Risk-free rewards
The South Australian Government Financing Authority opened up a new asset class with an inaugural floating-rate note linked to the Australian Overnight Index Average rate.
The first use of a risk-free reference rate anywhere in the Asia Pacific region helped draw attention to the global shift to alternative reference rates, which has gathered pace since the Bank of England endorsed the Sterling Overnight Index Average and the US introduced the Secured Overnight Financing Rate in 2018.
SONIA and SOFR are set to replace the scandal-hit London interbank offered rate, which is expected to be discontinued after reporting requirements end in 2021.
In response, Australia’s regulators have underlined the need for alternative reference points.
“The transaction was driven by SAFA’s desire to align a government business with a suitable product that does not include credit risk and is complementary to the existing BBSW benchmarks, while, from an investor’s point of view, AONIA-FRNs offer diversification in HQLA portfolios,” said Andrew Kennedy, director for treasury services at SAFA.
Similar to the UK and US benchmarks, AONIA closely tracks the central bank’s target cash rate, whereas BBSW, the midpoint rate at which banks lend eligible securities to each other in Australia, contains a modest credit premium to compensate for the counterparty risk.
SAFA, rated Aa1/AA+ (Moody’s/S&P), raised A$500m (US$350m), five times the indicative issue size, from a one-year FRN that pays a monthly coupon of 41bp over the daily compounded AONIA.
Seventeen investors participated in the deal with banks taking 68%, asset managers 13%, official institutions 9%, trading 6% and middle market 4%. Australia was allotted 88%, EMEA 7% and Asia 5%.
The response was especially encouraging, given that Australia has no plans to discontinue BBSW.
The introduction of an alternative risk-free rate is also a significant step for Asia, where banks and investors have done little to prepare for the transition away from Libor, as Bank of China found with a lukewarm response to its first SOFR-linked bond in October.
Furthermore, the use of AONIA is spreading with Commonwealth Bank of Australia in November issuing the first AONIA-linked RMBS, a reference rate it intends to use for all its future mortgage securitisations.
Tim Galt, head of Asia Pacific DCM syndicate at arranger and sole lead manager UBS, expects the AONIA-FRN market to attract new issuers and evolve along the curve, including the typical five-year tenor seen in comparable offshore markets.
“We feel the development may be applicable to all who have historically issued in FRN format, including both bank treasuries and government-related borrowers,” Galt said.
IHS Markit was the issue’s independent calculation agent.
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