank lenders from which we regulators step in with lightning speed were asking for the same information. We to support the nonbank sector. always received proactive and timely data from the nonbank industry.

60|KANGANEWS FEB/MAR 2021 DEEMPLE BUDHIA RUSSELL MCVEAGH The engagement that the New Zealand nonbank industry had with Treasury and the RBNZ in 2020, through bodies like the ASF, was positive as we now have more active dialogue with government agencies. The building blocks are there for future engagement in relation to matters relevant to the nonbank industry.

MARK DE REE UDC FINANCE While the final form of UDC’s warehouse structure did not include mezzanine funding, in the early stages there was very strong interest from mezzanine investors in participating – at attractive pricing levels. This interest came from investors in New Zealand, Australia and further offshore.

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61 EVENT REPORT

ASB BANK LIAM CLEARY WESTPAC CHANDU BHINDI System cash balances increased to We welcomed the delay to capital reforms around NZ$30 billion from around NZ$8 particularly given the COVID-19 pandemic and billion in the space of a couple of months our priority to support economic recovery. early in the COVID-19 crisis. The speed The combination of the delay, suspension of response from the RBNZ to provide of dividends and restrictions on redeeming liquidity to the system drew a line under capital securities mean New Zealand banks any chance of a funding or liquidity crisis. are currently sitting on large capital buffers.

PAUL DALEY ANZ The 2008 financial crisis was a slow burn before it got going. At the time, New Zealand banks were not as well funded and we struggled when issuance markets dried up. In the years since, our funding structures and capital requirements have changed so in many ways we were more prepared for a crisis when COVID-19 hit.

62|KANGANEWS FEB/MAR 2021 MAHES HETTIGE BNZ TIM MAIN KIWIBANK We need to be much more mature We had strong asset growth in 2020 so felt it was in asset-liability management necessary to top up our capital level with a tier-two going forward. This includes how transaction. This was a risk given the final form of tier- we manage in a QE environment two capital is yet to be finalised. But we had enough and maintain a market presence, confidence that the main change will be the removal of because we want to avoid having a the nonviability trigger in current documentation to be maturity cliff at the back end of this. comfortable going to market.

GUY LETHBRIDGE RUSSELL MCVEAGH Banks are now dealing with a market setting that no-one was expecting at the beginning of 2020. There are record low interest rates, repayment deferrals for borrowers, a delay in capital reforms, prohibition of dividends and redemption of capital instruments, and a flood of money coming in through LSAP and soon the funding-for-lending programme. It has certainly been a year of challenges.

63 EVENT REPORT

JAMES ATHEY ABERDEEN STANDARD INVESTMENTS SIMON MACGILL MARK BUTCHER NEW ZEALAND LOCAL COMMONWEALTH BANK GOVERNMENT FUNDING AGENCY We have seen most of the At the beginning of 2020, We need to think about the dramatic decline in economic the New Zealand market eventual withdrawal of central- activity reversed and investors lost its traditional yield bank support. There are three now mostly have positive advantage to Australia options for an issuer reliant on outlooks as policy remains and the government’s a central bank: it either has to supportive and economies fiscal position was getting become financially stronger normalise. All the while, stronger. Attracting new to repay, find new investors however, central banks remain investors to the New to soak up maturities upon uber cautious with respect Zealand high-grade market refinancing, or the central to any unwarranted or pre- was becoming difficult. bank keeps rolling over QE – emptive tightening of financial COVID-19 was certainly a which nobody wants. conditions. New Zealand is a cure for this as high-grade market where we see these issuance increased to an forces playing out. unprecedented level.

STEVE LUCAS ASB BANK We have the opposite challenge of the high-grade borrowers in that deposit growth and the RBNZ’s funding-for-lending programme have reduced our issuance task for the next 12-24 months. We have a strategy to maintain contact with our domestic and offshore investors, though – because we want to stay relevant to them.

64|KANGANEWS FEB/MAR 2021 MICHAEL MICHAELIDES CARMIGNAC JON DAY NEWTON INVESTMENT MANAGEMENT We have seen after previous recessions that If the global economy deteriorates the output gaps, which were not as large as they economies of Australia and New Zealand are now, took a very long time to close. This will also deteriorate, and vice versa if there is time, the recovery has been much quicker improvement – so these sovereign bonds still than most expected, particularly in the US. work very well as hedging assets. Generally, This raises the question of whether a larger though, we think things are changing and output gap might now close very fast – and government bonds may not be as useful whether the market could front-run the hedging assets as they once were due to levels withdrawal of support. of spending and central-bank monetary easing.

JOHN BERRY PATHFINDER ASSET MANAGEMENT Extending time horizons from the next quarter or the next year out to the next decade or even several decades means we must account for a wider range of risks. This includes climate change: an intergenerational risk that will have truly massive financial impacts. It is a risk that cannot be ignored by businesses, regulators, consumers or investors.

LOUISE AITKEN ĀKINA FOUNDATION There is a massive role for the financial-services industry to play in meeting challenges like climate change and inequality. We have a serious challenge in our communities around financial inclusion. The Aotearoa Circle’s Sustainable Finance Forum’s roadmap has 11 key priority areas and we cannot expect the government or philanthropic sector to solve them all.

65 EVENT REPORT

CHRISTINA LEUNG STEPHEN TOPLIS BNZ NEW ZEALAND INSTITUTE OF ECONOMIC RESEARCH Fiscal policy has been driving the economic When we are in such a low interest- rescue mission and the central bank has been rate environment, where the cost of the supporting actor, with QE. Over the next borrowing is so low, considerations for year or so it will remain the domain of fiscal housing investment become skewed policy to determine where the economy goes. toward the rate of return. Anything that One of the great things about the fact that changes expectations around return, the government overestimated the economic such as housing supply or capital-gains decline is that it now has a pot of revenue it can tax, could help balance this. spend if the wheels fall off.

DOMINICK STEPHENS WESTPAC The main problem is that the lower the cash rate goes, the wider the gap between banks’ remuneration for reserves and for anything that money could be used for if lent elsewhere. This bank profit problem could be solved with an effective tiering system as they have in Europe.

66|KANGANEWS FEB/MAR 2021 NICK TUFFLEY ASB BANK A big issue we have not solved is the supply and demand of housing. There is a migration issue on one hand, where New Zealand housing supply has lagged population growth for a while but can now catch up. On the other hand, we have not nailed the issues of cost of land and the impact of regulation. As a result, we have a very inelastic supply response to housing issues.

SHARON ZOLLNER ANZ DIANA GORDON KIWI WEALTH We are starting to think we are bullet Vaccines change a lot for our strategy. proof, and obviously we are not. There are There are plenty of idiosyncratic risks we significant medium-term challenges and can take in the high-yield market, which we have not yet had a slowdown in which is something we will do now there is an people’s economic decisions and loss of end to this crisis in sight. With several income are reflected, rather than the dramatic viable vaccine candidates, the calculus for interruption caused by the government’s investment versus speculation changes – health response. and we will also change.

MARK BROWN HARBOUR ASSET MANAGEMENT The LSAP programme created opportunities at the beginning and has been reasonably consistent throughout. While LSAP continues at the prevailing level, yield rises should in theory be contained. I expect that as soon as we see economic conditions that could cause this unwind, the bond market will start to reflect it and push bond yield higher.

67 EVENT REPORT

DEAN SPICER ANZ SILVANA SCHENONE TAKEOVERS PANEL ROB HEWETT SILVER FERN FARMS Companies’ stakeholders New reporting requirements Exporters need to be are now having a larger around climate change will nimble. This time last year, say, whether it is the increase the compliance our lamb exports to China consumer, capital burden on businesses. accounted for around providers or staff – who Having said this, in my view 40 per cent of total lamb now often want to see disclosure is good. It helps business. By March it was the company they work market participants price risk 10 per cent and now it is for acting in ways that are and helps everyone make 55 per cent. We have been focused on more than just informed decisions. However, able to shift the focus of the bottom line. To ignore we also need to be careful our exports as the crisis has this trend of broader not to create a competitive changed. Having a relatively stakeholder engagement is disadvantage for New Zealand short-term focus during this very risky. by increasing requirements period has been essential. too much.

RICHARD HILDER PRECINCT PROPERTIES Investment in the New Zealand property sector is very strong. There is a lot of overseas interest, with global funds interested in Auckland and Wellington. We see growth opportunities, particularly in Wellington, and I can see this leading to term requirements in debt capital markets.

68|KANGANEWS FEB/MAR 2021 DAVID MCLEISH FISHER FUNDS MANAGEMENT BEN TROLLIP MELVILLE JESSUP WEAVER The tools we as active managers have The move to passive investment strategies at our disposal are the same as they has not been as pronounced in New Zealand’s have always been. It is business as usual institutional fixed-income and cash markets to some extent, because we are in the as it is elsewhere. Part of the reason is business of outperforming the market. that fees have already been sharp and are We are not in the business of chasing the continuing to compress. Also, outperformance returns that we might have been able to is more predictable in this sector so active achieve many years ago. management still has a role to play.

DAVID AUSTIN WESTPAC The savings industry in New Zealand has matured a lot in recent years. KiwiSaver is now into its 13th year and has more than NZ$60 billion of assets under management. More than 100,000 KiwiSaver members are retired, which raises the question of whether inflation-linked bonds should become part of the bond indices.

CECILIA TARRANT NEW ZEALAND GREEN INVESTMENT FINANCE It is estimated that we will need to double our current renewable-energy production if we are to achieve the degree of electrification needed to meet our emissions targets. This is a daunting task, so reducing use of electricity and improving efficiency is vital. Technology will have a key role to play in this.

69 KANGANEWS AWARDS

The KangaNews Awards 2020 reflect the reality of an unprecedented year, recognising the houses, transactions and individuals that best coped with the devastating impact of COVID-19. At the same time, many houses that have established longstanding records of success maintained their positions even in this most challenging year.

he awards process has of the year, and the best sustainability debt Australia, New Zealand and offshore to remained consistent in house in New Zealand. vote on behalf of their firms. its methodology. Awards This latter category once again In 2020, KangaNews received several are based on market illustrates the growing significance of hundred legitimate votes from market votes, which means award sustainability in the Australasian debt participants that were used to determine winners can proudly market. In 2017, the KangaNews Awards which organisations and individuals best boast that their acclaim recognised the Australian Sustainability served their clients over the year, including comes dircetly from clients, peers and Debt House of the Year for the first time. as many votes as ever from international Tcompetitors. In 2018, the awards added the Australian participants in the Australasian market. Meanwhile, the variety of awards Sustainability Fund Manager of the Year, Votes came from almost every continues to change to reflect the the Australian Sustainability Issuer of the significant institutional fixed-income evolution and maturity of the Australasian Year and the Australian Sustainability investor and intermediary in Australia and debt market. KangaNews presented just Deal of the Year. In 2019, the significance New Zealand, as well as the lion’s share of 12 awards in its inaugural suite in 2007, of coverage in the rating-agency space active borrowers from the supranational, a number that has grown to more than and the increasing number and variety of sovereign and agency, FI, securitisation 50 in 2020. The spread of valid votes sustainability-linked deals in New Zealand and corporate sectors. represents the growth of the Australasian were also recognised. The awards process also includes debt market and its importance to an a thorough process of reviewing and, international audience. CONSISTENT METHODOLOGY where necessary, verifying votes to ensure A pair of new categories added for ince their inception at the end integrity. A high degree of rigour is 2020 further refine the way KangaNews of 2007, the KangaNews annual applied to ensuring that award winners recognises the coverage provided to Sawards have been the only ones are truly backed by a plurality of market Australian issuers seeking to engage with given to participants in the Australasian participants with legitimate motivation to global markets, with one award apiece for debt market based purely on input from contribute to the process. the rates and credit sectors. These cover other market users. Because of this input from genuine both foreign-currency issuance and dealer KangaNews does not employ an market participants, KangaNews is support for distribution of Australian awards committee or ask for submissions to confident that its awards are the best and dollar debt to offshore investors. determine the winners of its annual awards. fairest recognition of excellence in the Meanwhile, there are also new Instead, the magazine’s editorial staff Australasian debt market. KangaNews categories for Australian bank and invite a comprehensive and representative would like to thank all the market nonbank financial-institution (FI) issuers group of issuers, investors and bankers in participants who voted in the awards.

70|KANGANEWS FEB/MAR 2021 SUBSCRIBE

TODAY current issue + supplements KangaNews is a one-stop information source on the AUD and NZD bond markets. Each issue provides all the information market participants need to keep up to date with the deals and trends making headlines in the markets, in-depth issuer and investor insights and statistics. Subscribers also have access to email updates on breaking deals and news from the KangaNewsAlert service, as well as all the data on www.kanganews.com

To subscribe or request a free trial please contact Jeremy Masters

t. +61 2 8256 5577 e. [email protected] KANGANEWS AWARDS

KangaNews Market People of the Year 2020

The KangaNews Market People of RAKESH JAMPALA the Year are the individuals who voters ANZ in the KangaNews Awards 2020 believe went above and beyond their roles to contribute to the development of the ANZ has been the top performer Australian and New Zealand debt market. in many of the house of the year categories in the KangaNews There are no restrictions on the firms, Awards for a decade or more. positions or seniority of winners, and One of the most consistent elements of the bank’s success – and perhaps the least discussed – is the support it garners, year after voters are asked to consider who year, from the investor community, which focuses in particular contributed most to the market in either on the service ANZ provides in the secondary market. With rates 2020 specifically or across the span of a and credit volatility back with a vengeance in 2020, KangaNews Awards voters recognised the individual who has assembled and career. runs Australia’s highest-ranked bond trading operation. With ANZ already acclaimed as Australian Secondary Market House KangaNews is pleased to reveal the eight of the Year, Rakesh Jampala’s inclusion in the KangaNews Market Market People of the Year 2020, and People of the Year for 2020 acknowledges the consistency and to offer its congratulations to the winners breadth of service his business offers the local market, especially in and thanks to the voters. a most challenging year.

KIM MARTIN MICHAEL BATH TE TAI ŌHANGA – AUSTRALIAN OFFICE THE TREASURY OF FINANCIAL MANAGEMENT

Without functional and visible It is not just that the Australian sovereign-debt sectors, the Office of Financial Management challenges of 2020 could have (AOFM) supported the Australian become critical for Australian and securitisation sector in 2020, or New Zealand capital markets. While other local government- even that it did so quickly and without apparent false steps early sector entities may have completed the most eye-catching in the COVID-19 crisis. What really made market participants individual transactions of the year, market participants credit universal in their praise of the government debt-management New Zealand Debt Management (NZDM) for its transparent agency’s intervention is the innovation with which it set about approach to a funding task that ballooned and then came back its task and the tireless way in which it engaged with the private down to earth over the course of the year – and in particular Kim sector to communicate and deploy its strategy. The person most Martin’s role in delivering this confidence-boosting strategy. In closely associated with the rollout of AOFM support is Michael just one example of the scale of task Martin oversaw, NZDM Bath – a figure well known to the local securitisation industry and syndicated NZ$23 billion (US$16.8 billion) of new supply in debt market but whose reassuring presence captured the support 2020, having printed an aggregate of NZ$21.5 billion between its of voters in the KangaNews Awards 2020. debut in 2012 and the end of 2019.

72|KANGANEWS FEB/MAR 2021 market, one of the most affected was undoubtedly lenders in the ANNE-MARIE NEAGLE securitisation industry. A maelstrom of loan forbearance, disparate KING & WOOD government intervention and the potential for market seizure MALLESONS made for nervous times. One of the clearest contrasts with the global financial crisis, however, was that securitisation funding – from banks and, in relatively quick order, the capital market – never dried up. Sarah Samson is acclaimed by KangaNews Awards Some of the KangaNews Market voters for her efforts, and those of her team, in supporting clients People of the Year are highly visible through this most challenging of periods – much of it while in market figures, often being those lockdown in Melbourne. most closely associated with high-profile transactions. Others do their work mostly behind the scenes – though their acclaim is no less richly deserved. Anne-Marie Neagle falls into the latter DEAN SPICER category. Parties involved in the development of the Australian ANZ Office of Financial Management’s forbearance special-purpose vehicle – a key plank of its support of the local securitisation Last year saw Dean Spicer market – universally say Anne-Marie Neagle’s work contributed transition from his longstanding most to making the concept a reality. Her tireless efforts played no role as ANZ’s head of capital small part in keeping the market functional through a challenging markets in New Zealand to a new year, and her peers and clients recognise this unique contribution. position as the bank’s local head of sustainable finance. His recognition as one of the KangaNews Market ROB NICHOLL People of the Year is primarily for his role in building and AUSTRALIAN OFFICE OF maintaining ANZ’s position as a powerhouse in the New Zealand FINANCIAL MANAGEMENT debt market, but it also acknowledges the particular challenges of the move to his new role: at times, Spicer was effectively covering both positions during a generational period of economic and market upheaval. The commitment to delivering for his bank, The Australian Office of Financial clients and colleagues that Spicer is recognised for is how he built Management (AOFM) faced the ANZ business and ensures he will keep delivering through this a Herculean task in 2020 as its period and into a new year and new challenges. issuance requirement spiralled: it placed more than A$200 billion into the market in Q2-3 alone, compared with barely A$50 billion in the whole preceding FIONA TRIGONA calendar year. And yet, after market functionality returned in April NEW SOUTH WALES and May, the AOFM was able to maintain an orderly issuance TREASURY CORPORATION process – assisted no doubt by reserve-bank support but also benefiting greatly from the agency’s own expertise. Through this period, Rob Nicholl is recognised by market participants as a calm hand on the tiller. The Australian debt market is in astonishingly Arguably the story of 2020 in the good health in early 2021, and a well-managed and transparent Australian dollar fixed-income sovereign programme is a key contributor. Rob Nicholl is the market was the increase in issuance driving force behind that contribution. required of the sovereign and semi-government issuers – a task that commenced just as global markets hit their roughest patch since the global financial crisis. SARAH SAMSON Fiona Trigona is recognised for managing New South Wales NATIONAL AUSTRALIA Treasury Corporation (TCorp)’s funding programme through this BANK period and beyond – but this is far from her only achievement. Market participants also acclaim her longstanding high-quality approach to market engagement and the leadership she has provided to the TCorp green and sustainability bond programme, If 2020 brought upheaval for which has made the state of New South Wales the largest virtually every sector of the debt Australian dollar issuer in this growing sector.

73 KANGANEWS AWARDS

AUSTRALIAN BOND HOUSE OF THE YEAR ANZ Australian market house awards

AUSTRALIAN RATES AUSTRALIAN CREDIT HOUSE OF THE YEAR HOUSE OF THE YEAR Commonwealth Bank of Australia ANZ

AUSTRALIAN DOLLAR SSA AUSTRALIAN SECONDARY MARKET HOUSE OF THE YEAR HOUSE OF THE YEAR TD Securities ANZ

74|KANGANEWS FEB/MAR 2021 AUSTRALIAN SECURITISATION GLOBAL COVERAGE HOUSE OF THE YEAR HOUSE OF THE YEAR – RATES National Australia Bank UBS

GLOBAL COVERAGE US PRIVATE PLACEMENT HOUSE OF THE YEAR – CREDIT HOUSE OF THE YEAR Citi National Australia Bank

AUSTRALIAN SUSTAINABILITY AUSTRALIAN RATES DEBT HOUSE OF THE YEAR FUND MANAGER OF THE YEAR ANZ Ardea Investment Management

75 KANGANEWS AWARDS

AUSTRALIAN CREDIT AUSTRALIAN SUSTAINABILITY FUND MANAGER OF THE YEAR FUND MANAGER OF THE YEAR Macquarie Investment Management QIC

AUSTRALIAN LAW FIRM AUSTRALIAN RATING AGENCY OF THE YEAR OF THE YEAR King & Wood Mallesons Moody’s Investors Service

AUSTRALIAN RATES SECTOR AUSTRALIAN CREDIT SECTOR RATING AGENCY OF THE YEAR RATING AGENCY OF THE YEAR S&P Global Ratings Moody’s Investors Service

76|KANGANEWS FEB/MAR 2021 The number…

…reason for Asia Pacific customers to choose Moody’s? Our expertise.

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leading global provider of credit ratings, reserved. All rights and affiliates. Service, Inc. and/or its licensors Investors © 2021 Moody's research, and risk analysis; our trusted insights can help decision-makers navigate the safest path through turmoil and market volatility. With 300+ analysts based in the Asia Pacific region, we combine our global expertise with extensive local presence to deliver comprehensive credit analyses to our customers. Over the last decade, Moody’s has expanded its debt coverage across the Asia Pacific region; in 2020 alone, we rated 82% of total rated debt1. To learn more, please visit ratings.moodys.io

1 Source: Dealogic Limited; calculated based on the face amounts at the time of issuance, issued by Asia Pacific issuers. KANGANEWS AWARDS

AUSTRALIAN STRUCTURED FINANCE AUSTRALIAN TRUSTEE RATING AGENCY OF THE YEAR OF THE YEAR S&P Global Ratings Perpetual Corporate Trust

AUSTRALIAN GOVERNMENT-SECTOR ISSUER OF THE YEAR Australian Office Australian market of Financial Management issuer awards

KANGAROO AUSTRALIAN NONBANK FINANCIAL ISSUER OF THE YEAR INSTITUTION ISSUER OF THE YEAR World Bank Firstmac

78|KANGANEWS FEB/MAR 2021 “KangaNews Australian Nonbank Financial Institution Issuer of the Year”

Firstmac is Australia’s leading non-bank residential lender, with $12 billion in loans under management. Since 2003 we have issued $30 billion in RMBS.

This year, we were proud to receive the Kanga Award for Australian Nonbank Financial Institution Issuer of the Year. Voted by market participants, it is bestowed on the issuer that most impressed the market.

Our 2020 landmarks

Re-opened the COVID-19-affected RMBS market Issued $3.3 billion of RMBS in March with a FMFT 2020-1 $1.0B prime RMBS Re-issued two transactions at above contractual transaction step-up Commenced benchmark monthly reporting of COVID-19 hardship data

To find out more about our debt securities, contact James Austin, CFO. 0407 010 200 [email protected]

Firstmac Limited ABN 59 094 145 963 Australian Credit Licence 290600 KANGANEWS AWARDS

AUSTRALIAN BANK AUSTRALIAN CORPORATE ISSUER OF THE YEAR ISSUER OF THE YEAR ANZ Banking Group AusNet Services

AUSTRALIAN SUSTAINABILITY ISSUER OF THE YEAR ANZ Banking Group Australian market deal awards

AUSTRALIAN DOLLAR RATES SSA KANGAROO BOND DEAL OF THE YEAR BOND DEAL OF THE YEAR Australian Office World Bank of Financial Management A$1.1 BILLION 0.5% MAY 2026 & A$550 MILLION 1.1% NOVEMBER 2030 A$15 BILLION 1.75% JUNE 2051 LEAD MANAGERS: LEAD MANAGERS: ANZ, Commonwealth Bank of Australia, ANZ, Nomura, RBC Capital Markets, TD Securities Deutsche Bank, J.P. Morgan, UBS

80|KANGANEWS FEB/MAR 2021 AUSTRALIAN DOLLAR FINANCIAL AUSTRALIAN DOLLAR CORPORATE INSTITUTION BOND DEAL OF THE YEAR BOND DEAL OF THE YEAR

ANZ Banking Group Qantas Airways A$1.25 BILLION 10.5NC5.5 TIER-TWO SDG FRN A$500 MILLION 5.25% SEPTEMBER 2030

LEAD MANAGER: LEAD MANAGERS: ANZ Citi, Commonwealth Bank of Australia, National Australia Bank, Westpac Institutional Bank

AUSTRALASIAN-ORIGIN OFFSHORE FINANCIAL INSTITUTION AUSTRALASIAN-ORIGIN US PRIVATE BOND DEAL OF THE YEAR PLACEMENT DEAL OF THE YEAR Westpac Banking Corporation Sydney Airport Corporation US$1.5 BILLION 2.668% 15NC10 TIER-TWO US$52 MILLION 2035, €50 MILLION 2035, & 2.963% US$1 BILLION NOVEMBER 2040 TIER-TWO A$220 MILLION 2040, A$100 MILLION 2040 SUSTAINABILITY-LINKED & A$120 MILLION 2045 LEAD MANAGERS: BofA Securities, Citi, Goldman Sachs, AGENTS: J.P. Morgan, Westpac Institutional Bank MUFG Securities, National Australia Bank, Scotiabank

AUSTRALIAN SECURITISATION AUSTRALIAN SECURITISATION DEAL OF THE YEAR DEAL OF THE YEAR

Brighte La Trobe Financial A$190 MILLION BRIGHTE GREEN TRUST 2020-1 A$1.25 BILLION LA TROBE FINANCIAL CAPITAL MARKETS TRUST 2020-1 ARRANGER AND LEAD MANAGER: National Australia Bank ARRANGER: Macquarie Bank LEAD MANAGERS: Citi, Commonwealth Bank of Australia, HSBC, Macquarie Bank, National Australia Bank, Natixis

81 KANGANEWS AWARDS

AUSTRALIAN SUSTAINABILITY AUSTRALIAN SYNDICATED LOAN BOND DEAL OF THE YEAR DEAL OF THE YEAR Lendlease Finance Downer Group Finance A$500 MILLION 3.4% OCTOBER 2027 GREEN BOND A$300 MILLION 2023, A$400 MILLION 2024, A$400 MILLION 2025 & A$300 MILLION 2026 LEAD MANAGERS: SUSTAINABILITY-LINKED LOAN ANZ, Commonwealth Bank of Australia, HSBC, National Australia Bank, SMBC Nikko SUSTAINABILITY COORDINATORS: BNP Paribas, HSBC MANDATED LEAD ARRANGERS: ANZ, BNP Paribas, HSBC, Mizuho, SMBC Nikko

AUSTRALASIAN-ORIGIN OFFSHORE CORPORATE BOND DEAL OF THE YEAR Scentre Group US$1.5 BILLION 4.75% 60NC6 HYBRID & US$1.5 BILLION 5.125% 60NC10 HYBRID Australian market STRUCTURING ADVISER: UBS LEAD MANAGERS: innovation awards ANZ, BNP Paribas, Citi, Commonwealth Bank of Australia, HSBC, UBS

AUSTRALIAN INNOVATIVE AUSTRALIAN MARKET DEBT DEAL OF THE YEAR INNOVATION OF THE YEAR

THE AUSTRALIAN OFFICE OF FINANCIAL Australian Unity MANAGEMENT’S FORBEARANCE SPECIAL-PURPOSE A$120 MILLION PERPETUAL VEHICLE MUTUAL CAPITAL INSTRUMENT Awarded to the Australian Office of Financial Management FINANCIAL ADVISER: and the following contributors: Acacia Partners INDUSTRY PARTNER: Australian Securitisation Forum ARRANGERS AND LEAD MANAGERS: ADVISERS: King & Wood Mallesons, Clayton Utz, Eticore Acacia Partners, Morgans, National Australia Bank

82|KANGANEWS FEB/MAR 2021 KangaNews online has even more of the breaking debt-market news and in-depth analysis you need. KANGANEWS AWARDS

NEW ZEALAND BOND HOUSE OF THE YEAR ANZ New Zealand market awards

NEW ZEALAND RATES NEW ZEALAND CREDIT HOUSE OF THE YEAR HOUSE OF THE YEAR Proud to be accelerating a BNZ Westpac Banking Corporation New Zealand Branch sustainable future for Aotearoa.

We’re thrilled to win the KangaNews Awards for New Zealand Sustainability Debt House of the Year and New Zealand Credit House of the Year.

Two other KangaNews 2020 awards also recognise the role we played in Auckland Council’s NZ$500M 30-year green bond (Westpac was a Joint Lead Manager):

– New Zealand Dollar Rates Bond Deal of the Year. – New Zealand Sustainability Deal of the Year. NEW ZEALAND SUSTAINABILITY KAURI HOUSE DEBT HOUSE OF THE YEAR OF THE YEAR Together, with our customers, we’re helping drive Aotearoa’s transition towards Westpac Banking Corporation ANZ an inclusive and thriving net-zero emissions economy. New Zealand Branch westpac.co.nz/sustainable-finance

84|KANGANEWS FEB/MAR 2021 Westpac New Zealand Limited. JN16515 Proud to be accelerating a sustainable future for Aotearoa.

We’re thrilled to win the KangaNews Awards for New Zealand Sustainability Debt House of the Year and New Zealand Credit House of the Year.

Two other KangaNews 2020 awards also recognise the role we played in Auckland Council’s NZ$500M 30-year green bond (Westpac was a Joint Lead Manager):

– New Zealand Dollar Rates Bond Deal of the Year. – New Zealand Sustainability Deal of the Year.

Together, with our customers, we’re helping drive Aotearoa’s transition towards an inclusive and thriving net-zero emissions economy.

westpac.co.nz/sustainable-finance

Westpac New Zealand Limited. JN16515 KANGANEWS AWARDS

NEW ZEALAND SECONDARY MARKET NEW ZEALAND FUND MANAGEMENT HOUSE OF THE YEAR HOUSE OF THE YEAR BNZ Harbour Asset Management

NEW ZEALAND LAW FIRM NEW ZEALAND RATING AGENCY OF THE YEAR OF THE YEAR Chapman Tripp S&P Global Ratings

NEW ZEALAND TRUSTEE NEW ZEALAND ISSUER OF THE YEAR OF THE YEAR Guardian Trust Kāinga Ora – Homes and Communities

86|KANGANEWS FEB/MAR 2021 Three in a row!

New Zealand New Zealand New Zealand Issuer of the Year Issuer of the Year Issuer of the Year

New Zealand Innovative Debt Deal of the Year ( for our $300m 2040 inflation linked bond)

New Zealand Sustainability Deal of the Year

New Zealand Domestic Rates Deal of the Year

We are the largest residential property owner in New Zealand

White Lines East, Waiwhetu – Wellington OUR LOCAL CURRENCY Thank you to our investors, intermediaries and other CREDIT RATINGS market participants who have helped make 2020 Moody’s: Aaa another outstanding success during a world pandemic. Standard & Poor’s: AAA You have all played a part in helping support New Zealanders’ to have good quality, affordable homes, and live in strong, healthy communities. For more information, go to www.kaingaora.govt.nz/investor-centre/ KANGANEWS AWARDS

KAURI ISSUER NEW ZEALAND DOLLAR RATES OF THE YEAR BOND DEAL OF THE YEAR

World Bank Auckland Council NZ$500 MILLION 2.95% SEPTEMBER 2050 GREEN BOND LEAD MANAGERS: ANZ, BNZ, Westpac Banking Corporation New Zealand Branch

NEW ZEALAND DOLLAR CREDIT KAURI BOND DEAL BOND DEAL OF THE YEAR OF THE YEAR

Kiwibank World Bank NZ$275 MILLION 2.95% NZ$1 BILLION 0.75% JUNE 2026 DECEMBER 2030 TIER-TWO & NZ$300 MILLION 1.25% DECEMBER 2030 ARRANGER: JOINT LEAD MANAGERS: Craigs Investment Partners ANZ, BNZ, Commonwealth Bank

LEAD MANAGERS: Craigs Investment Partners, Forsyth Barr, Jarden Securities

NEW ZEALAND SUSTAINABILITY NEW ZEALAND INNOVATIVE DEAL OF THE YEAR DEBT DEAL OF THE YEAR

Auckland Council Kāinga Ora – Homes and Communities NZ$500 MILLION 2.95% SEPTEMBER 2050 NZ$300 MILLION 2.5% SEPTEMBER 2040 GREEN BOND INFLATION-LINKED WELLBEING BOND LEAD MANAGERS: LEAD MANAGER: ANZ, BNZ, ANZ Westpac Banking Corporation New Zealand Branch

88|KANGANEWS FEB/MAR 2021 Use KangaNews to facilitate your online investor updates With in-person roadshows limited for the foreseeable future, borrowers are increasingly using the web for investor updates.

KangaNews can facilitate, plan and market your online updates, bringing an independent and highly engaging approach to this vital form of investor relations. CONTACT US TODAY TO LEARN MORE ABOUT HOW WE CAN HELP Jeremy Masters HEAD OF COMMERCIAL [email protected] +61 2 8256 5577