The participants
Paul Bide, head of debt markets research, Bankers Trust
John Gerli, head of debt capital markets, Salomon Smith Barney
Wayne Hoy, head of capital markets, Commonwealth Bank of Australia
John Keith, head of origination, Nomura
Paul Umbrazunas, director, global markets, Deutsche Bank
Has the ADB damaged the kangaroo bond market?
[An Asian Development Bank (ADB) five-year issue for A$ 1 billion was launched in September 1998 at a spread of 39 basis points over the government bond. It widened by up to 25bp in the aftermarket.]:
Paul Bide: It's done damage to ADB's issuing prospects. But not to the market.
What was wrong with the deal?
Bide: They changed the coupon after the issue had been done.
Wayne Hoy: There were three things that went wrong with the deal: size, size, and size. [Commonwealth Bank of Australia was a joint lead manager on the deal. The lead manager and bookrunner was Warburg Dillon Read. A representative from lead manager Warburg Dillon Read was invited to the barbecue but declined to attend.]
Paul Umbrazunas: It was too big.
Hoy: A billion is a lot of money. I heard from your guys they were comfortable with x. We knew what Merrills were comfortable with, and what we were comfortable with and Westpac, and we talked to the bookrunner and it said yep, we're coming with a billion. They gave us 10 minutes and told us it was going to be A$1 billion rather than A$500 million. It was a question of execution.
Bide: There's a lot left on the books with that deal. That deal didn't clear.
Hoy: So what's that say? Size.
Bide: It could be price too. You can't just say it's size. Some people thought it was expensive. So it was that and size.
Umbrazunas: We were asked for our comments. We said we thought the spread was about right, but maybe we should start around A$500 million to A$600 million and see how we go. That view came from four people in that room. You said it Wayne, Merrill said it, we said it.
Bide: I said if you're trying to issue this without respect to international issuing spreads you're crazy.
John Keith: When ADB brought its kangaroo issue you could asset-swap their dollar issues for about 15 basis points.
Bide: It was a shocking difference.
Keith: Whether fund managers can asset swap or not, they're going to say why are you trying to take money from me by selling me something at a far tighter spread than where it trades elsewhere in the world.
Bide: There was nothing about that deal made sense. It was just rammed down the throats of Australian investors. But ADB will not be able to come back to the Australian market again because of that issue.
Hoy: A A$750 million could have been done exceptionally well at 11 under Libor.
Umbrazunas: The market was there for that.
Bide: The appetite was more for A$500 million than A$750 million. But it wasn't about the Australian market. Most people thought that deal was at the tail end of the global feeding chain and SBC got it for some quid pro quo elsewhere in their network and it had nothing to do with the Aussie market. That's the problem with the Aussie market we will always be at the end of the global chain and if a global player wants to come in here and loss-lead they will. Australia is a small market.
But the deal didn't work.
Hoy: The message is we're not going to sit here and get stuffed. The Australian investors said this is too big, you're trying to stuff me. The price was right. If it had been a smaller volume they would have said I love this and would have taken it.
Bide: Yes, there are enough non-swap-focused investors in this country for it to be taken at that price.
Keith: The price was wrong. I had some of my salesmen field calls from local investors saying: "Should I buy this? Where does it trade relative to World Bank in dollars and Fannie Mae?" We said it was too expensive and it would cheapen up.
Bide: If ADB is trading at 10 through Libor everywhere in the world, why should it go at 20 through in Australia. I don't think investors buy things which are too expensive.
Hoy: It was just one deal. It's insane to focus too much on it. There are bigger issues. The big picture is Canberra. You should do a barbecue in Canberra [with the politicians] on bond markets and you would come away shocked by the lack of understanding of what they've created. They've created this wonderful opportunity for a virgin capital market and haven't looked at the key issues, one of them being withholding tax.
What is the current status with repealing withholding tax for foreign investors?
Bide: It was put to parliament in draft form last year and only applies to [Australian] corporations. And now the opposition has just referred it to a Senate committee so it's delayed at this time. There are lobby groups who want sovereign bonds included too, and so it's not an easy thing to overcome. There's a lot of argy-bargy going on about it.
Isn't this a case of shooting yourself in your foot?
Umbrazunas: Just get rid of it across the board. That's what has got to be done.
AMP funds offshore in the Euromarkets at five basis point cheaper than the domestic market. This is purely because of withholding tax isn't it?
Hoy: That's a fairly valid argument. The best indicator of what the premium is for withholding tax is QTC's [Queensland Treasury Corporation's] globals. If you look at their 2003 and 2005 maturities you'll find that the globals and domestics have got about the same volume of issuance, so you're comparing like with like it's the perfect examination of the cost to this economy of withholding tax it's exactly six points across their curve. The domestic market is six points higher. The global market is obviously cheaper.