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Capital Financing 2016 Year in Review 2016 YEAR IN REVIEW Capital Financing This document was published on 15 December 2016. Steve Lambert, EGM Capital Financing A LOOK BACK OVER THE YEAR 2016 saw the theme of volatility and innovation continue, the importance of Asian investors and the growing power of self-managed superannuation for non-institutional investors in the domestic bond market. Last year in our Year in Review 2015 overview I spoke a capital account surplus. The importance of Asian about two common themes being innovation and investors in funding Australia has been consistent since volatility. Volatility saw markets closed at various times the Global Financial Crisis, be it through loans and/or due to many factors, often global in nature. In respect bonds. The importance of the offshore market cannot to innovation there was a strong move in how people be underestimated. Every year the percentage of the needed to find solutions to overcome this volatility and domestic market that is purchased from Asian investors other challenges. grows and the number and the variety of the investors from Asia are becoming more diverse both geographically In some respect those two themes continued in 2016. The and from the type of institution. We are also seeing more first few months of 2016 saw the low point of commodity activity from the Asian offices of a number of European or prices and a lot of uncertainty over global growth US fund managers. I don’t see this changing in 2017. generally and Chinese growth specifically. The market rebounded in March and we broadly saw a more friendly The other big theme is the power of self-managed issuing environment through the remainder of the year. superannuation and the power of the growth of non- Markets became focused on elections and their aftermath institutional investors in the domestic bond market. domestically and the US as well as the Brexit vote. Traditionally we saw this demand in the hybrid and Geopolitical issues in the Middle East, China sea, North convertible market but increasingly these investors are Korea and Russia all distracted and impacted markets providing liquidity in the senior debt for all types. 2016 during the year. At the end of 2015 we spoke of the types was the year where this went from a consistent, albeit of geo-political risk we saw potentially being the back small, bid for new issues, into being a more significant drop for 2016. Most of that played out, markets opened, part of most book builds. A number of infrastructure they closed; they created opportunities and we saw all of related issuers saw strong bids in 10 year FRN’s from this this in 2016 and we have similar expectations in 2017. sector and I think this will be a continuing theme in 2017 as more self-managed superannuation move towards fixed Australian corporate borrowers were less active in 2016 income, a seriously underweight asset class. than we saw in 2015. The syndicated loan markets were down approximately 20% in 2016 compared to 2015. The Innovation is weaved into both of these themes. NAB corporate bond market in 2016 broadly experienced a is extremely proud to bring the first green bond from a similar decline. Partly this decline is due to the transition commercial bank at the end of 2014. In 2015 we saw that of Australians economy post the mining boom; challenges transaction replicated by other banks both domestically in the construction industry and; the debate over foreign and offshore. In 2016 the green bond market stepped investment. Overall the bond markets produced similar up another level, in April we saw the first green certified volumes domestically year on year. securitisation transaction for Flexigroup, following we saw a tranche of that securitisation for green qualifying Two key themes we are seeing in the Australian domestic assets. In July we saw the first green bond from an market is one; the continued rise of the importance Australian Government Authority, Treasury Corporation of of Asian investors and; two the rise of the power of Victoria. This market is certainly becoming more topical self-managed superannuation with the growth of non- for Australia and a reflection on the growing investor institutional investors in the domestic bond market. appetite for assets that are socially responsible. Australia continues to run current account deficits; hence we need to borrow money overseas to create Capital Financing Year in Review 2016 3 This market will continue to grow as investor’s continue to have the desire for investments that are attractive in their own right and equally have purpose. As we finish 2016 there is continuing discussion about Australia’s sovereign rating, S&P have Australia on negative outlook since July. This has particular relevance for all financial institution borrowers and ultimately for other non-financial borrowers. I believe this discussion will get more attention during 2017. There will be lots of election discussions next year as well, so while the US election is out of the way, we will see elections in France, the Netherlands, Germany (both state and federal) as well as an interesting independence referendum (think Scotland) in Catalonia. It will be interesting this year to see how the new US administration deals with the ongoing foreign policy issues around the globe. This will create the usual propensity for markets to react, whether this is from instability in North Africa and the Middle East or one of a number of other spots around the world it is hard to say. The key is for issuers to expect volatility and be ready to issue in windows when the markets are open. Thank you for allowing us to work with you during the year. We look forward to working with you in 2017. 4 Capital Financing Year in Review 2016 AUD CORPORATE BOND MARKET OVERVIEW Australia’s corporate bond market consolidates amid slow macro backdrop, ahead of an expected supply rebound in 2017. Brad Scott Australia’s corporate bond market experienced a Following that, the issuance was dominated in a volume year of supply consolidation in 2016, during a period sense by Kangaroo issuers including a return from Apple characterised by muted company demand for term debt, (A$1.425 billion/3 tranches) and an impressive debut issue recurrent bouts of volatility and a continued investor bias from The Coca Cola Company (A$1 billion/2 tranches) towards longer tenors. which enhanced headline market volumes. Given these first half jumbo volumes, the first half of 2016 saw issuance Calendar 2016 was ushered in with sharp rises in market of A$4.85 billion, up around 10% on the prior comparable volatility initially related to concerns regarding China’s period. In reality, deal count wise, transactions were down slowing economy. Markets were then further rocked by however, while the resultant skew towards ‘AA’ rated the negative flow-on effect to commodity prices, namely volumes, masked the underlying trend seen towards 7yr oil, and in turn to investor sentiment. BBB demand driven by Australian and Asian investors. Combined with reporting season and a rise in credit Recent A$ corp issuance by rating rating downgrades, it would be easy to conclude that local 100% issuers stood back and bided their time to issue in Q1. 20% 29% In reality, local corporate debt markets were facing a 80% 40% supply drought based on the reality that many issuers had pre-funded in prior years, deleveraged or were perhaps 60% 24% targeting different markets such as USPP, Sterling and Euro 53% markets for varying reasons – tenor, volume etc. This came 40% 28% as no surprise to NAB’s DCM team as we saw a lack of a forward deal pipeline emerge at the tail end of 2015. This 20% 47% phenomenon, it should be said, impacted all debt markets 25% 27% universally and by the end of 2016 total corporate funding 0% 6% is around A$100 billion down from A$160 billion in 2015. 2014 2015 2016 ≥AA band A band BBB band NR It is against this backdrop, and with fixed income market Source: NAB Corporate Debt Markets participants wondering when indeed an Australian corporate would issue, that May finally saw its first Pleasingly, the second half of the year saw a rise in activity corporate issue when AirServices Australia (AAA) issued its with NAB busy across multiple corporate mandates first ever dual tranche transaction totalling A$400 million including SGSP Australia Assets, Local Government. (7yr/10yr) with NAB acting as JLM. Prior to this the only Funding Vehicle, Infrastructure play Westlink M7 (printing single transaction had come from repeat Kangaroo issuer A$500 million in 2 tranches) and a debut Kangaroo Korea National Oil Corporation in February. AirServices’ issue from Toyota Motor Credit Corporation amongst excellent outcome, however, had its intended effect of many others. Until the emergence of both Brexit and the reassuring issuers about the solid level of demand locally, Australian Federal election, it is equally noteworthy to and by months end, 3 more issuers had entered the the extent that taps of A$30-$50 million became a more market. These included two Kangaroo auto issuers and popular vehicle for corporate issuers in 2016, notably in the first domestic BBB rated issuer of the year, Port of the property sector. Brisbane, who issued an eye catching 7yr A$250 million at a very tight credit spread (NAB JLM). Capital Financing Year in Review 2016 5 Key 2016 themes: further headwinds for investors. The second half of 2016 saw some of the more traditional Credit curves steepen post US presidential election themes that have been prevalent in recent years namely: outcome 3.00 • A rise in activity around the 7yr+ tenors, is a trend 2.90 that indeed remains the sweet spot for the market and 2.80 2.70 should remain so in 2017.
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