Debt Sales Drop to Least Since 2008 on Financial Turmoil: Australia Credit

Borrowers issued the fewest bonds in Australia in almost three years last quarter as Europe’s budget crisis roiled markets, driving up yield premiums, while the nation’s banks used record term deposits to cut debt offerings.

Sales in the three months to Sept. 30 were A$16.5 billion ($15.7 billion), down from A$26.4 billion in the prior period and the slowest pace since the fourth quarter of 2008, according to data compiled by Bloomberg. U.S. investment-grade offerings of $168.8 billion were the least since the second quarter of 2010 and Australia’s four biggest lenders sold the smallest amount since 2007.

Banks cut debt offerings at home and abroad as households save the most ever in fixed-term deposits, avoiding stocks as the Australian All Ordinaries Index of equities heads for its first back-to-back yearly loss since 1982 on concern European and U.S. fiscal crises will disrupt global growth. The extra yield investors demand over government securities to hold Australian corporate debt surged 64 basis points last quarter to 241 basis points, as global premiums jumped 101 to 264, Bank of America Merrill Lynch indexes show.

“Investors are nervous about how to price risk in such a volatile market,” said John Sorrell, head of credit at Tyndall Investment Management Australia Ltd. in Sydney, which manages about A$14 billion of fixed-income assets. “Issuers seem unwilling to pay the price or in the case of the banks have managed their funding requirements so they can afford to wait until markets calm down.”

Bank Sales Shrink

Commonwealth Bank of Australia (CBA) and Westpac Banking Corp. (WBC) sold A$3.6 billion of notes in their home market, while Australia & New Zealand Banking Group Ltd. (ANZ) and National Australia Bank Ltd. (NAB) issued none, as offerings by the nation’s four biggest lenders shrank 54 percent from the second quarter.

Commonwealth Bank topped the arranger rankings with a 27 percent market share, followed by ANZ Bank and Westpac, the data show. If self-led deals are excluded, ANZ Bank takes the top spot, with UBS AG in second and Westpac in third.

Australian households, lured by the developed world’s highest benchmark interest rate, held a record A$469.5 billion in term deposits in July, central bank data show. The deposits were the most relative to offshore bank debt in data going back to 1984. Westpac was paying 5.6 percent interest on one-year deposits of A$5,000 and over, while Commonwealth offers 5.3 percent for accounts with at least A$10,000, the banks’ websites showed last week.

Ralph Norris, chief executive officer of Commonwealth Bank, said in Sydney on Sept. 26 that the lender was so well funded it wouldn’t have to raise financing in wholesale debt markets until next year.

The nation’s four largest banks sold $5.5 billion of U.S. dollar-denominated bonds in the three months to Sept. 30, down 70 percent from the prior quarter and 39 percent from the same period a year earlier, data compiled by Bloomberg show.

Premium Drops

That’s helped push the premium that banks pay to switch U.S. bond sale proceeds into their home currency through basis swaps to the lowest level since 2009, reducing the discount for sellers of so-called kangaroo bonds seeking to perform the opposite transaction.

Sales of bonds by foreign issuers in Australia totaled A$5.7 billion for the quarter, the least since the second quarter of 2010, Bloomberg data show.

The five-year Australian dollar basis swap, which measures the cost of switching interest based on the London interbank offered rate for payments linked to Australia’s bank bill swap rate, was at 8.25 basis points today, after falling to 5.3 on Sept. 14, the lowest close since January 2009.

Kangaroo Sales

“The major banks have scaled back their offshore funding in recent months, which has the knock-on effect of lowering basis swap levels, making the Australian market less attractive for kangaroo issuers,” said James Holian, a director of syndicate at ANZ Bank. “A key unknown for issuers and investors is where spreads will settle when the markets are calmer, and many investors are monitoring how the European crisis plays out before putting their cash to work.”

Citigroup Inc. and UBS have cut forecasts for global growth as the sovereign crisis that began in Greece spreads to larger European economies and threatens the region’s common currency.

Greece’s government approved 6.6 billion euros ($8.7 billion) of austerity measures including firing state workers, to show it can trim its budget deficit enough to secure a pending aid payment and a second rescue package.

Bond Yields

Australia’s 10-year government bond yield has plunged for nine straight months amid the turmoil. The security yielded 4.05 percent as of 12:47 p.m. in Sydney, or 228 basis points more than Treasuries.

The so-called Aussie dollar, the world’s fifth-most traded currency, dropped for the first quarter since the three months ended June 30, 2010, closing at 96.62 U.S. cents on Sept. 30 from $1.0722 at the start of the period. The currency reached $1.1081 on July 27, the strongest since it was freely floated in 1983, and was at 95.32 U.S. cents in Sydney today.

The gap between yields on Australian government bonds and inflation-indexed notes shows investors estimate consumer-price gains to average 2.38 percent for the next five years, down from 2011’s peak of 3.14 percent on May 6.

The Markit iTraxx Australia index of credit-default swaps surged 104 basis points since June 30 to 217 basis points on Sept. 30, CMA prices show. Swaps on the Australian sovereign jumped 45 basis points to 102, while U.S. contracts rose to 52 from 50.6, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Bond Risk

Debt sales in Australia plummeted to A$12.8 billion in the fourth quarter of 2008 in the wake of the Lehman Brothers Holdings Inc. collapse, as the corporate bond risk gauge surged 142 basis points to 342 on Dec. 31 of that year. Offerings rebounded to A$25.1 billion the following quarter, helped by a government guarantee on bank bonds.

“I would expect a natural return of issuance once markets normalize, as issuers resume their funding activities,” said Gus Medeiros, a director of credit research and strategy at Deutsche Bank AG in Sydney.

To contact the reporter on this story: Sarah McDonald in Sydney at smcdonald23@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

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