Australia’s state governments have dominated local bond markets since the start of the fiscal year with Queensland, the biggest of the semi-sovereign issuers, looking beyond its home market in search of cost-effective financing.
Australia’s state governments largely shrugged off the difficult global backdrop during a proactive start to the 2011/2012 fiscal year, responding to increased funding pressures after Canberra turned off its financial crisis-inspired stimulus taps.
With state tax revenues struggling in the face of deteriorating consumer confidence, it was no surprise to find semi-sovereign issuers determined to make early inroads into their funding targets.
Queensland Treasury Corporation has the largest fiscal hole to fill as it continues to deal with the impact of the disastrous Christmas 2010 floods with an A$22bn (US$22.6bn) financing target established for the 2011–12 fiscal year. The targeted amount represents an increase of almost 50% from the A$15bn borrowing programme for the preceding 12 months.
Coming on the heels of QTC are Western Australia, New South Wales, Victoria, South Australia and Tasmania, which aim to raise A$16bn, A$11bn, A$6.5bn, A$3.5bn and A$1.5bn, respectively, during the fiscal year from July 1 2011.
QTC also leads the pack in another area. It is proving to be one of the most innovative and opportunistic issuers so far this year – most notably with an inaugural trip to the Swiss franc market on August 17.
The SFr110m (A$132m) 1.72% fixed-rate September 2039 bonds priced just 28bp wide of the Swiss Government curve.
This was only the second Swiss franc issuance from an Australian semi since the 1980s, following New South Wales TCorp’s March 2011 SFr130m 2.375% 30-year transaction.
The QTC deal stemmed from favourable moves in the long-dated basis swap, making it economical to fund long-term projects via the Swiss market before swapping back into Australian dollars.
Execution was completed very quickly to hit the swap window, with SFr100m raised initially before SFr10m was added a little later. Lead manager UBS said the deal would not have worked 10 to 15 minutes either side of pricing.
August 17, the day of pricing, was very volatile for the Swiss franc, especially either side of a meeting between the SNB and the Swiss Government aimed at containing the strength of the Swiss franc – a move that ultimately did not resolve very much.
The bond was sold to institutional investors looking for duration and diversification and was headed by a few lead orders.
New South Wales TCorp’s head of balance sheet and funding, Tim Hext, who helped arrange the state’s March issue, noted: “Five or 10 years ago, there was a lot of competition in the Triple A or Double A space, but, on a relative basis, Australian semis have done very well since then to the extent that a new group of international investors are now openly targeting them for new supply.”
Hours before its Swiss franc issue, QTC placed an A$250m (US$261m) three-year floating-rate note at 3bp inside three-month BBSW. A bulk of the notes went to a single Asian offshore investor.
South Australia Government Financing Authority, rated Aaa/AAA, had blazed that trail, launching the first FRN from a semi-government issuer 12 days earlier to raise A$275m via a December 2014 paper at 10bp inside three-month BBSW.
This was the same spread that similarly rated New South Wales TCorp achieved on a four-year FRN on August 18. The premium QTC paid highlighted the price of being the only state in Australia rated Double A by all the major agencies.
The August 17 print was QTC’s inaugural FRN, as well as its first visit to the domestic bond market since Fitch revised its AA+ rating outlook to negative in July, citing the slow pace of the state’s fiscal recovery and a still-challenging operating environment.
Fitch’s warning exacerbated QTC’s recent underperformance. Its February 2018 bonds widened 54.5bp, moving from 43.0bp to 97.5bp over the Australian Government curve from June 14 to August 22, while New South Wales TCorp paper slipped from 38bp to 78bp.
Despite the deepening European Union debt crisis and ongoing concerns about the US economy, the spreads have retreated around 30% from their peaks and were quoted at 66bp and 86bp in the middle of September.
Martin Whetton, interest rate strategist at Nomura, believes this tightening may still have some way to go. “Large supply and equity market volatility explain the widening, but ratings and credibility are not an issue for semis, which enjoy local taxation powers and implicit central government support,” he said.
He pointed to the explicit Commonwealth guarantees provided to QTC and New South Wales TCorp in 2009 (withdrawn on January 1 2011), which strongly suggested that, “if things turned desperate, you can pretty much rely on direct fiscal transfers from the Commonwealth or government guarantees being put in place.”
Furthermore, the inclusion of semi-sovereign bonds as liquid instruments under Australia’s adaptation of the Basel III rules (in contrast to foreign currency supranational paper) will likely ensure strong demand for future bond sales. QTC, thanks to its relatively lower credit rating, remains particularly attractive to yield-hungry investors.
