New Zealand looks forward

The seventh annual KangaNews New Zealand DCM Summit took place in Auckland on 22 August at a fascinating juncture for the local debt market. Discussion focused on forthcoming changes to bank-capital requirements and the finalisation of a bank securitisation regime locally, the global context of trade wars, the low interest-rate environment and major capital-market upheaval.

"I don’t agree with the idea that monetary policy ‘needs mates’ to meet the inflation target. In an actual downturn, we’d expect to see monetary and fiscal policy pulling in the same direction – but it doesn’t require coordination."

"We live in a world where we are seemingly not allowed to have downturns. This has led to excessive debt-fuelled growth and, in some cases, unnecessarily low interest rates. There is a sense of denial about the need for economic cycles, but they are essential to maximise long-term, sustainable growth."

"New Zealand’s top three trading partners, either directly or indirectly, are going to be affected by the trade war. Geopolitical uncertainty is causing the biggest problems for the globe and Donald Trump has made the global economy toxic."

"At some point, loosening monetary policy further is not going to help. Lower interest rates work by bringing forward spending from the future. But what happens when the future eventually arrives?"

"We seem to be quite well advanced in the global economic cycle but we have not seen monetary-policy normalisation. The Fed has been able to raise interest rates a bit but only against the backdrop of significant fiscal stimulus."

"Work is ongoing to keep BKBM fit for purpose. We are also monitoring what is going on globally, of course. This includes exploring a fallback benchmark interest rate –which will most likely be the OCR."

"We have been involved in the ISDA working group on the development of a fallback rate in Australia, and we are also focused on a multibenchmark approach in Australia. The feedback we have had from market participants is that they want to look at alternative benchmarks but it takes time to prepare operationally and therefore to adopt them."

"In the future, as we bring funding back from offshore, we expect we could move towards an OCR-based benchmark domestically. This is simply to remove the element of basis risk that would arise from issuing internationally off a risk-free rate while continuing to fund off BKBM domestically."

"There is no escaping the lower-for-longer interest-rate world we are in. But fixed-income investment managers have a toolbox of resources at their disposal to enhance return, including duration, currencies, asset classes and credit."

"I’d love to see an OIS market, which would also allow for the development of a forward-looking risk-free rate. This could become a viable reference rate in itself – which means we might want to re-examine fallback language yet again. There are more questions than answers at the moment."

"Investors are sliding down the risk structure in the search for yield. But investment managers should be trying to get better risk-adjusted return – not taking on greater risk."

"The market has only just started trading risk-free rates and it is not yet clear how liquid OIS and futures markets for these risk-free rates will ultimately be. It is therefore difficult to be definitive about the future viability of forward-looking term risk-free rates. Regulators are telling us to be ready to stop using LIBOR; the development of market liquidity will help drive the pace of adoption of risk-free rates."

"There is greenwashing aplenty and our clients are not having a bar of it – there is no appetite from our client base for companies that are not authentic on the ESG front. On our part, in the age of ‘ESG 2.0’ it is not enough simply to say we are not going to buy particular companies."

"We tick all the ESG boxes but it ultimately starts with our purpose. We won’t get to attract the next generation of New Zealanders who are going to transform this country with technology for good if we don’t have a clear purpose."

"We have a fundamental belief that human contact and the kindness that comes with being cared for, in a community that is designed for its members, is key. Technology is very important and should be there to assist, but we believe the human touch is crucial."

"There is a redefinition going on in how businesses engage with the community. Our communities are diverse places so if we don’t have diversity in our organisations, how can we meet the demands of our stakeholders? I believe no organisation will be relevant in the future if it doesn’t do diversity well."

"We have seen business confidence ticking down of late and, according to a recent survey of CEOs, growth over the next three years will be harder earned. Businesses face the challenge of moving to an agile business model alongside greater expectations of their social licence to operate."

"There has been a lot of activity over the last 24 months in three asset classes: RMBS, auto ABS, and credit-card securitisation. RMBS was particularly slow to recover after the financial crisis but we have had four deals in the last two years and an increase in the number of warehouses established."

"Fixed-income fund managers have clearly defined investment mandates which define risk profile. In a low-yield environment, there is a risk that investors reduce fixed-income exposure to chase returns via riskier asset classes. We need to educate investors on the importance of fixed income in a diversified portfolio."

"If banks need to hold more capital and – as their feedback suggests – this leads to increased lending rates, it would only be beneficial for the nonbank sector and could level the playing field somewhat."

"The rates environment is conducive for launching a new high-grade product. We are trying to see how much more flexibility we can provide. This includes attempting to get a variety of note classes in the securitisation framework, with the aim of attracting different types of investors without jeopardising the idea of a simple and standardised product."

"In a world where capital levels have gone up substantially, capital efficiency will be on everyone’s mind. If we can structure RMBS to get capital relief it would be a positive development."

"The financial crisis still casts a shadow in the securitisation sector. In one of our mandates, if we want to buy securitised product we need to write an eight-page credit report – but we don’t need to write anything to buy a triple-B credit. This isn’t a roadblock per se – we are investing anyway – but it is illustrative of end investors’ appetite for securitisation."

"We expect rating outcomes in RMO transactions to be more alike than they are different. The major reason for this is the commoditised nature of the RMO, where the portfolio parameters, capital structures, transaction documents and waterfall are similar."

"We are calibrating these bank-capital rules for the specific risks we see in New Zealand, and for what we believe will be best to protect New Zealand’s financial system. We believe this will put New Zealand at the conservative end of the global capital spectrum, but it will by no means be extreme."

"One of the unintended consequences of the capital proposals is that we are having to spend more time with offshore investors explaining why New Zealand is different. We often only have 45 minutes with each investor and once we have explained why New Zealand is different from other countries we are often left with barely enough time to discuss a transaction."

"We need to be thoughtful in implementing any capital proposal, for instance taking adequate account of other policies that are also designed to improve resilience. The cumulative impact of these other polices combined with significantly higher capital levels could lead to over-insurance – the cost of which will largely be borne by New Zealanders."

"There is a tug of war between APRA and the RBNZ regarding major-bank capital. While the standalone ratings of the subsidiary banks can be strengthened by stronger capital, the lower relative core equity target in Australia effectively lowers the amount of the Australian entity’s core capital available to protect Australian depositors in a stress event."

"The capital proposals aim for a very high ratio compared with global standards, though they are in line with the Scandinavian economies. We need to be aware that capital should be appropriate for the amount of risk. Recent evidence has shown that the benefits of capital diminish once levels reach around 12 per cent."

"The banks are largely aligned with the RBNZ in that we agree well-capitalised banks are good for a stable economy. We should not get caught up in the idea that the banks want something entirely different from the RBNZ. The difference comes in how much capital is necessary, what is counted in the capital requirements and how risk in underlying assets is measured."

"An assumption the RBNZ has taken into account is that if more capital is held there will be less need for senior debt. Balance sheets may become smaller as well. If this is the case the major banks will need to make decisions on whether they issue less offshore or domestically."

"We appear to be operating in a new economic paradigm. The global environment is volatile with trade wars and Brexit among other factors, and there has been a significant rally in rates globally and locally. Domestically, we are even beginning to hear talk of negative rates and QE."

"It would be difficult for Transpower to issue a green bond under the current standards, even though at face value the company is relatively green – much greener than some organisations which have been able to issue green bonds."

"There is a temptation in a low-yield environment to reach out across the yield curve and to take on illiquid exposures. But it is incumbent on us to be disciplined. We look through cycles and we take active positions."

"Interest rates are currently low and vacancy rates are also very low, which means rents are increasing. But we are conscious of things like negative sentiment in business surveys. If this persists it will filter into the market and our broader operations."

"The QFP regime has been very good for corporate borrowers and is still improving. However, I do wonder why companies that have listed equity need to put out a PDS for a debt instrument – because the disclosure is already there. This is the next step I would like to see for the QFP regime."