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The Corporate Bond Report 2018 Australia's Growing Appetite For The Corporate Bond Report 2018 Australia’s growing appetite for corporate bonds Commissioned by FIIG Securities Limited Foreword Jim Stening Managing Director FIIG Securities Limited A fundamental cornerstone of any Market commentators, legislators, properly functioning capital market superannuation fund managers and is access to debt capital. The ongoing financial advisors need to consider what development of the Australian corporate constitutes a debt investment for investors bond market will help to generate and their allocation to these assets. investment opportunities along the risk return spectrum between cash and At the same time, the options for equities. It will also enable the funding borrowers in Australia have been limited of a much broader range of opportunities to the traditional debt providers, whose for borrowers. provision of credit is not suited for every organisation. This report demonstrates the low allocation both private and professional This report helps to shine a spotlight Australian investors have to corporate on what the bond market is comprised of, bonds relative to the rest of the world. how investment in the bond market has It is now time for Australians to consider performed and the potential of the a more diversified approach to asset corporate bond market in Australia. allocation to help reduce periods of extreme volatility for investors. In commissioning this report, we hope to add to the momentum of change Diversified asset allocations across and contribute to removing the existing a balanced mix of asset classes is barriers to further growing the Australian particularly important given our ageing corporate bond market, by encouraging population and the increasing reliance on investors and borrowers to engage with the growing superannuation savings pool the exciting opportunities being to sustain Australians in retirement. made available. Contents Highlights | 02 1. The Australian corporate bond market is growing | 10 2. Rising private investor demand for corporate bonds | 19 3. Capital preservation and yields drive investment in corporate bonds | 27 4. Improving investor awareness and understanding of corporate bonds | 34 5. Population ageing and the low yield environment provide future opportunities | 39 6. Increasing middle market activity and unrated issuance | 47 References | 53 Australia's growing appetite for corporate bonds What’s the opportunity? More than $1 trillion of corporate Only 47% of the Australian Average gross annual return of bonds are outstanding in Australia: corporate bond market is owned Australian bonds was 6.1% between the corporate bond market is by Australian investors 2006-16, compared to 4.3% around 70% the size of the listed for Australian shares share market (ASX) Snapshot of private investment Only 16% of high net worth Corporate bonds are 11% of total 95% of corporate bond investors individuals in Australia directly portfolio assets for individuals with own AUD-denominated bonds, own corporate bonds direct holdings while 72% own USD-denominated bonds Why corporate bonds? Expected yield of an investment Reasons for holding corporate Older Australians have is the #1 consideration affecting bonds: 73% for a reliable income larger corporate bond holdings: individuals’ investment decisions stream; 72% for the level of return corporate bonds are 22% of assets given risk profile;54% for for individuals aged 55+, compared capital preservation to 3-4% for younger groups Barriers to investing 84% of high net worth individuals Lack of awareness of the Almost 70% of non-investors in Australia do not own benefits of bonds identified as have insufficient understanding corporate bonds a barrier to investment by to invest in corporate bonds 38% of non-investors What’s the outlook? 86% of corporate bond A net 15% of non-investors Low yields in cash investments investors have had a positive intend to invest in the next 12 is the #1 concern identified by experience, and a net 37% months. Therefore the share of investors. And 40% are concerned intend to invest more in the high net worth individuals owning about government policy next 12 months corporate bonds could grow uncertainty from 16% to 29% Snapshot of issuer activity Non-financial corporations Number of unrated issues in Value of unrated issues in in Australia raise around Australia increased from 16 in Australia was more than 10% of total funding from 2012-14 to 39 in 2015-17 $1.1bn in 2017 corporate bonds The Corporate Bond Report 2018 Highlights The Australian corporate bond market As at June 2017, total bonds on issue has grown by more than 40% since 2010, by Australian banks was around $540 currently reaching over $1 trillion of billion, with another $460 billion on issue Australian corporate bonds outstanding.1 by other financial institutions, and $255 This is more than two-thirds the size of the billion by non-financial corporates. Almost Australian stock market – yet, corporate half (47%) of outstanding bonds are owned bonds do not receive nearly as much by Australian companies, governments and attention as an investment option in individuals, with the remaining 53% owned Australia and fly under the radar of by overseas investors. But direct market most investors. participation by Australian investors is relatively low compared to other countries: Historically, corporate bonds have only private investors hold less than 1% of all been issued by large rated companies in corporate bonds on issue in Australia Australia and purchased by overseas or compared to almost 20% in the United institutional investors. Innovations in the States, and Australian superannuation funds Australian corporate bond market are hold only 10% of their assets in bonds and enabling greater access for both issuers bills compared to an OECD average of and investors. Recent years have seen 40% (Chart i). increased issuance by unrated corporates seeking direct access to capital markets, While this may partly be due to regulatory and greater demand for corporate bond differences, such as different countries investments from private and non- mandating that retirement funds hold a institutional corporate investors. higher proportion of fixed income securities, it suggests that Australia’s corporate bond This report unpacks the latest trends market is relatively underdeveloped. in Australia’s corporate bond markets, However, a number of conditions – such seeking to understand what’s driving as an increasingly aging population – mean investor and issuer activity, what’s holding that the Australian bond market is well back market participation, and what might positioned for further development over happen next. The research is informed by a the coming years. Deloitte Access Economics survey of more than 700 high net worth individuals (HNWIs – individuals with more than $2 million of investable assets), as well as consultations with corporate investors and debt issuers. 1 We use the term ‘corporate bond’ to describe bonds that have been issued by both financial and non-financial corporations. 02 The Corporate Bond Report 2018 Chart i OECD countries’ pension fund asset allocations in bonds and bills, 2016 0% 10 20 30 40 50 60 70 80 90 Czech Republic Mexico Israel Slovak Republic Slovenia Greece Hungary Turkey Chile Spain Iceland Latvia Portugal Austria Korea Luxembourg Italy Ireland Norway OECD average 40% Germany Japan Denmark Finland United Kingdom Netherlands United States Canada Estonia New Zealand Sweden Switzerland Belgium Australia 10% Poland Source: OECD Pension Markets in Focus No.14 (2017) 03 The Corporate Bond Report 2018 There’s been growing interest in corporate bond investments from private and corporate investors in Australia. Our research finds that 16% of HNWIs in Australia have direct holdings of corporate bonds. For the HNWIs who own corporate bonds, this asset class represents an average of 11% of their total portfolio – the fourth highest investment allocation behind property, cash and shares (Chart ii). Private investors who do not own corporate bonds have a much higher proportion of their assets allocated to investment property. Chart ii Average asset allocations of HNWIs’ investment portfolios 0% 5 10 15 20 25 30 35 40 Investment property in Australia Cash or term deposits Shares listed in Australia Corporate bonds Shares owned via managed fund or exchange-traded fund Overseas investments (property, shares, etc.) Government bonds Bonds owned via managed fund or exchange-traded fund Private company in Australia Other investment Investors with corporate bonds Investors without corporate bonds Source: Deloitte Access Economics survey (2018) 04 The Corporate Bond Report 2018 The main drivers of corporate bond investment are clear: around three-quarters of HNWIs with corporate bonds believe they provide a reliable income stream and relatively good returns given the risk profile (Chart iii), and corporate investors cite similar reasons for holding corporate bonds. As a fixed income asset, corporate bonds provide capital stability and regular interest payments. But they offer higher yields than other fixed income securities such as government bonds and deposits, in order to compensate investors for the additional risks associated with corporate issuers. Chart iii Reasons for including corporate bonds in current investment portfolio 0% 10 20 30 40 50 60 70 80 90 100 Provides a regular and reliable income stream Provides good returns given risk profile For portfolio diversification Preservation of initial capital investment Provides
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