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KangaTrendsKanga

League-table wrap 2015: ANZ and NAB grab top spots in Australia

ANZ was responsible for A$12.9 billion (US$9 billion) of league-table volume across all Australian dollar

domestic bond markets in 2015, including syndicated government-sector, bank, corporate and all Kangaroo issuance but excluding self-led deals. Commonwealth Bank of Australia (CommBank) ran

second in an all-domestic top four, with UBS the highest-ranking international intermediary (see table 1).

In the domestic credit market – comprising financial institution and corporate deals, but not self-led volume – NAB topped the pile in 2015 ahead of Westpac Institutional Bank (Westpac) (see table 2).

ANZ topped the 2015 league table for syndicated sovereign and semi-government issuance with A$6 billion of accredited league-table volume, albeit only winning out by A$300 million over perennial sector powerhouse, UBS. CommBank, Deutsche Bank and Westpac rounded out the top five in the domestic sovereign and agency market.

The Kangaroo market was hotly contested in 2015. TD Securities (TD) came out on top with A$4.3 billion of Kangaroo league-table volume excluding self-led deals, but less than A$200 million separated the Canadian bank from its nearest competitors, Deutsche Bank and Nomura. RBC Capital Markets (RBCCM) and CommBank joined the top five.

NAB took a commanding position as a lead manager in the securitisation sector in 2015. The bank accounted for A$5.3 billion of domestic non-self-led structured-finance league-table volume, more than A$1.5 billion ahead of ANZ. Westpac, CommBank and Deutsche Bank completed the top five.

ANZ maintained its historic strength in the New Zealand bond market last year, as the bank took a market share of more than a third across the combined league table for non-self-led domestic and Kauri transactions. BNZ, Westpac, TD and Citi made up the balance of the top five (see table 3).

Westpac placed second in the league table for New Zealand domestic deals, followed by BNZ, Citi and UBS. BNZ moved up to second place in the Kauri league table, followed by TD, Westpac and CommBank. •

* You can see all KangaNews’s intermediary league tables at www.kanganews.com/league-tables

ANZ and National Australia Bank (NAB) topped the tree in KangaNews’s intermediary league tables for Australian-market bond deals in full-year 2015. ANZ comes out on top in the league table for all Australian dollar issuance, while NAB scores in Australian domestic credit.

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TABLE 1. KANGANEWS ALL-AUSTRALIAN DOLLAR VANILLA BONDS LEAGUE TABLE (EXCLUDING SELF-LED DEALS), TOP 10 FOR FULL-YEAR 2015

BOOKRUNNERVOLUME

(A$M)NUMBER

OF DEALSMARKET SHARE

(PER CENT)

ANZ 12,900 69 15.8Commonwealth Bank of Australia 11,277 57 13.8Westpac Institutional Bank 9,233 56 11.3National Australia Bank 9,178 58 11.3UBS 8,424 33 10.3Deutsche Bank 8,204 62 10.1TD Securities 4,640 54 5.7Nomura 4,391 44 5.4RBC Capital Markets 3,890 49 4.8Citi 3,750 29 4.6 SOURCE: KANGANEWS DECEMBER 31 2015

TABLE 2. KANGANEWS AUSTRALIAN CORPORATE LEAGUE TABLE(EXCLUDING SELF-LED DEALS), TOP 10 FOR FULL-YEAR 2015

BOOKRUNNERVOLUME

(A$M)NUMBER

OF DEALSMARKET SHARE

(PER CENT)

National Australia Bank 6,433 44 25.7Westpac Institutional Bank 5,127 36 20.4ANZ 4,871 36 19.4Commonwealth Bank of Australia 4,423 31 17.6UBS 1,564 10 6.2Citi 579 8 2.3FIIG Securities 460 12 1.8J.P. Morgan 432 3 1.7TD Securities 329 2 1.3Nomura 267 3 1.1 SOURCE: KANGANEWS DECEMBER 31 2015

TABLE 3. KANGANEWS ALL NEW ZEALAND LEAGUE TABLE (EXCLUDING SELF-LED DEALS), TOP 10 FOR FULL-YEAR 2015

BOOKRUNNERVOLUME (NZ$M)

NUMBER OF DEALS

MARKET SHARE (PER CENT)

ANZ 4,643 38 38.8BNZ 2,183 19 18.2Westpac Institutional Bank 1,899 16 15.9TD Securities 992 7 8.3Citi 500 1 4.2UBS 500 1 4.2ASB Bank/Commonwealth Bank 325 6 2.7Deutsche Craigs 260 6 2.2Forsyth Barr 187 4 1.6First NZ Capital 135 3 1.1 SOURCE: KANGANEWS DECEMBER 31 2015

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KangaTrendsKanga

AOFM benefits from flight-to-quality bid as investors stay close to home

A strong domestic bid reinforces the notion that investors are staying close to home as global storms rage. On January 20,

the AOFM priced a A$4.6 billion (US$3.2 billion), November 2027 maturity nominal bond at 16 basis points over the implied bid yield for the primary 10-year Treasury futures bond contract (EFP). Syndication took place over two days, via joint lead managers ANZ, Citi, UBS and Westpac Institutional Bank.

Despite volatile market conditions early in 2016, Michael Bath, director, financial risk at the AOFM in Canberra, says the issuer was able to go through an orderly process of execution.

He explains: “We keep a standard watching brief on the market and on where execution windows may lend themselves to the best outcomes. After

the release of the Australian government’s mid-year fiscal and economic outlook, we announced that January or February would be a good time to issue a new line as this would afford the market additional flexibility in terms of its incorporation into the 10-year futures basket. Having identified this broader window between public holidays and lunar new year, the effective windows were reduced.”

Paul White, global head of debt syndicate at ANZ in Sydney, adds that

lower month-on-month issuance of supranational, sovereign and agency (SSA) 10-year paper and the expectation that investors would have cash to put to work in the new year led the lead managers to believe demand would be solid.

“Traditionally we see large volumes of SSA issuance at the start of the year but 2016’s levels were lower than previous years. Meanwhile, the vast proportion of issuance in 2016 to date has been in the five-year part of the curve. Upcoming redemptions are also quite sizeable in this asset class – with more than A$7.5 billion maturing in January and February,” White tells KangaNews.

Solid supportSupport for the AOFM deal was evident in the final book size as total orders reached more than A$8.5 billion, issuer

and lead managers reveal. This means there was hefty scaling in the book – and this required a careful balancing act, Bath says. “We want to ensure the transaction performs reasonably well after issue, and this helps with deliberations in terms of total deal size,” he tells KangaNews. “Pricing is an important, and somewhat competing, consideration, but the fact that this bond was quoted at around 15.5 basis points versus EFP the day after pricing suggests we got both about right.”

White agrees, adding: “The bond was trading around half a basis point tighter in the secondary market very soon after pricing – which demonstrates the issuer paid a fair price and the transaction was well-received by investors.”

Official deal distribution data show that 73.3 per cent of the transaction was placed with domestic investors. Asia took 10.3 per cent, the UK 5.3 per cent, Europe 2.5 per cent and others the remainder. By type, strong real-money support was in evidence with fund managers taking 31 per cent and hedge funds 18.3 per cent. Bank trading books and bank balance sheets were 30.1 per cent and 17.4 cent respectively.

White notes the solid domestic real-money and bank balance-sheet participation in the transaction. He adds: “Offshore distribution was likely a little lower than in previous AOFM syndications, but this is not unexpected given the new transaction’s 10-year maturity and the fact that investors tend to stay closer to home during volatility.”

The AOFM expects some variability in buyer base from deal to deal, and 73 per cent domestic participation is not unusual. Bath says: “This is a bond which will likely find itself in a 10-year futures basket relatively quickly. While it is up to the market to determine how quickly this happens, if we were issuing, say, a 20-year bond – particularly prior to there being an established 20-year futures contract – we might expect to attract a different type of investor base.” •

Issuer and lead managers on the Australian Office of Financial Management (AOFM)’s first syndicated nominal bond deal of 2016 suggest a flight to quality helped shelter the transaction from the wider impact of market volatility.

“WE WANT TO ENSURE THE TRANSACTION PERFORMS REASONABLY WELL AFTER ISSUE, AND THIS HELPS WITH DELIBERATIONS IN TERMS OF TOTAL DEAL SIZE. PRICING IS AN IMPORTANT CONSIDERATION, BUT THE FACT THAT THIS BOND WAS QUOTED AT AROUND 15.5 BASIS POINTS VERSUS EFP THE DAY AFTER PRICING SUGGESTS WE GOT BOTH ABOUT RIGHT.”MICHAEL BATH AUSTRALIAN OFFICE OF FINANCIAL MANAGEMENT

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KangaTrendsKanga

NRW.BANK roadshows as it plots Kangaroo market return

The issuer has dusted off and renewed its A$3 billion (US$2.1 billion) Kangaroo programme which it inaugurated in 2005.

The roadshow was organised by RBC Capital Markets (RBCCM) in Australia and Daiwa Capital Markets (Daiwa) in Japan. RBCCM is also acting as arranger of the Kangaroo programme.

NRW.BANK has issued in the Kangaroo bond market once before, pricing a A$300 million, five-year transaction in 2006. Frank Richter, head of investor relations at NRW.BANK in Düsseldorf, says much has changed since the agency’s debut, which should lead to more consistent issuance in the future.

He comments: “In the past we had the challenge of not being repo eligible in Australia, which triggered a price disadvantage. Today, being on the level-

one high-quality liquid asset [HQLA] lists in Europe is much more important. Moreover, no foreign supranational, sovereign and agency [SSA] issuer qualifies for the level-one HQLA list in Australia, so we are all on a level playing field.”

Richter – who roadshowed in Australia along with Klaus Rupprath, Düsseldorf-based senior managing director and head of capital markets at NRW.BANK – adds that the Kangaroo investor base has developed since 2006.

“We are seeing demand from Australian banks and funds as well as from Japanese life companies, central banks and even Swiss-based investors,” he reveals. “This broader demand offers opportunities across the curve, which makes it easier for issuers to find a maturity that works for both themselves and the buyers.”

Join the clubRichter has been encouraged by the experience of big-volume issuers such as KfW Bankengruppe (KfW) and Rentenbank as well as the other German state development agency active in the Kangaroo bond market, L-Bank. “You can imagine that we talk to each other and what is good for these other issuers should be good for us. Their advice has been that we need to ‘join the club’.”

In terms of pricing comps, Richter says any of the German agencies active in the Kangaroo bond market represent a similar risk profile as they are all German public-sector risk. Within this group, he adds, the closest similarities are found between NRW.BANK and L-Bank – in terms of funding task, issue size, state ownership and guarantee structure.

“At the end of the day market forces will determine the right price. We will make a call based on the advice we receive

NRW.BANK – the state development agency for North Rhine-Westphalia – roadshowed in Sydney and Melbourne on January 18 and 19, followed by a visit to Japanese investors, to discuss appetite for Australian dollars.

“WE ARE SEEING DEMAND FROM AUSTRALIAN BANKS AND FUNDS AS WELL AS FROM JAPANESE LIFE COMPANIES, CENTRAL BANKS AND EVEN SWISS-BASED INVESTORS.”FRANK RICHTER NRW BANK

from RBCCM and Daiwa, as well as the colour we receive from investors during the roadshow,” Richter told KangaNews ahead of the investor visits.

He stresses the fact that NRW.BANK offers a guarantee from the state of North Rhine-Westphalia, its ownership – 100 per cent state-owned – its strong capital base and its Basel III-compliant key figures. He adds: “We offer diversification within the German public sector, which is more important than in some jurisdictions because the German sovereign and states do not have a presence in the Kangaroo bond market.”

NRW.BANK offers a pick-up versus KfW and Rentenbank, while also having a focus on strong secondary-market performance. Says Richter: “We only issue if there is demand, we only use strong investment banks to lead our deals, and we offer alpha. This all means we are not aggressive in primary-market pricing as our focus is on achieving the intrinsic performance potential of each deal.”

Richter is keeping near-term Kangaroo expectations realistic, though, targeting minimum volume of A$100 million and a maturity range from three years upwards should market conditions allow. He is indifferent between fixed- and floating-rate notes and would be happy to issue a dual-tranche deal, insisting that issuance will mirror investor demand.

“We are keen to dip deeper into the Australian and Japanese investor bases,” he comments. “We also recognise that the Australian dollar is getting more weight in central-bank reserve allocation. So the idea is to provide an instrument that our investors need.”

For now, NRW.BANK will focus on vanilla Kangaroo bonds – even though it has started to build a euro green-bond curve. Richter explains: “We need to concentrate our resources in this asset class in euros because we do not have unlimited green assets.”

Ultimately, says Richter, NRW.BANK plans to issue up to 5 per cent of its annual funding in Australian dollars. Its task for 2016 is around €10 billion (US$10.9 billion) equivalent. •

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KangaTrendsKanga

Basel committee softens approach on trading-book capital – but not by much

On January 14, the Basel committee published its new standards on minimum capital requirements for market risk.

The proposals have gone through several iterations, from a consultation process starting in May 2012 to the first draft of the proposals, published in October 2013, and a further issues document emerging in December 2014. Implementation is set for 2019.

The response to these previous versions caused the Basel committee to scale back some of its expectations – but not enough to satisfy concerns that increased trading-book capital requirements will, even in a reduced form, further diminish market liquidity.

Basel committee viewEver since the start of the process, the Basel committee has been clear about its desire to introduce measures to “improve” the assignment of capital to bank trading books, which it says is “a key component of… overall efforts to reform global regulatory standards in response to the global financial crisis”.

The Basel committee says: “The purpose of the revised market-risk framework is to ensure that the standardised- and internal-model approaches to market risk deliver credible capital outcomes and promote consistent implementation of the standards across jurisdictions.” The latest version of the FRTB rules is extensive, but there are five critical elements.

The first is a revised boundary between the trading book and the bank book. The new FRTB documents says: “A better defined boundary will serve to reduce incentives to arbitrage between the regulatory banking and trading

books, while still respecting banks’ risk-management practices.”

The Basel committee is also proposing a revised internal-models approach for market risk. This lets individual banking-sector supervisors move away from having to grant internal-modelling approval for each trading desk. It also “allows a more consistent identification and capitalisation of material risk factors across banks, and sets constraints on the capital-reducing effects of hedging and diversification”.

The new rules also provide a revised standardised approach. This will now, the Basel committee believes, provide “a credible fall-back as well as a floor” to the internal-models approach, while still being appropriate for banks that do not require a sophisticated market-risk treatment.

The new rules propose a shift to an expected-shortfall measure of risk under stress, from a value-at-risk (VaR) model. The Basel committee says this “will help to ensure prudent capture of ‘tail risk’ and so maintain capital adequacy during periods of significant market stress”.

Finally, the latest FRTB document proposes incorporating the risk of market illiquidity into trading-book capital requirements. It says: “Varying liquidity horizons are incorporated into the revised standardised and internal-model approaches to mitigate the risk of a sudden and severe impairment of market liquidity across asset markets.”

Lighter touchThe Basel committee estimates that the practical consequences of the latest FRTB demands will be an average 40 per cent increase in the amount of capital banks will be required to maintain for their trading books.

This represents a – theoretical – win for the industry, as estimates of the impact of the previous iteration of the rules were for an average increase of 74 per cent in capital required. Some asset classes, including securitisation, had been expected to see four times as much capital required to be held against bank trading books under earlier drafts. The impact will not be the same across banks. The Basel committee’s 40 per cent estimate is a weighted average, and it says the median increase will be 22 per cent.

However, the scaling back is not sufficient for some. In a statement published immediately following the latest FRTB release, the Global Financial Markets Association, the Institute of International Finance and the International Swaps and Derivatives Association all argued that the new rules could have an adverse impact on trading markets.

They say: “Overall, we are concerned that despite the Basel committee’s reiteration not to significantly increase overall capital requirements, trading-book capital will increase by 40 per cent under the new rules based on the Basel committee’s impact assessment. We worry that the rules may have a negative effect on banks’ capital-markets activities and reduce market liquidity.”

The associations add: “Further impact assessment needs to be run to assess if the gap between the standard and internal-models-based capital outcomes is reasonable, considering the Basel committee’s future work on standardised floors. We will be reviewing the rules in depth with our members and look forward to continued discussion with the Basel commitee to ensure the FRTB meets its original goals.” •

The latest publication to come out of the Basel Committee on Banking Supervisions (Basel committee)’s fundamental review of the trading book (FRTB) scaled back the extra capital to be demanded of bank trading books. But the increase is still sufficient to cause consternation in the global markets community.

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KangaTrendsKanga

Australia’s major banks find ample demand but wider pricing in early-year benchmarksThree of Australia’s major banks priced benchmark bond deals in January, one offshore and two domestically. All three achieved good volume outcomes, though deal pricing clearly reflects the new market environment.

National Australia Bank (NAB) was the first mover, pricing a four-tranche, US dollar deal – in 3a2 format via its US branch – on January 6, with

lead managers Bank of America Merrill Lynch (BAML), Citi and RBC Capital Markets (RBCCM). Aggregate volume was US$3.5 billion, from a book that

reached close to US$9 billion according to lead-manager data. The 10-year notes were particularly well bid (see table on p13).

Commonwealth Bank of Australia (CommBank) then reopened the Australian domestic market with the pricing of a self-led, five-year deal on January 12. The transaction had volume of A$2 billion (US$1.4 billion) across fixed- and floating-rate tranches, and priced at 115 basis points over swap benchmarks. ANZ Banking Group (ANZ) followed eight days later with the pricing of a A$1.4 billion floating-rate note. The self-led deal offered a margin of 88 basis points over bank bills.

NAB scoresNAB and its leads say the bank’s transaction clearly demonstrates that substantial demand can be found in global markets despite growing turbulence. But they counsel caution as volatility shrinks

execution windows and necessitates careful action.

The first week of the new year was characterised by slumping global equity markets, and Eva Zileli, head of group funding at NAB in Melbourne, says although the issuer was sufficiently confident of securing large volume it did not anticipate the strength of response.

“We were surprised on the upside with the order book, particularly in light of the softer offshore markets both prior to and during the trade,” Zileli tells KangaNews. “We had a target volume outcome, which we achieved. We could have taken more in the 10-year tranche, however we chose to target a tighter spread. The Australian dollar swapped-back cost was an additional factor in our decision making.”

Gerard Perrignon, Sydney-based managing director, debt capital markets at RBCCM, says NAB’s deal required careful execution – but, having found a conducive window, the response to the transaction was phenomenal. “In a week which was extremely challenging in markets globally, NAB demonstrated that if issuers find the right moment to bring a deal they can still achieve very productive outcomes,” he comments.

In this case, NAB benefited from pricing on the only day of the week of

issuance that did not feature major equity-market pain. Perrignon reveals that launch was announced after the mid-point of the trading day in Hong Kong so the leads could get a read on the market mood in Asia. The positive open in Shanghai allowed NAB – as a relatively low-beta name – to ride good Asian support into the US.

Notwithstanding choppy market conditions, Chad Karpes, managing director and head of debt capital markets and syndicate at BAML in Sydney, agrees that there is good underlying demand for high-quality Australian credit in US dollars. “I think a number of international asset managers are relatively comfortable with the Australian economic environment at present, and in particular see some Australian names as something of a safe haven amid global volatility. The demand we saw for NAB wasn’t concentrated, either – it was from a broad spectrum of investors.”

Even so, taking advantage of support from Asian buyers as execution rolled into the US timezone is a key transactional highlight, Karpes adds. This allowed the deal to keep momentum through to pricing despite a notably more bearish market tone emerging in the European and then US trading days.

“IN A WEEK WHICH WAS EXTREMELY CHALLENGING IN MARKETS GLOBALLY, NAB DEMONSTRATED THAT IF ISSUERS FIND THE RIGHT MOMENT TO BRING A DEAL THEY CAN STILL ACHIEVE VERY PRODUCTIVE OUTCOMES.”GERARD PERRIGNON RBC CAPITAL MARKETS

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KangaTrendsKanga“We saw notable demand for the

10-year notes, especially from Asian investors,” Perrignon adds. “It is another important reminder of the potential size and receptivity of the US dollar bond market. There is a huge quantity of real money looking for opportunities to be put to work on a truly global basis, and NAB’s ability to offer index-qualifying, 3a2-format securities across multiple tranches made it a good option.”

Pricing and performanceLead-manager data suggest the NAB transaction paid a new-issue premium of around 10 basis points to secondaries in US dollars. Meanwhile, Zileli says the swapped-back levels were also par for the course. “From our perspective the offshore premium was in line with expectations and consistent with the

premium that has been paid historically for going offshore,” she confirms.

Markets continued to be challenged in the immediate wake of NAB’s execution, but Karpes says early signs were that strong liquidity and excess demand were supporting the new lines. He suggests: “The breadth and quality of the order book is evidenced by the strong performance of the bonds. The deal was 5-7 basis points tighter by the end of the week of pricing, depending on the tranche.”

The leads wanted to retain the quality of the order book even when its size might have offered the opportunity to push further on price. “In a volatile market it’s important to be very careful about squeezing price,” Karpes continues. “I think NAB found the right equilibrium point between a high-quality order book and the appropriate spread levels.”

Australian dollar optionsNAB’s outcome clearly illustrates the capacity potential of global markets even in stressed conditions. However, when it comes to pricing – and in a turnaround from 12 months previously – ANZ and CommBank’s domestic returns highlight the advantage offered by the Australian dollar market over offshore alternatives. But execution caution and capacity constraints continue to be important considerations here, too.

Like the NAB deal, CommBank’s benchmark return required careful execution. The bank pressed ahead despite ongoing upheaval in equity and commodity markets, its Sydney-based deputy treasurer, Simon Maidment, tells KangaNews. “The backdrop was certainly soft but we had not seen as poor conditions globally in credit markets

versus others, and this gave us some confidence that, like the major offshore markets, the cash build-up over the holiday period would support a deal on the right day.”

While the right timing was a priority, in the end a good execution window was found relatively quickly. “Having watched the markets for a more stable window we saw this on January 12 and decided to move ahead – albeit we adjusted our price and size expectations slightly to reflect the volatility,” Maidment says.

In the end, the transaction’s outcome was in line with the bank’s target. Maidment comments: “We met our expectations on price given secondary levels and a small new-issue premium, while the volume was greater than what we thought we might see given the backdrop.”

Conditions had not noticeably improved by the time ANZ brought

its first benchmark deal of the year. Christopher Cornwell, associate director, group funding at ANZ in Melbourne, says the market widened further after the CommBank deal – but this did not influence ANZ’s execution strategy.

He explains: “We were conscious there had been no trading inside the reoffer level of the CommBank transaction and we were certainly mindful of this. However, we concentrated on providing clarity to the market around our own transaction – including offering a more defensive maturity, which investors keenly supported.”

Domestic stacks upAccording to KangaNews data, NAB was the last major bank before CommBank to issue a five-year senior benchmark in the Australian dollar market – in November

last year. NAB’s floating-rate note (FRN) had volume of A$2.1 billion and pricing of 108 basis points over bank bills.

CommBank most recently issued in the five-year part of the curve in its home market in July last year – for A$1.5 billion at 90 basis points over BBSW. According to Yieldbroker ratesheets, these transactions were indicated at around 106.5 and 103 basis points over bank bills, respectively, on January 11.

Spread pricing has widened over the last few months in both primary and secondary markets (see chart on facing page), suggesting investors are looking for a little extra compensation in the current primary-market environment. “In late 2015 we saw secondary spread levels indicated at around 105-110 basis points area over BBSW,” Maidment says “With an adjustment for the curve and a reasonable new-issue premium we

“I THINK A NUMBER OF INTERNATIONAL ASSET MANAGERS ARE RELATIVELY COMFORTABLE WITH THE AUSTRALIAN ECONOMIC ENVIRONMENT AT PRESENT AND IN PARTICULAR SEE SOME AUSTRALIAN NAMES AS SOMETHING OF A SAFE HAVEN AMIDST GLOBAL VOLATILITY.”CHAD KARPES BANK OF AMERICA MERRILL LYNCH

1 3

thought 115 basis points over BBSW was fair value for a new issue.”

Pricing on the CommBank transaction demonstrates that the domestic market has returned to its normal state of being more cost-effective for local major-bank issuers than offshore options. NAB’s January US dollar deal contained a five-year tranche which priced at 105 basis points over US Treasuries. KangaNews understands this swapped back into Australian dollars at an estimated level of around 128 basis points over BBSW.

For the domestic market to offer better pricing than offshore during volatile periods is not unusual, Maidment explains. “While 12 months ago it was almost cheaper for us to issue US dollar denominated debt and swap it to BBSW we’re now back to around a 15-20 basis point differential [in favour of domestic issuance],” he adds.

The pricing edge offered by Australian dollar deals is even more pronounced at the shorter end of the curve, says Cornwell. “Three-year offshore markets are about 25 basis points wider on a BBSW basis than a few months ago, but only 20 basis points wider in five years. This is in part due to movements in underlying swap spreads,” he reveals. “As a result, we found quite a bit of value in the three year tenor.”

New-year focusAchieving NAB’s result required the right decision to be made in terms of market and instrument selection. For instance, while it is likely no surprise that a subordinated security might find less demand given market conditions, RBCCM’s Perrignon also suggests that the US covered-bond market has offered relatively less execution certainty of late compared with earlier market conditions.

Zileli at NAB adds: “The US largely provided the best relative levels for the tenors and the product we were looking to issue. We have seen considerable issuance in euro covered bonds and were last in this market in November last year, so from a diversification perspective we had a preference to look at other options.”

Issuer and leads point out that while the fundamentals of global demand for Australian bank paper remain robust, in turbulent conditions it is necessary to time execution well.

Zileli tells KangaNews: “The macro and geopolitical backdrop has resulted in more discrete windows of issuance, so issuers need to be nimble and act on these. One needs to take into account all the usual measures of market stability and move forward with more uncertainty than is prevalent in stronger markets.”

CommBank’s Maidment notes the extent to which execution risk is elevated at the start of 2016, but he says this has so far required no change in issuance strategy. He comments: “We saw some similar dynamics in the second half of 2015. For us, it means we continue with the strategy of holding sufficient liquidity to avoid having to issue into poor conditions.”

However, Maidment also suggests that in this context bank funders may be required to draw on the full range of options within their funding toolkit

MA

RG

IN

(BP

/S

WA

P O

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BS

W)

SOURCE: KANGANEWS, YIELDBROKER JANUARY 31 2016

130

120

110

100

90

80

70

60

AUSTRALIAN DOMESTIC MAJOR BANK FIVE-YEAR BENCHMARK PRICING

Month-end secondary pricing* New price points

Nov 14 Dec 14 Feb 15 May 15 Jul 15 Sep 15 Oct 15 Dec 15 Jan 16

90

*Based on average of closest-maturity major-bank benchmarks at each month end.

NATIONAL AUSTRALIA BANK JANUARY 6 DEAL BREAKDOWN

MATURITY VOLUME ISSUED (US$M)

ORDER BOOK VOLUME (US$M)

COUPON SPREAD DISTRIBUTION NTH AM/APAC/

EMEA (PER CENT)

14 Jan 19 1,250 1,750 2% 85bp/UST 47/39/14*

14 Jan 19 500 925 3m US Libor +78bp

78bp/3m US Libor

47/39/14*

14 Jan 21 1,000 2,350 2.625% 105bp/UST 56/34/10

14 Jan 26 750 3,750 3.375% 130bp/UST 47/37/13

*Combined for both three-year tranches

82 80

90

108115

SOURCE: RBC CAPITAL MARKETS JANUARY 7 2015

especially during challenging periods for deal execution. “We keep capacity in markets and products that are typically less correlated with some of the macro market moves, for example covered bonds,” he says.

ANZ had been waiting for some weeks for a window to open. “We had significant reverse enquiry for a shorter-dated domestic deal prior to Christmas, however due to volatile conditions we were reluctant to access the market,” Cornwell reveals. “Given persistent volatility in offshore markets and the comparatively more defensive domestic market we positioned ourselves to execute when the local market reopened following the holidays and when conditions had improved.”

Cornwell says ANZ’s choice of three-year tenor reflected the weaker backdrop than existed when CommBank issued in five years a week prior. “We were attracted to the more defensive nature of the three-year maturity and saw a scale of demand which met our expectations. Overall we were pleased with the result.” •

1 4 | K A N G A N E W S F E B / M A R 2 0 1 6

KangaTrendsKanga

Kauri market shakes off global woes but issuance momentum likely to be subdued in 2016The four Kauri transactions printed in January match a record for the month, and New Zealand intermediaries say solid on- and offshore demand continues to underpin high-grade Kauri deals. But they also have reasons to expect a moderate year for supranational, sovereign and agency (SSA) volume – and not just because of wider market turbulence.

The four Kauris all came from North American issuers (see table on this page). The number of deals matches the January record, set in 2008 and

repeated last year. Meanwhile, although 2016’s aggregate volume of NZ$1.2 billion (US$775.1 million) falls well short of the record NZ$2.1 billion from 2015 it still is the second-largest Kauri January on record (see chart on this page).

Functional marketAs in the SSA Kangaroo market at the start of the year (see p48), Kauri intermediaries choose to emphasise the positive, highlighting the fact that deals

coming to market printed in good order and with broad investor support despite challenging conditions.

The new-year market was assisted by a tailwind from low deal flow at the back end of 2015. No Kauris printed between September last year and January this, and more than three-quarters of 2015’s total Kauri volume of NZ$6.3 billion priced in the first half of the year.

Pricing conditions have also swung back into favour for Kauri issuance. Tom Irving, managing director and head of Asia syndicate at TD Securities in Singapore, comments: “Investors are buying predominantly because New Zealand swap spreads are wide, relatively speaking, and

there is a pickup versus the sovereign. But the lack of issuance over the fourth quarter of last year certainly helps.”

Another encouraging sign is that investors from both within New Zealand and offshore have been active. International Finance Corporation’s market opening deal saw 75 per cent domestic placement, while nearly 60 per cent of World Bank’s Kauri return went offshore. The respective size of the deals suggests both saw about NZ$200-250 million of bonds sold to New Zealand investors.

Mike Faville, head of debt capital markets at BNZ in Auckland, tells KangaNews that the healthy domestic bid that has contributed to Kangaroo demand in early 2016 is also evident in Kauri deals. “More than half the placement of Kauri issuance so far this year has been with domestic investors, and we also note a concentration of demand from bank balance sheets,” he reveals.

Real money is also active, though likely as a complementary bid. “The deals we have led have all had a healthy domestic component – dominated by bank liquidity books but also reflecting an increasing regularity and diversity of domestic real money,” says Glen Sorensen, director, syndicate at ANZ in Wellington.

As in Australia, the fact that the New Zealand government bond (NZGB) curve has been heavily bid has opened a window of opportunity for local investors in Kauris. Matt Wilsher, Auckland-based syndicate at Westpac Institutional Bank, comments: “One factor driving domestic demand is the compelling pick-up over NZGBs. This is due to a combination

KAURI DEALS PRICED IN JANUARY 2016PRICING DATE ISSUER MATURITY

YEARVOLUME (NZ$M)

LEADS

7 Jan 16 International Finance Corporation 2020 325 ANZ, BNZ

13 Jan 16 World Bank 2021 550 ANZ, TD, WIB

15 Jan 16 Inter-American Development Bank 2021 175 BNZ, CB

19 Jan 16 Export Development Canada 2020 125 ANZ, BNZ SOURCE: KANGANEWS JANUARY 31 2016

VO

LU

ME

(N

Z$

M)

NU

MB

ER

OF

DE

AL

S

SOURCE: KANGANEWS JANUARY 31 2016

2,500

2,000

1,500

1,000

500

0

5

4

3

2

1

0

JANUARY IN THE KAURI MARKET

850

225

925 925

2,100

1,175

Volume (LHS) Number of deals (RHS)

2009 2010 2011 2012 2013 2014 2015 20162008

4

1

4

4

3 3

000

1 5

2,550

VO

LU

ME

(N

Z$

M)

SOURCE: KANGANEWS JANUARY 26 2016

6,000

5,000

4,000

3,000

2,000

1,000

0

SSA KAURI MATURITY PROFILE

125

2,050

1,0101,400

1,125

2,200

9751,275

4,775

3,550

5,2255,625

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

of the current swap-spread level and attractive margins to swap.”

Wilsher points out that World Bank’s January 2016, five-year Kauri offered a margin of 76.4 basis points over the May 2021 government bond. The margin over the April 2020 NZGB from the same issuer, and at the same duration, was just 56.1 basis points when it executed in the Kauri market a year previously.

Domestic demand may be the cornerstone of at least some transactions, but Irving says he is encouraged to see support from international real money, too. “Domestic demand was solid in the World Bank Kauri but it was probably not as high as in some previous Kauri transactions,” he reveals. “More interesting was the level of offshore participation – particularly from offshore asset managers – because this bid is not always there in such size.”

Tailwind droppingThere have been sufficient supportive factors to facilitate Kauri deal flow at the start of the year, but New Zealand market intermediaries are cautious about the near- and mid-term potential for more. For one thing, a choppy market means deals are unlikely to shoot the lights out.

“Investors are taking a cautious approach to the market, so it is sensible for issuers not be too ambitious in what they expect it to deliver,” Faville counsels. “In our view the issuers to date have benefited from taking a prudent approach around things like more modest launch volumes.”

Irving adds: “Dealers’ reaction times need to be quicker even if execution periods are still relatively long. In order to give European and US accounts the opportunity to participate it will be difficult to offer intraday execution. But at the same time intermediaries may have to hold back on launching deals and also be very aware that when conditions are right they will have to move quickly.”

Kauri deal flow navigated troubled waters at the start of 2016, but if turbulence in the wider market persists it may prove difficult to maintain the

momentum. Irving continues: “There has to be some kind of follow-through effect when equity markets drop, even if it is just from the fact that some fund managers will wish to hold a higher proportion of cash. In the early stages there may be a flight to quality which benefits fixed income, but if equity markets become very disjointed there is likely to be a negative impact on fixed income as well.”

There are also some question marks over medium-term Kauri demand, based on the fact that the current year is not a banner one for redemptions in the New Zealand dollar market. There is no NZGB or New Zealand Local Government Funding Agency (LGFA) benchmark maturity, while the SSA Kauri renaissance does not start to generate its own significant redemption flows until 2017 (see chart on this page).

Sorensen tells KangaNews: “It is no surprise that lack of supply and widening swap spreads have helped attract solid demand. But with limited New Zealand dollar redemptions in 2016 I expect it will be difficult for the market to maintain this early momentum.”

By contrast, Simon Rutz, senior manager, debt capital markets origination at Commonwealth Bank of Australia in London, argues that the evolution of the Kauri buy side could support deal flow over and above redemptions. He explains: “The low level of maturities from the SSA sector will play a role, but the investor base looks very different to what it did when these deals were issued some time ago. The universe of Kauri investors is

continually expanding and demand is relatively strong.”

Sustainable futureAs Rutz suggests, and despite the obvious challenges, Kauri market intermediaries remain comfortable with the longer-term sustainability of the market following back-to-back years of record SSA issuance. Looking out to 2017, redemptions from the sovereign, LGFA and SSA Kauri sectors all kick into a much higher gear. And broad-based demand will not simply evaporate.

“High-grade bonds will always have natural buyers, despite equity conditions at any specific point in time,” Faville says. “At the same time, local banks and corporates will continue to look at the domestic market for funding opportunities.”

In fact, Wilsher suggests the New Zealand domestic deal pipeline is “shaping up for a strong start to the year” as it continues to offer the most competitive pricing options to most local borrowers. He says: “Corporates and financial institutions will be keeping a close eye on the market with a view to identifying the appropriate issuance opportunity.”

Kauri deal flow of recent times has also put the New Zealand dollar market on the radar of a larger group of global borrowers, Sorensen says – suggesting that there will be no shortage of takers as and when conditions swing back into favour. In fact, Sorensen argues that deal timing “is increasingly challenging for the Kauri market as the number of issuers looking for windows continues to grow”. •

2,550