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Australia-into-Asia: Bond market returns to normalcy

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Australian banks are ready to return in force to the capital markets for their fundraising activity, with investors in Asia set to play a critical role in the deals.

Change is looming for Australian banks. About fifteen months after the Reserve Bank of Australia (RBA) kicked off its term funding facility (TFF) for select firms in March 2020, the programme closed to new drawdowns in June 2021.

Why does this matter? The TFF offered low-cost three-year funding to authorized banks, as the Australian authorities focused on boosting the economy by reducing the funding costs for banks so they could expand their lending business.

RBA data shows that by June 30, about A$188bn ($140bn) in funding was outstanding under the initiative — which had been expanded, extended and amended since its launch.

Naturally, banks in Australia had leveraged the central bank’s TFF, resulting in a fall in lenders’ need to tap public capital markets. Between April 2020 and June 2021, about A$146bn was raised by financial institutions in the country from the public bond market, according to data from Dealogic. This compares to about A$156bn raised during the same period the previous year.

“The last 18 months have been quite unique for Australian banks, given the advent of the term funding facility in Australia,” Alexander Bischoff, managing director for balance sheet, liquidity and funding management at Westpac Banking Corp, said during a panel at the Global Borrowers and Investors Forum, Asia, organised by Euromoney Conferences in late September. “It has seen us being quite absent not just from the Asian markets but from global markets as an issuer.

“That is clearly starting to change now as we are forecasting a return to more normal activities given the end of the facility,” he added. “And when we think of ‘more normal’, Asia plays a really critical role in that funding pattern, be that in local currencies or global currencies like US dollars.”

Bischoff added that Westpac has seen “quite large changes” around its balance sheet. For instance, net wholesale funding outstanding has dropped significantly, while the firm’s loan-to-deposit ratio has improved over the past 12 to 18 months.

But Westpac, rated A+/Aa3/AA-, has just under A$30bn of wholesale funding maturing next year, which it plans to refinance, while raising anything additional it may need to meet its funding requirements.

Asia investor focus

Fergus Blackstock, head of term funding, group treasury, at Commonwealth Bank of Australia (CBA) added during the panel discussion that access to the TFF was largely “a substitute” for some of the firm’s standard senior and short-term funding.

CBA had returned to the senior bond market recently after two and a half years away, and plans to continue tapping traditional forms of funding in the future, added Blackstock.

Andrew Duncan, head of debt capital markets for Australia at HSBC, reckons the launch of TFF by the Reserve Bank of Australia, and the subsequent initiatives from the Australian Prudential Regulation Authority, were “very sensible” from a policy perspective to stabilise the country’s financial system. But he also said that the end of TFF and the return to more normalised and balanced funding options among Australia’s banks come at an opportune time.

“It’s going to coincide with the point in history when a lot of the Asian investors are looking to diversify their holdings within the region,” said Duncan. “I think it could be a reasonably fruitful 12 to 18 months from the Australian landscape into Asia, and indeed, globally.”

This raises a critical question for Australian borrowers keen to tap into the flourishing Asian buyer base — what are investors looking for?

HSBC’s Duncan believes that Asia has multiple pockets of different investors looking for different things.

“They are not homogenous,” he said. “They are driven by different motivations, have different capital backing them, and different points of the cycle will appeal to them. But traditionally we think about Asia as looking for yield, and hence the tier one and tier two products are really down the fairway.”

But both Bischoff and Duncan pointed out that the depth of demand from Asia for other instruments — like senior secured debt, covered bonds and residential mortgage-backed securities — in currencies spanning US dollars, Australian dollars and Singapore dollars has grown exponentially in recent years.

“The increasing depth of wealth and savings in Asia, the sophistication of the Australian borrower base, the diversity and sophistication of Asian investor base have lent themselves to more and more iterations of bringing Australia and Asia together,” said Duncan. “It’s a phenomenon that has seen Asian investors grow from being a junior partner to many Australian capital markets deals to being a very serious part, or even a leader in many transactions. Every sophisticated borrower in the world now looks at Asian investors and knows that this is a region they need to approach.”

ESG push

It certainly helps that Asia’s environment, social and governance (ESG) bond market has growth rapidly recently, with issuers keen to sell green, sustainability-linked or social deals, and investors showing equal amounts of enthusiasm to buy such bonds.

Australia, admittedly, doesn’t have a strong international reputation on climate action. But in its capital markets, progress is coming fast.

Green bonds are still the dominant part of the ESG debt market, but a handful of sustainability-linked bonds and deals tied to the United Nations Sustainability Development Goals have been printed.

CBA, for instance, has raised funding through a climate bond, as well as numerous green bonds.

When it comes to assets on the eligible green, social and sustainable register, Blackstock said that the bank has taken a conservative approach.

“I still think we're quite early in our journey,” he said. “When we look at what’s happening in some of the European markets, and other market including in Australia, we still have a long way to go. We want to focus on getting it right, rather than getting it done quickly.”

Westpac’s Bischoff agreed, pointing out that the Australian firm has sold a number of green bonds over the years, in Euros, in Australian dollars and in local currencies in Asia. “But it’s about ensuring you have got the right asset identification, a robust process around impact reporting and ongoing audits.”

That’s not all. As Australia’s markets get more innovative — across conventional and ESG deals — they will find solid support from investors in Asia.

HSBC’s Duncan believes the Asian investor base, more broadly, has responded well to innovative deals, citing the examples of structures like private placements and callable bonds placed by Australian banks into the region.

While some Asian investors still tend to be focused on outright yields, the resulting pricing on offer for Australian issuers in the ultra-long dated, structured or subordinated markets is highly competitive, and investors in the region are very welcoming of innovative deals.

This approach can even trickle over to the ESG market. Duncan said that investors are more than willing to look at everything from environmental credits and the emerging market around carbon economy, to traditional formats of callable structures.

“Asia is a specialist in some of these products and that’s partly because investors in the region are used to dealing with quite a fragmented market, with lots of different issuers and different nuances in certain jurisdictions and different local capital constraints,” added Duncan. “There is capital they need to deploy and I would say that Asia is absolutely a place that can embrace innovation.”

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