Bond issuance in Australia was down 50% in January compared with the previous year but the rest of 2014 is expected to bring a solid flow of corporate bonds and securitisation, believes John Chauvel, head of debt capital markets at Australian bank Westpac.
A tough start to the year is being experienced globally as issuers wait to see the effects of the US Federal Reserve's decision to slow its programme of quantitative easing. But Chauvel is optimistic that the current hesitancy will pass and sees new issuance being supported by an upswing in business investment, a rise in the number of local fixed income funds, Asian investor demand, and tighter bank lending.
“Bank lenders have always had a big influence on volumes in the corporate bond market but looking ahead we think the demand for business credit will outstrip the banks’ ability to fund loans given their enhanced liquidity requirements,” Chauvel said in a telephone interview on Wednesday.
He says the evolution of a deeper, more sophisticated corporate bond market makes it an attractive alternative for borrowers. “Tenors have stretched out to seven years or longer, deal sizes are bigger and investors are prepared to buy BBB or lower-BBB credits,” Chauvel told FinanceAsia. “All of this makes it tougher for the bank lending market to compete.”
Proof that Australian company treasurers are increasingly turning to corporate bonds was evident last year when a record 22 debut issuers tapped the market, versus five debut issuers in 2012.
All up, a total of A$11.1 billion was raised in the domestic corporate market in 2013, according to Westpac figures, with the largest deal being a seven-year A$525 million transaction for railway company Aurizon.
The evolution is being propelled by demand from Asian investors, who have historically bought only US dollar paper and are now prepared to buy Australian names in other currencies. Asia-based accounts now make up 40% of the average distribution mix on deals.
Plans to expand
Chauvel, who took up the post at Westpac last May after 15 years with ANZ and Societe Generale, is expanding the business into new geographies and currencies. “We have always been strong in Aussie dollar and Kiwi dollar debt and the Australian dollar has now become a core borrowing currency globally, but we want to become more active in foreign currency bonds,” he said.
The plan is to boost distribution capabilities by hiring more sales staff in overseas offices. The bank’s global syndicate is run from Sydney, with syndication hubs in Singapore, London, New York and New Zealand, and a sales force covering all of these offices as well as Hong Kong. “Our Australia-based originators take issuers on regular road shows through the Asia region, while the syndication process is coordinated by our offshore sales force.”
Westpac recently ramped up its presence in Hong Kong with four new hires.
“On the origination front, the plan is to introduce our existing Australian dollar borrowers to the possibility of issuing in other currencies,” said Chauvel. “We want to build our capabilities in euro, sterling, Singapore dollar, Hong Kong dollar and CNH [offshore-trade renminbi].”
Chauvel said the bank has seen a recent boost in euro-denominated deals due to an improvement in pricing dynamics and the cross-currency swap rate versus the US dollar market.
Another part of Westpac’s strategy is to increase its market-making presence by buying selectively in the secondary market.
Domestic banks like Westpac have been filling the liquidity gap left by the withdrawal of traditional market-making banks from the US and Europe. It is estimated some 70% of liquidity has been sucked out of the Australian market as these banks ponder the implications of the Volker Rule on their proprietary trading activities.
Chauvel made the clarification that Westpac isn’t a proprietary credit trader. “Our secondary trading activity is client-driven – built around supporting our bond issuers by being an active market maker,” he said. “There is a growing opportunity for us to enter the market and trade, and our primary issuers and investors are increasingly comfortable with Westpac playing this role.”