A Flood of Cash Is About to Hit Australia's Bond Market

  • Syndicated offerings excluding federal debt fall almost 25%
  • `There will be a strong environment in terms of cash:' CBA

A flood of cash is about to hit Australia’s bond market as unprecedented maturities come at a time when new issuance is falling.

About A$54.8 billion ($42 billion) of Australian-dollar denominated debt owed by governments, foreign institutions and companies is coming due next quarter. Investors will be cash rich at a time when syndicated bond sales in Australia by borrowers other than the federal government have slowed almost 25 percent so far in 2016 from a year earlier.

New bond sales have been hampered this year by turbulence in financial markets, more attractive pricing for borrowers in Europe and Japan, and muted demand for non-government paper from lenders that are required to hold safer securities to meet liquidity rules. While revenue pressures are fueling increased bond offerings from the federal government, Commonwealth Bank of Australia expects that issuance by other borrowers probably won’t rise this year.

“There will be a strong environment in terms of cash, but we may not see all of those maturities refinanced in Australia, as may have been the case in previous years,” said Adam Donaldson, head of debt research at Commonwealth Bank. “One of the trends that’s coming through is that as bank balance sheets continue to adjust the composition of their holdings toward high-quality liquid assets, their appetite to take up credit paper and bonds from sovereign-backed and supranational issuers is not quite as strong as it used to be.”

The amount originally slated to mature in the second quarter was A$71 billion, the most in Bloomberg data going back to 1995, although some of this has already been repaid. The figure has been bolstered as large amounts of federal and state-issued debt come due.

Issuance by the Australian sovereign has remained robust this year, though activity by offshore quasi-government borrowers has been more subdued in the first quarter than last year. Highly-rated sovereign-backed, supranational and agency issuers have sold just A$5.4 billion of notes since Dec. 31, even though more than A$7 billion was originally scheduled to mature in the first three months of 2016. That volume of sales is about half the A$10.2 billion priced over the same period of 2015, according to the data.

“There were quite a lot of maturities of SSAs in particular and the market did actually still struggle to match the issuance that we’ve seen in previous years,” Donaldson said.

Demand Change

These bonds can’t be counted by banks as liquid assets despite being highly rated. In addition to banks’ balance sheets requirements, there’s also been a change in demand from central banks and sovereign wealth funds, Donaldson said.

A strengthening U.S. dollar and weakening commodity prices mean global foreign-exchange reserves have declined 6.5 percent in the past year, led by a nearly $600 billion slide in China’s stockpile. This means that managers may not need to invest maturing bonds into Aussie assets, which make up about 1.8 percent of reserve holdings for nations that disclose their allocations to the International Monetary Fund.

The slump in SSA issuance along with a dearth of non-financial corporate paper has reduced overall volumes even as Australia’s major banks bolstered domestic sales. The four largest Australian banks have increased local issuance by 47 percent to A$9.5 billion compared with the year-ago period, the data show.

Refinancing Options

Some of the corporate names coming due next quarter may refinance in euros or yen given that central bank easing has driven down borrowing costs in those currencies, said Katrina King, director of research and strategy at Brisbane-based fund manager QIC Ltd.

The average spread over the swap rate for yen-denominated investment grade bonds was 27 basis points on Tuesday, compared with 80 basis points for euro bonds and 144 basis points for Aussie dollar paper.

The solution for QIC has been to become a cornerstone investor and work with corporates to bring deals to market, as well as working with clients to add exposure to global credit holdings, King said.

“Issuing offshore is probably a sensible strategy for them,” she said. “But that’s a quandary for Australian fund managers with mandates to invest in corporate bonds. Where do you put your money if local issuance drops off?”

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