SHINING STARS UNDER THE SOUTHERN CROSS T€¦ · Group Funding COMMONWEALTH BANK OF AUSTRALIA...

he Australian economy has been the stand-out performer on the

global stage this year and New Zealand has benefited due to its

proximity. The high-grade sovereign and agency issuers from the

Antipodean region met in Sydney on October 28, at a roundtable discussion

sponsored by Commonwealth Bank of Australia, to talk about their domestic

funding strategies, the impact of new liquidity regulation and the merits or

otherwise of bringing syndicated deals. They were joined by one of the biggest

Australian bank issuers, as well as the heads of funding from two of the

supranational issuers that have been active in the Kangaroo bond market.

ROUNDTABLEDISCUSSION

1 2 | K A N G A N E W S / C B A S U P P L E M E N T N O V E M B E R 2 0 0 9

PARTICIPANTS: JOHN BORTHWICK Deputy Treasurer and Head of Funding INTERNATIONAL FINANCE CORPORATION PHILIP COMBES Treasurer NEW ZEALAND

DEBT MANAGEMENT OFFICE ANDREW CROSS Principal Financial Officer INTERNATIONAL FINANCE CORPORATION ADAM DONALDSON Head of Debt Research

COMMONWEALTH BANK OF AUSTRALIA LAURA FAN Head of Funding INTER-AMERICAN DEVELOPMENT BANK BRENDAN FLYNN Senior Director, Corporate &

Government Ratings STANDARD & POOR’S PETER HENDRY Head of Global Markets, Institutional Sales, Fixed Income COMMONWEALTH BANK OF AUSTRALIA

RICHARD JACKSON General Manager, Financial Markets QUEENSLAND TREASURY CORPORATION STEPHEN KNIGHT Chief Executive NEW SOUTH WALES

TREASURY CORPORATION MELVIN NUNES Deputy Chief Executive Officer WESTERN AUSTRALIAN TREASURY CORPORATION JOHN TE WECHEL General Manager,

Group Funding COMMONWEALTH BANK OF AUSTRALIA WILLIAM WHITFORD Managing Director TREASURY CORPORATION OF VICTORIA

MODERATORS: PETER CHRISTIE Head of Fixed Income, Origination and Distribution COMMONWEALTH BANK OF AUSTRALIA

SAMANTHA SWISS Managing Director KANGANEWS

SHINING STARS UNDERTHE SOUTHERN CROSS

� DONALDSON The other item we are waiting for resolution onis the passage of the exemption for interest withholding tax onCommonwealth bonds through parliament, which is due anyday now. That should help bring new offshore private sectorbuyers into the Commonwealth government security (CGS)market and will potentially see the extent of switching andrelative value analysis between the triple-A type securities stepup a gear. That should improve liquidity and issuing conditionsacross the sector.

Swiss The Australian Prudential RegulationAuthority (APRA) has called for submissionson its proposed amendment of APS210, which will include a clearer definition of what constitutes liquid assets for banks from a prudential perspective. At this stage during the consultation process it is clear that Commonwealth government

T

REGULATORY ISSUES AND APS210

Christie From a regulatory point of view, isthere anything that needs to be done toensure the semis can continue fundingsignificant volumes?� JACKSON There is one thing outstanding with QueenslandTreasury Corporation (QTC)’s US registered programme underwhich we issue global AUD-denominated bonds. The ReserveBank of Australia (RBA)’s decision to approve QTC’s globalbond application and issue eligibility certificates will be deferreduntil all US and Luxembourg legal and regulatory requirementshave been met by both the Commonwealth as guarantor andQTC, and once necessary amendments to QTC’s global bondprogramme have been finalised. Unlike QTC’s domestic bonds,global bonds are registered with the US Securities andExchange Commission and listed and admitted to trading onthe regulated market of the Luxembourg Stock Exchange.

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securities will be classified as liquid assets.Are the semi-governments confident theirbonds will be included in the liquid assetdefinition?� WHITFORD As an industry group the semi-governments areworking on a submission to APRA as to why our bonds shouldbe included. From the conversations we have all had withvarious participants in the market we think there is a fair bit ofsupport for the idea of including the semis. In addition, thereare some good arguments about liquidity and the asset class ingeneral that support this.� KNIGHT We believe APRA will be supportive to thearguments. However, we don’t want to take it for granted andassume the regulator will see the market the same way we do.

If anyone was arguing that semis would not qualify ashaving good secondary market liquidity, they would point tothe fact that liquidity waschallenged, even in our sector, inthe period between December lastyear and February/March 2009.This is correct, but the primaryreason for that was the exogenousfactor of the bank guaranteescheme. If you take that off thetable semis were as liquid as anyother asset class.

In the period leading up to that,it was interesting to observe that a

number of funds were selling semis in mid- to late 2008because they were the only assets they could get a sensible bidon and they needed to generate cash. This provides evidence ofthe liquidity of the semi-government asset class, even though itwas somewhat frustrating to hear of investors selling our paperdue to its better liquidity!� NUNES That argument can be supported by the AustralianOffice of Financial Management (AOFM)’s actions – at thebeginning of this year they liquidated their semi-governmentportfolio of A$4 billion (US$3.6 billion). Western AustralianTreasury Corporation (WATC) and other semis continued toissue right throughout this period so the AOFM’s activity wastotally uneventful as far as the market was concerned. Themarket absorbed both the bonds being sold on the secondarymarket as well as new issuance, and I think this is ademonstration of good liquidity.

“WE HAVE ALL BEEN TRAVELLING A GREAT DEAL, ROADSHOWING TOINVESTORS. THE POSITIVE RECEPTIONWE ARE SEEING GLOBALLY IS TOWARDSAUSTRALIA AS A WHOLE.”R I C H A R D J A C K S O N

Q U E E N S L A N D T R E A S U R Y C O R P O R A T I O N



Christie Are there any concerns about thepotentially long time frame for the APS210process?� KNIGHT APRA knows this is a really tough issue to deal with.They don’t want to go back to the draconian days of the past interms of the very punitive liquidity ratio settings for banks. Atthe same time, they can’t just say because the banking system inAustralia did well over the crisis, the regulator can ignore thefact that there is a regulatory push globally to ensure banksdon’t just hold each other’s paper for liquidity. The events ofthe last two years have shown there can be times when thatsystem breaks down.

Swiss Is part of the semis’ argument to APRAbased on the differences between thestructure of the Australian market comparedwith other markets around the world?� KNIGHT The supply issue is a relevant point. But theargument also has to stack up on the grounds of truesecondary market liquidity. The premise is that banks shouldhave assets they can rely on the secondary market to liquidatein good times and bad.

Swiss Even if semi-government bonds wereexcluded, how much of a real impact wouldthat have on the semis? Are bank liquidportfolios a big part of your buying base?

� WHITFORD The various bank portfolios, including their liquidity portfolios, areinvestors in the semis. The lossof any investor is a concernand it would be unfortunate to lose some ongoing demandfor our bonds if the semiswere excluded.

Christie We have twosupranational issuers

here. How does what is occurring in Australiaaround the regulatory aspect of liquid assetscompare with what you are seeing in otherjurisdictions?� CROSS There are two countries that come to mind here. Oneis Singapore where the regulator, in a fairly accelerated fashion,eased up the rules around supranational paper being classifiedthe same as government paper. So if a bank had to holdgovernment paper or pledge government securities, they couldreplace this with supranational paper. It was a fairly narrowly-defined list of supras that qualified. That was a very immediatechange at the end of last year and shows how one regulatordefinitely sees supras as liquid assets.

The other comparison I would make is with the EuropeanCentral Bank and what it has done over the last year in terms ofbroadening the qualifying assets for repo purposes.� CHRISTIE However, APRA has said there is a distinctionbetween what is a qualifying asset for repo purposes with thecentral bank, versus a bank’s overall liquidity requirements.� KNIGHT APRA is trying to find the right balance between thetwo. I think they don’t want to default to the position of sayinganything that can be delivered for repo with the Reserve Bankof Australia (RBA) is liquid. They want to avoid the situationwhere if there is another crisis, the central bank becomes thelender of last resort. APRA wants the market to be the self-generator of liquidity to the extent that it can.� WHITFORD The other thing APRA will have to take intoaccount is that, if you do the maths, there are simply not

sufficient Commonwealthgovernment securities onissue to cover all the banks’requirements for liquid assets.So they will have to broadenthe list of eligible securitiesfrom CGS only.� TE WECHEL As we have justwitnessed globally, in asystemic crisis the only realbackstop is the central banks.The RBA expanded the typesof qualifying assets that couldbe repo’d and it is expected

Peter Christie Peter Hendry Adam Donaldson

“DOING A SYNDICATED DEAL MEANS YOUGET THE BEST INFORMATION ON WHO ISBUYING YOUR BONDS. WE ARE CONSCIOUSTHAT WE WANT TO BE EVEN-HANDED INCHOOSING LEAD MANAGERS – ALTHOUGHTHERE IS NO FREE RIDE SO FOR ANINTERMEDIARY TO BE INVOLVED THEY HAVETO BRING SOMETHING TO THE TABLE.”STEPHEN KNIGHT NEW SOUTH WALES TREASURY CORPORATION

C B A PA R T I C I PA N T S

> > C O N T I N U E D O N P 1 8

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Christie In terms of offshore investorsin domesticcurrency bonds, our estimates arethat up to 80 per cent ofCommonwealthgovernmentsecurities are heldby internationalaccounts. Are thesemis still recordinghigh levels ofoffshore ownershipof your bonds?

WHITFORD It is difficult to

measure the number of

offshore investors as you

cannot tell in some cases who

is the ultimate owner of the

bonds. However, we think 15-

20 per cent of Treasury

Corporation of Victoria

(TCV)’s bonds are held

offshore.

JACKSON At the moment we

would say over 50 per cent of

Queensland Treasury

Corporation (QTC)’s bonds

are owned by international

investors.

KNIGHT New South Wales

Treasury Corporation (TCorp)

is the same – we have more

than 50 per cent of our bonds

owned by offshore accounts.

NUNES QTC and TCorp have

global programmes so it

makes sense that they would

have higher proportions of

offshore accounts. For

Western Australian Treasury

Corporation (WATC) and TCV

OFFSHORE INVESTOR INTEREST REMAINS STRONGTHERE HAS TRADITIONALLY BEEN A HIGH PROPORTION OF FOREIGN OWNERSHIP OF AUSTRALIAN

SOVEREIGN AND SOME SEMI-GOVERNMENT BONDS. ISSUERS REPORT THAT OFFSHORE INVESTOR INTEREST

REMAINS STRONG, WHILE SUPRANATIONAL ISSUERS SAY THIS YEAR THERE HAS BEEN MORE GRANULARITY

OF INVESTORS IN THEIR KANGAROO DEALS.

it is quite different because we

don’t have those programmes.

DONALDSON All the

numbers show there is much

greater interest in the

Commonwealth bond market

from offshore, particularly by

central banks. For the semis it

is a little different but now

that TCorp and QTC have

offered to consolidate their

global with their domestic

bonds and all semis have

increased their issuance, we

think there will be a lot

greater participation from

offshore in the future.

Christie Have the semis sensed any movement in the percentage of offshoreparticipation over the last 12 months?

KNIGHT One thing we have

seen is a shift back in

participation by domestic

investors. The trend up until

about a year ago was that

offshore participation was

outstripping domestic. Now

we have seen domestic

investors – in particular fund

managers – come back in as

more significant participants.

Bank balance sheets have

also been active all the way

through.

JACKSON When a new

sizeable offshore investor, for

example a central bank, first

invests in semis they will

generally buy quite a

reasonable volume in a

relatively short period of time,

until they reach their limit.

Regarding domestic bank

balance sheets, we have just

been through a period where

liquidity was at a premium,

including for the semis, so it

should be no surprise that we

have seen certain domestic

investors looking to purchase

and hold significant volumes

of repo-eligible assets such as

semi-government securities.

FAN Prior to this year we had

a similar experience in which

the offshore investor demand

was stronger than the

domestic interest. For this

year, based on the two

Kangaroo deals we have

executed, around 70 per cent

of bonds were sold to

domestic investors. In

previous years that ratio

would have been reversed.

Having said that, for our 2014

tap, demand was evenly split

between offshore and

domestic accounts.

I believe this increased

interest from domestic

investors is due to changes in

relative value dynamics in

terms of spreads versus

governments, semis and

swaps. The relative values

provided attractive investment

opportunities for domestic

investors that had previously

not considered supras.

Swiss Will thosedomestic investorsbe there for the long haul?

FAN I think – and hope – they

will continue to purchase our

bonds. Given the recent

performance of the Inter-

American Development Bank

(IADB)’s five- and 10-year

AUD benchmark issues, I

trust the new investors have

had a positive experience

with IADB bonds and would

continue to consider our

bonds as alternatives in the

high-grade asset class.

BORTHWICK For

International Finance

Corporation, even more

important than the amounts

that were sold is the

diversification of the investor

base we have seen this year.

If we compare the Kangaroo

deal we did last year with the

first one we did this year –

both of which were five-year

maturities – we had more

than twice the number of

investors in this year’s

transaction, including a

number of central banks that

invested in supra bonds for

the first time.

This broadening of the

investor base really

impressed me. Other

dynamics – including bank

balance sheet demand –

are influencing the amounts

we can sell in this market.

But the fact that we are

getting in new investors,

particularly internationally,

is one of the best signs for

the market.

FAN I agree that there has

been more investor

diversification this year. We

have seen a lot more

granularity in our 2009

Kangaroo deals than in the

past. The depth and breadth

of the market has expanded

and we view this change as a

positive for the market.



FLYNN Ratings in the

Australian and New Zealand

sovereign and agency space

remain extremely high and

the outlooks are stable. A lot

of the issues we have been

facing in the last 12-18

months have been cyclical –

which should not really have

much of an impact on such

high ratings. And Australia

and New Zealand both have

very strong stories to tell.

Christie Despite this,there has been quitea lot of action byS&P in the ratings ofsemi-governmentsover the last 18months or so.

First, New SouthWales (NSW) andtherefore TCorpwere placed onnegative outlook,although now theyare back on stableoutlook. Then, inFebruary 2009Queensland andtherefore QTC weredowngraded to AA+from AAA. The NewZealand sovereignwas also put on anegative outlook atthe beginning of thisyear, although it is also now back tostable.

Brendan Flynn, canyou explain thebackground to this?

STRONG CREDIT RATING STORIESAFTER SOME VOLATILITY IN THE CREDIT RATINGS OF AUSTRALIAN SEMI-GOVERNMENTS AND THE NEW

ZEALAND SOVEREIGN OVER THE LAST YEAR, ALL THESE ISSUERS ARE NOW ON A STABLE OUTLOOK AND

ONLY ONE – QUEENSLAND TREASURY CORPORATION (QTC) – HAS BEEN DOWNGRADED BY STANDARD &

POOR’S (S&P).

FLYNN There has been a

progressive structural change

in state government finances.

For a long time reducing debt

was the focus, but then in

2006/07 the states started to

think about infrastructure, at

which point capex started to

increase. As a result, we had

to think about what could

impact some of the AAA

ratings of the semi-

governments. So last year we

put out some rating

guidelines as to what levels of

net financial liabilities to

revenue balance sheets

would have to get to before

we thought the AAAs might

come under some risk.

By and large the states have

stayed within those ratios.

Queensland was the

exception and the downgrade

was the result. The key to our

action on this state was that

the government was

committed to its spending –

government policy was that

capital spending was too

important not to go ahead

with it. Whereas some of the

other states delayed capital

spending, as well as taking

other measures.

With the other states it is still

a very strong story – even

though they have all taken a

big cyclical hit and their

balance sheets are looking

much weaker than they did

this time last year.

With NSW being placed on

negative outlook last year the

reason wasn’t so much

connected with what was

happening with their balance

sheet, rather that we had

some concerns over their

fiscal flexibility. However, the

government produced a mini

budget where they took some

difficult measures. This gave

us confidence they did have

fiscal flexibility. As a result,

NSW was put back onto a

stable outlook after the full

budget in June when it was

clear that the mini-budget

measures were being made

to stick.

We put the New Zealand

sovereign on negative outlook

at the beginning of this year.

At the time, we conducted a

review of most of the high-

grade sovereigns around the

world and we made a few

rating and outlook changes.

There were some concerns

with New Zealand that

finances were starting to

weaken.

New Zealand and Australia

are a good comparison as

both are pretty similar in

terms of having strong

balance sheets and good

economies, while they have

the same weakness which is

the large external imbalance.

The problem is that New

Zealand’s strengths are not

quite as strong as Australia’s

strengths, while their

weaknesses are greater than

those of Australia. That is

why New Zealand’s foreign

currency rating is AA+ while

that of Australia is AAA.

However, as with NSW, New

Zealand then showed in the

budget it had the fiscal

flexibility to make tough

decisions, whereas when we

put them on negative outlook

deficits were getting worse

with no credible exit strategy.

In the budget the government

put a strategy in place and as

a result we put them back

onto stable outlook.

Swiss PhilipCombes, do youagree that thepositive Australianstory has benefitedNew Zealand?

COMBES Undoubtedly. You

just have to look at how the

New Zealand dollar tracks the

Aussie dollar to see how we

are running in tandem with the

Australian story. Essentially,

while the commodities are

different – in New Zealand you

are looking primarily at soft

commodities while in Australia

it is hard commodities – the

same drivers of growth in the

Asian region are what will give

medium- to long-term support

to the commodities of both

countries.

It is true that the terms of

trade in the two countries

don’t track one-for-one, but

they are tracking sufficiently

well to allow the NZD to run

with the AUD to a large extent.

We are benefiting from that in

terms of interest in our bond

market.

Christie Have therebeen any changes regarding S&P’smethodology forrating governmentssince the crisis?

FLYNN In terms of rating

governments, we are quite

happy with how the ratings

have held up. I would stress,

though, that we are trying to

look through some of the

cyclical issues.

Also, particularly when you are

looking at sovereigns, there is

more to it than just the debt.

1 7

“THE RISKS TO THE AUSTRALIAN GOVERNMENT RATINGS ARE NOT ON THE FINANCES. THEY ARE MORE ABOUT WHATTHE BANKS ARE DOING BECAUSE THERE IS A LARGEEXTERNAL POSITION AND ALL THE EXTERNAL DEBT ISGETTING CHANNELLED THROUGH THE BANKS. HOWEVER, WE ARE VERY COMFORTABLE WITH THE AUSTRALIAN BANKS– THEIR RATINGS ARE AMONG THE HIGHEST IN THE WORLD, SO AUSTRALIA HAS HAD A PRETTY GOOD DOWNTURN.”B R E N D A N F LY N N S T A N D A R D & P O O R ’ S

For example, in Australia

there has been much

discussion around the fact

that government debt is

increasing and deficits are

worsening. However, from a

global perspective the deficits

are small and the starting

point was very strong.

We think the risks to the

Australian government ratings

are not on the finances. They

are more about what the

banks are doing because

there is a large external

position and all the external

debt is getting channelled

through the banks.

However, we are very

comfortable with the

Australian banks – their

ratings are among the highest

in the world, so Australia has

had a pretty good downturn.

Christie So thebanks have been key to the standoutperformance ofAustralia over the crisis?

FLYNN Definitely. There are

all kinds of reasons for

Australia standing out but I

think there are three key ones.

The first is that the Australian

economy is pretty flexible

and, even when we thought

things were going to be worse

in Australia, the outlook was

not as bad as what was

happening offshore.

Also, compared with some of

its overseas peers, there

wasn’t so much intense

competition in the domestic

market among banks,

therefore they weren’t being

pushed into some of the

reckless lending like some of

the other banks around the

world. As a result, their credit

books are holding up much

stronger. And finally, as

commercial banks, the

Australian financial institutions

are focused on more

traditional activities.

So we are comfortable with

the Australian banks and we

have all of them on stable

outlook as well – which is

pretty remarkable given what

we have gone through.

Donaldson TheAustralian dollar had some prettyhairy days at the end of last year and the beginning of 2009. Iunderstand that partof S&P’s ratingassessment revolvesaround the liquidityof the currency. Was the currencyvolatility a challengefor S&P?

FLYNN Not really. Because of

the large external balance

Australia has, it sets the

sovereign apart from many of

its peers. But we upgraded

Australia back in 2003

following the period of the

preceeding years when the

AUD was really out of fashion

partly because Australia was

perceived to be an old-

fashioned or old-world

economy. Because Australia

never got involved in the

technology boom and

remained dependent on

commodities, the currency

got down to 48 cents to the

US dollar.

We always knew a lot of the

external debt was in Aussie

dollars, and the remainder of

the foreign-currency

denominated debt is largely

hedged anyway. But the early

2000s proved our thinking

that the depth of liquidity in

the AUD alleviates the

liquidity pressures on external

funding without much

adverse economy-wide

impact during times of

external shocks such as the

early 2000s depreciation.

There is some volatility in the

currency but it is still a very

deep market – which is

another reason Australia is

AAA whereas New Zealand is

AA+: we don’t see the same

depth in the Kiwi dollar as the

Australian dollar.

70

60

50

40

30

20

10

0

1999

-00

2005/06 budget

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

A$

B

IL

LIO

NS

2011

-12

2012

-13

ALL STATES AND TERRITORIES NON-F INANCIAL PUBLIC

SECTOR CAPITAL SPENDING

SOURCE: STANDARD & POOR’S OCTOBER 28 2009

Current (2009/10 budget)



this list will not change, certainly for the foreseeable future.In this sense there is a disconnect between the RBA and the regulator.

Stephen Knight is right in saying the difficulty theregulator has is to find the happy medium. At the moment ifwe were to interpret the rules precisely, we would have tosignificantly increase the amount of liquid assets we own andthat would have to be in the form of government bonds. Butthere are unintended consequences of further regulation.And one of the biggest is that the bond market here inAustralia is showing signs of effectively shutting down –because bank balance sheets are not in a position to knowwhat they should be buying.

Jackson Has there been any bank paperissued since APRA released its DiscussionPaper on September 11?� TE WECHEL There has only been one public benchmark dealsince then.

Swiss Philip Combes, as a sovereign borrowerare these kinds of discussions taking placeamong regulators around the world havingany impact on the New Zealand DebtManagement Office (NZDMO)’s issuance?� COMBES Not really. The way I look at these issuesinternationally is that it is a bonus if we can get repo eligibilityoffshore. Our target investor market includes Asian centralbanks and there is such untapped demand there that we don’tneed to put great effort into seeking to advance our cause inregulatory discussions internationally.

I have the same view in our own market. The Reserve Bankof New Zealand (RBNZ) has put out a draft policy on liquidassets. We don’t have the same issue in New Zealand as theAOFM does in terms of having another level of high-gradeissuers in the form of the Australian semi-governments. So thenew policy will be a bonus for us as it will almost certainlyincrease New Zealand bank holdings of our bonds.

I would add that over the last year liquidity has improved,particularly in Australia but also in New Zealand. That hasbeen driven by a couple of things. Increased issuancevolumes have helped and we have also seen in New Zealandthe return of a number of banks which are now puttingbalance sheet behind the market as well as a tripling oftender participants over the past 12 months. That has beenvery positive for the market.� NUNES With regard to Australia, the role of the semi-governments is worth highlighting. We are probably the onlyjurisdiction in the world where the states and territories areclosely linked fiscally to the federal government and the semi-government bond market is structured around liquidbenchmark lines similar to that of sovereign bonds. I am notaware of any other jurisdiction that has the same semi-government bond market structure. I would have thought boththese factors – the fiscal ties and the market structure – wouldbe strong issues in favour of semis being included in thedefinition of liquid assets.

Christie Laura Fan and John Borthwick, assupranationals issuing in many differentmarkets, what is your view on the structure ofthe market in Australia? Do you think it helps

“AS AN INDUSTRY GROUP THE SEMI-GOVERNMENTS ARE WORKINGON A SUBMISSION TO APRA AS TO WHY OUR BONDS SHOULD BEINCLUDED IN THE NEW DEFINITION OF LIQUID ASSETS UNDERAPS210. FROM THE CONVERSATIONS WE HAVE ALL HAD WITHVARIOUS PARTICIPANTS IN THE MARKET WE THINK THERE IS AFAIR BIT OF SUPPORT FOR THE IDEA OF INCLUDING THE SEMIS.”W I L L I A M W H I T F O R D T R E A S U R Y C O R P O R AT I O N O F V I C TO R I A

“I WOULD BE CONCERNED IF SYNDICATION BECAME THE NORMFOR ALL ISSUES. IN THIS CASE WE COULD BE IN DANGER OFEXPERIENCING WHAT HAS HAPPENED IN THE EURO MARKETS,WHERE SECONDARY MARKET ACTIVITY AND HENCE LIQUIDITYHAS BEEN ADVERSELY IMPACTED AS THE LEAD MANAGERSCONTROL THE DEALS AND THERE IS NO INCENTIVE FOR ANYONEELSE TO MAKE TWO-WAY MARKETS.”M E LV I N N U N E S W E S T E R N A U S T R A L I A N T R E A S U R Y C O R P O R A T I O N

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to have the dualCommonwealth/semi-government structure andwhat implications doesthat have for youcompared with othermarkets where there isjust a government curve?� BORTHWICK There is a layer ofuncertainty and complexity as wellas less transparency tobenchmarking that doesn’t exist,for example, in the US dollar orsterling markets. Having said that,another similar market to Australiais Canada, where the Province of Ontario (Ontario) providesa benchmark in the same way that some of the semis dohere in Australia.

We face the issue of where we issue vis-à-vis those credits.In Canada, there was a strong argument that we should issuethrough Ontario but that rarely happened. However, we haveto price to sell our bonds around the benchmarks in anyparticular market and we are used to adapting to differentmarket structures.

We can all see why it happened in Australia and Canada –they are both very strong countries and at one point thesovereigns did not need to issue a lot of bonds. In fact, theyprovided a service to the market by continuing to issue evenwhen the governments were in surplus.� FAN Supranationals can serve as alternatives to semi-governments, especially for investors who are looking fordiversification within the high-grade asset class. In that sense wedon’t necessarily compete with the semis, rather we complementthe asset class by providing another option for investors.

CROWDING OUT IN THE TRIPLE-A SPACE

Christie With all the triple-A issuers in the market now, do the semis still view it as helpful to have the supranational, sovereign and agency (SSA) issuers in the Kangaroo market?� KNIGHT I have always thought itis good to have diversification.Even going back to the days whenthe semis weren’t borrowing somuch, what we needed was ahealthy fixed income market – sothe more issuers the better. I don’tthink the supply dynamics of thefederal and state governments havechanged that argument.� HENDRY Having more issuers inthe triple-A sector gives investors

globally more opportunities. When a new issue comes out aninvestor has to think about duration, the curve and switchingopportunities and that is good for the market in general.� TE WECHEL I agree. From a bank balance sheet point of viewit is all about diversification. There is clearly a benefit in holdinghigher-yielding assets.� DONALDSON We certainly noted a degree of selling of therelatively liquid semi-government and bank securities in 2007and 2008. When fund managers were confronted with clientredemptions and allocations back to equities for their balancedfunds, they tended to sell semis and supras rather than themore highly liquid CGS or less rationally priced weaker credits.� BORTHWICK I would argue that a strong semi-governmentmarket is a prerequisite for SSAs to have access to the market.If you look at the normal tiering, investors will first look tosovereign bonds, then they will look at semis, then SSAs.� TE WECHEL It is incredibly important to the development ofthe capital market here. Australia has relied on internationalsavings to fund its growth and without a vibrant bond marketthe cost of borrowing escalates. Because if the banks areborrowing large volumes of foreign currency offshore, withoutthe Kangaroo issuers being active the basis swap just moves inone direction, making our borrowing more expensive.� DONALDSON In fact, we seem to be getting a clear exampleof that at the moment. Supras aren’t really stepping in to takeadvantage of the widening in the basis swap, perhaps because

“THERE ARE UNINTENDEDCONSEQUENCES OF FURTHERREGULATION. AND ONE OF THE BIGGESTIS THAT THE BOND MARKET HERE INAUSTRALIA IS SHOWING SIGNS OFEFFECTIVELY SHUTTING DOWN –BECAUSE BANK BALANCE SHEETS ARE NOTIN A POSITION TO KNOW WHAT THEY SHOULD BE BUYING.”J O H N T E W E C H E L C O M M O N W E A LT H B A N K O F A U S T R A L I A

“IF THE CONCEPT OF CROWDING OUTREARS ITS HEAD AGAIN, IT WILL BE IN AN ENVIRONMENT OF GOVERNMENTDEFICITS RATHER THAN SURPLUSESAND THEREFORE INCREASEDBORROWING BY FEDERAL AND STATEGOVERNMENTS.”A N D R E W C R O S S I N T E R N A T I O N A L F I N A N C E C O R P O R A T I O N



Do you think there is too much competitionin the high-grade SSA space?� JACKSON Not at all. Wehave always said we supportdiversity in the market. Theissue for us in the past hasbeen that the size of theAUD market was decreasingrather than increasing. Sohaving more issuers is a goodthing – provided investorsare having a positiveexperience. Right now, we

have all been travelling a great deal, roadshowing to investorsand we can see there is a lot of momentum with regard toAustralian credits in general – it’s not just down to governmentor semi-government or SSA bonds. The positive reception weare seeing globally is towards Australia as a whole.� CROSS If the concept of crowding out rears its head again, itwill be in an environment of government deficits rather thansurpluses and therefore increased borrowing by federal andstate governments. In this context, could it be said that SSAswill be taking money off the table away from the semis?� WHITFORD If you look at demand in general it seems unlikelythat would happen.

The other thing to think about in this context is that we aregenerally operating in different parts of the curve. The SSAsseem to be concentrating on the three- to five-year part of thecurve whereas the semis have some action there but we are alsointerested in the tail-end of the curve. If we were fortunateenough that the Australian government curve was extended outto 2030, that is a space the semis would also be interested in. SoI think there is room across the curve for all the issuers.� BORTHWICK And if you look at the level of diversificationgoing on globally within central bank reserves management,Australian dollars will be a beneficiary.� KNIGHT John Borthwick made the point earlier about thehome market advantage Ontario has in Canada and the semi-governments have in Australia. Although that is the reality, I

am also a big believer thatcapital markets are veryefficient in adjusting todifferent supply dynamicsand that will be reflected inthe price.

Markets generally work,and when they don’t it ismore a function of thetransmission mechanismsfreezing up rather thanbecause the supply dynamicscannot be absorbed.

APS210 means the banks are less likely to buy. That is startingto feed back into the cost of offshore bank issuance andlimiting their desire to tap that market at just the same timedomestic issuance has become more difficult because ofAPS210. The involvement of the supranationals is one of thebalancing mechanisms we need to make sure the basis swapmarket is liquid and domestic institutions can continue toaccess offshore markets.� BORTHWICK That’s right – the banks borrowing abroad is the counterpart to the SSAs, that need to swap, borrowing inAustralia. We need each other.� KNIGHT To take that point further, it has to be good for themarket to have a choice of a range of high-quality borrowersbecause in the absence of that you run the risk we had a fewyears ago where investors were chasing assets further andfurther down the credit curve and ended up investing in assetsthat arguably were not appropriate for all types of funds. Sowhether you are a bank balance sheet or a fund manager, thecapacity to have a lot of high-quality names is vital. Sure, wewill all be precious about how we price relative to each otherfrom time to time, but at the same time we all recognise thatthis is not the main game.

Swiss Richard Jackson, Queensland TreasuryCorporation has the biggest fundingprogramme out of all the issuers here today.

“EVEN MORE IMPORTANT THAN THEAMOUNTS THAT WERE SOLD IS THEDIVERSIFICATION OF THE INVESTOR BASE WEHAVE SEEN THIS YEAR. THIS BROADENING OFTHE INVESTOR BASE REALLY IMPRESSED ME.THE FACT THAT WE ARE GETTING IN NEWINVESTORS, PARTICULARLYINTERNATIONALLY, IS ONE OF THE BESTSIGNS FOR THE MARKET.”J O H N B O R T H W I C K I N T E R N AT I O N A L F I N A N C E C O R P O R AT I O N

“THERE HAS BEEN MORE INVESTORDIVERSIFICATION THIS YEAR. WE HAVE SEENA LOT MORE GRANULARITY IN OUR 2009DEALS THAN IN THE PAST. THE DEPTH ANDBREADTH OF THE MARKET HAS EXPANDEDAND WE VIEW THIS CHANGE AS A POSITIVEFOR THE KANGAROO MARKET.”L A U R A F A N I N T E R - A M E R I C A N D E V E L O P M E N T B A N K

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Swiss John teWechel, can you give us an update on CBA’s strategyregarding fundingwith and without the guarantee?

TE WECHEL I think the exit

strategy from the guarantee

is that it will just wither and

die. The government has

given us no real indication

that the guarantee has a finite

life – so it is just a question of

how long banks will use it.

For every deal we have done

in the domestic market with a

guarantee, we have tried to

add a non-guaranteed piece.

More recently, we are seeing

good take-up of Australian

bank non-guaranteed paper

offshore. So the need for the

guarantee has been reduced.

However, there are still buyers

with a desire for government-

guaranteed paper. We will

meet that demand for

diversification reasons if it is

there and if it makes

economic sense.

The thing that concerns me is

the glut of guaranteed paper,

globally, that will mature in

SOVEREIGN GUARANTEE: SEMIS WAITING FOR BANKS TO MOVEWHEN ASKED ABOUT THEIR EXIT STRATEGIES FROM THE SOVEREIGN GUARANTEE, AUSTRALIA'S SEMI-

GOVERNMENTS TEND TO SAY THEY ARE WAITING TO SEE WHAT HAPPENS WITH THE BANKS AND THEIR

GOVERNMENT GUARANTEE. JOHN TE WECHEL, HEAD OF FUNDING AT COMMONWEALTH BANK OF AUSTRALIA

(CBA), SAYS RATHER THAN DECLARE AN END TO THE GUARANTEE THE GOVERNMENT WILL ALLOW IT TO

PHASE OUT NATURALLY. BUT HE WARNS THAT ALTHOUGH BANKS ARE NOW FUNDING MUCH MORE WITHOUT

THE SOVEREIGN WRAP, IT IS STILL TOO EARLY TO CALL AN END OF GOVERNMENT SUPPORT.

late 2011 and over 2012.

There is also a big volume of

maturing repos from central

banks around the world

coming up that need to be

refinanced. How will that be

achieved? In this context, any

thoughts that guarantees will

disappear prematurely seem

mistaken.

This is especially true since

the buyers of the guaranteed

product have been diverse,

but there is a whole group of

rates buyers who don't

necessarily buy credit.

Refinancing without this

group of investors may be

tough. So I think it is way too

early to call the end of the

guarantee.

Swiss Would yousay, then, in thecontext of theAustralian PrudentialRegulationAuthority’s revisedAPS210 and theregulator’s call forbanks to term outtheir funding, thatyou have alreadybeen doing thisanyway?

TE WECHEL Australian banks

have already started to term

out their debt with credit

buyers. We have recently

issued seven, eight and 10-

year benchmark transactions

in a range of currencies.

APS210 revisions would

suggest further term funding

is required, which raises

interesting questions about

funding diversification and the

aggregate longer-term funding

requirements of the banks.

The stronger Aussie dollar is

not helping.

Swiss What are thesolutions for banksto broaden theirinvestor base andwhat asset classesare appealing in this context?

TE WECHEL It would be

fantastic to see the

securitisation market start to

come back into play. And we

have to think seriously about

the covered bond market. We

know the Australian regulator

has not been a big fan of

covered bonds but there is

certainly investor demand

offshore for Australian

covered bonds – which would

open up a whole new pool of

liquidity, including many of

those rates buyers who have

participated in government-

guaranteed issues. Wholesale

funding diversification away

from purely unsecured

sources would certainly

assist banks in broadening

their funding bases.

Christie How do you determine a sensible asset-liability matchingpolicy?

TE WECHEL For me it always

comes down to capacity. We

survey the market fairly

regularly on what is a

reasonable amount of funding

we can take out of the term

markets. Then we look at

refinancing plus balance

sheet growth, which indicates

how far we have to start

stretching out term.

All Australian banks are now

getting to the stage where

they have become of such

size that the days of

borrowing in maturities of

only two to five years are over.

Longer-dated maturities will

form a bigger part of bank

balance sheets in the future.

EXECUTION: SYNDICATED DEALS

Christie In terms of the syndication processused by some of the semi-governments thisyear, can we get some colour from the issuerson this execution process?� KNIGHT For us the drivers for changing from the tenderprocess for some transactions were clear. We could see that the

tender process would not work for all deals – particularlybecause typically the way they worked in the past was thatinvestors would hang back from bidding in the tender, so wewould rely on the dealers to put their balance sheets on theline, take the stock on, warehouse it, then investors wouldcome in at a later stage.

That is fine in a market where everything is flowingsmoothly and everyone has lots of balance sheet capacity. But,



as a result of the crisis, intermediaries didn’t have the capacityor the appetite to use their balance sheets. So it wasn’t in ourinterest to use the tender method.

The really interesting thing is what has happened since then– we have been very pleased with how it has worked. We havemore information than ever on the investors in the syndicateddeals and also, looking at the performance of syndicated versusnon-syndicated deals, it looks like there is tighter pricing in theinitial syndication than we would have achieved had we gone to tender.

To some extent that offsets the fee we paid to theintermediaries. As a result, I don’t think we are any worse off, ina price sense, from doing a syndicated deal.� WHITFORD I agree with Stephen Knight’s comments, and theother point that led to TCV deciding to do a syndicated dealwas volume. Traditionally we have been able to do A$500-700million via tenders and then we build these lines up tobenchmark size. With the syndication we got bids of A$2billion and ended up issuing A$1.5 billion, which cemented thenew line from the beginning.� JACKSON From QTC’s perspective the market is still broken.For a long time we issued our benchmark bonds via tender andtap through our dealer group of bank intermediaries. When theglobal financial crisis hit, the banks withdrew their balancesheets. As a result, if you now have funding to do and you wantto launch a new bond line – which we did earlier on this year –bookbuild is probably the only way to get a sizeable amountout in one hit so as to ensure there is liquidity in the line. Thefeedback from the market has been that if we tried to launchon a tender basis, we would have difficulty.

Swiss With a syndicated deal do you get a clearer picture of where your bonds are going?� KNIGHT Absolutely.

Swiss So is the profile of primary activity in the syndicated deals you have done somewhere in line with the overall profile of ownership of your bonds?� KNIGHT Not necessarily. But doing a syndicated deal meansyou get the best information you ever would on who is buyingyour bonds. That has been a real benefit.

Swiss What wereyour criteria forchoosing leadmanagers? So farsemis and the AOFMhave chosen mostlyinternational housesover domestic ones.Why? � KNIGHT In our first coupleof syndications we wanted to

acknowledge those houses that had been the best-performingon our panel over a period of time. In other words, there wasan element of reward for prior effort. That was the factor thatdominated the choice of lead managers when we first starteddown the syndication route.

From here on in it will be much more based on who wethink will offer the best combination of domestic and offshoreaccess to give us the right result. We are conscious that we wantto be even-handed – although there is no free ride so for anintermediary to be involved they have to bring something tothe table.� WHITFORD Our selection process was exactly the same as whatStephen Knight has outlined for TCorp. We wanted to rewardthose houses that have performed on our panel over time.� JACKSON I agree with what Stephen Knight and WilliamWhitford have said about the lead manager selection process.However, generally speaking, I think the debt capital marketsteams within the domestic banks have, in the past, notpromoted their own capabilities in the debt capital marketspace well enough.

The dealer panel member banks we selected as joint leadmanagers on the launch of our 2019 benchmark bond, allforeign banks, persisted in talking to us for many years aboutpotential syndicated deal opportunities, even though at the timewe saw no value in doing anything via syndication.

So when it came to having to launch via a bookbuildprocess a strong relationship and level of confidence alreadyexisted, which was important as an unsuccessful bond launchwas not an option as far as we were concerned. Whereas withthe domestic banks, the debt capital markets relationship waspossibly taken for granted. However, things have changed sinceour 2019 deal and the major domestic banks have becomemuch more proactive in developing their debt capital marketsrelationships with QTC.� CHRISTIE The reality is that the government and semi dealshave been tendered for as long as I can remember and alsothere was a point where most saw their issuance programmesdecreasing. As a result, there had been very little reason in thelast few years to have an origination connection with the semis– in fact, the relationship we have had with the semis hasalways been through the sales desk.� KNIGHT That’s right and we don’t criticise it. However, it isgood that it is now changing.

“AT THE END OF THE DAY WE ARE ATENDERER BY CHOICE. WE ARE HAPPY TOKEEP DOING THIS AS LONG AS WE CANCONTINUE TO CLEAR TENDERS THAT HAVEREACHED NZ$450 MILLION PER WEEK ONOCCASIONS.”P H I L I P C O M B E S NEW ZEALAND DEBT MANAGEMENT OFFICE

2 3

� BORTHWICK I do think it is surprising the number of banksthat approach you when a market is hot. The banks that arethere in the long run are the domestic banks and those are theones with which we have developed a relationship over time.The other banks will have to work to develop our trust and tobe put on deals because frankly, they could be here today andgone tomorrow.� FAN From our point of view we have had positiveexperiences with many of the domestic banks in Australia. TheKangaroo market was jump-started when many of thesupranationals were granted repo-eligibility status and hence,domestic bank balance sheets were initially very strongsupporters – as they still continue to be – for the SSA sector.The domestic banks have provided very consistent coveragefor many years. With the exception of taps, our Kangaroodeals have almost always included at least one domestic house.

Swiss Melvin Nunes, you have some reservations about the syndicationprocess. And WATC is the only semi-government issuer present today that has notyet gone down this route. Can you give somecolour on your thoughts in this regard?� NUNES I do think there is a place for syndicated deals in ourmarket – for example, when you are launching a newbenchmark line and want to issue a larger volume in one line.WATC will probably use a bookbuild in this situation.

However, beyond that I have reservations – I would beconcerned if syndication became the norm for all issues. In thiscase we could be in danger of experiencing what has happenedin the euro markets – where secondary market activity andhence liquidity has been adversely impacted as the leadmanagers control the issues and there is no incentive foranyone else to make two-way markets.

We have all been talking about how important liquidity isand it is the secondary market trading and pricemaking by apanel that underpins the liquidity in and strength of this market.

Swiss Philip Combes, the NZDMO has not yet used syndication either. Can youexplain why?� COMBES We have not needed to. In addition, we can issue ina single tender 5 per cent of our programme which is what theUK Debt Management Office is doing in many of itssyndicated deals. My view is we don’t have the volume to justifysyndication and neither do we have the need.

I am also a little sceptical on the pricing side. Our May2021 launch earlier on this year is a good example – we paidup in the inaugural tender in May as it was a particularlyunfavourable time and we were also lengthening our curve byfour years. Since then we have topped up the line in successivetenders to NZ$2.5 billion (US$1.8 billion) and it has gonefrom swap plus 47 basis points in the debut deal to 20 basispoints through swap.

As a result, we are very pleased we issued the line in the waywe did, by building it up during improving market conditionsrather than paying a fortune to issue one big line.

At the end of the day we are a tenderer by choice and weare happy to keep doing this as long as we can continue to clear tenders that have reached NZ$450 million per week on occasions.� KNIGHT I think the Australian sovereign is finding the samething with their nominal bond issuance – it is a differentproduct and the tender process works well.� NUNES The point Stephen Knight made earlier aboutknowing upfront who the investors are – rather than the bankstaking the bonds on balance sheet first – makes syndicationmore attractive. The question is whether the price and fees weare paying are valid. That is difficult to assess and it is the otherissue we are grappling with.� KNIGHT One of the things we are always conscious of is thatit helps us do our job properly if there are viable intermediarieswho are interested in what we are doing. The last thing we wantintermediaries to do is give up on our market if it is not viablefor them. In this context, one of the things syndication hasdone is make the fee for intermediaries more tangible.

On the other hand, I take Melvin Nunes’s point and none of us want to see the secondary market beingnegatively impacted by the way deals are brought. That iswhy I think doing a combination of syndications and tendersis the way forward.� BORTHWICK That really highlights the difference between thesemis and the SSAs – we have a choice. We can come to thismarket or not, whereas this is your foundation market and youhave to find a system that works. One of the advantages of asyndicated deal is the profile it brings. But you also needsomething that works day in and day out, and that is where thepanels and the market-making comes in. •

120

100

80

60

40

20

0

1999

-00

Last year

(2008/09 budget)

2000

-01

2001

-02

2002

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2003

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2009

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% O

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UE

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2012

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ALL STATES AND TERRITORIES NON-F INANCIAL PUBLIC

SECTOR ACCRUAL NET F INANCIAL L IABIL IT IES

SOURCE: STANDARD & POOR’S OCTOBER 28 2009

Current

(2009/10 budget)

SHINING STARS UNDER THE SOUTHERN CROSS T€¦ · Group Funding COMMONWEALTH BANK OF AUSTRALIA...

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Transcript of SHINING STARS UNDER THE SOUTHERN CROSS T€¦ · Group Funding COMMONWEALTH BANK OF AUSTRALIA...