New Zealand issuers comfortable despite larger tasks

Despite the volatility, we still have a functional New Zealand market and we are still seeing reasonable coverage of tenders at auction. It hasn’t been as strong as previous years, but it is still good.

We haven’t had any failed auctions and we have had two syndications over the past year – both of which were successful.

When it comes to politics, the New Zealand market is affected more by what is happening around the globe than what is going on locally.

We announced a mandate in July and then had to delay until September due to a cabinet reshuffle and the government’s housing build programme reset. This was an unfortunate window to miss, given the significant supply that came in between. Our November transaction followed shortly thereafter and achieved our volume aspirations but was allocated to a narrower investor base than we had seen in previous transactions.

On liquidity, we are starting to see positive signs in our curve. This is encouraging given we are still relatively new to markets. We always heard that our bonds were taken and put in the bottom drawer, to buy and hold. While this is still largely the case, there appears to be increasing activity in the secondary market, as is evident in turnover details provided to us by key intermediaries. This is what we would hope and expect to see as our volume grows.

We are stepping up investor engagement in 2020, including working with KangaNews to host our inaugural Investor Day in August. We want investors to know that we are always keen to meet, listen and share our story.

Kauri and NZGB [New Zealand government bond] holdings dropped in nominal terms as well as proportionally. Overall, it was a pleasing outcome for the LGFA.

Overall, I would say demand for high-grade New Zealand dollars softened in 2019. With interest rates where they are there was no true retail interest so we were all very dependent on bank and institutional support.

On the other hand, we did another euro denominated transaction in September last year and investor demand there continued to grow. These investors see New Zealand as a safe place with a stable political environment and an economy that is still ticking along. Investors like the diversity of New Zealand and Auckland Council, because we are not just another financial institution.

I agree, though, that there is not a lot of understanding of New Zealand, especially when it comes to local government. This is largely because there are few New Zealand issuers, especially in foreign-currency markets. It takes two or three meetings for a European investor to understand our credit thoroughly.

We have been to Europe for three benchmark euro transactions, we now see more investors getting interested. They now know it is not a one-off deal so they are willing to spend the time analysing our credit.

The level of engagement has picked up materially. We do roadshows with the same core investors each time. Some others are very comfortable with our credit and do not need a meeting, but there are new ones coming on as well.

The proportion of NZGBs that offshore investors hold stabilised at just more than 50 per cent last year, after trending down in recent years. The actual value of offshore holdings picked up from around mid-year.

I think it is also interesting to see what bonds were being bought and sold. Offshore investors were selling shorter-dated bonds and increasing the value of their long-dated bonds. They were still pretty well engaged on a risk-adjusted basis.

What we hear now is a more nuanced argument. Investors still appear to be very comfortable with New Zealand’s sovereign stability and institutional structure, and the clarity of our funding programme – but they are aware that they have had a good run. Investors will always make what they believe are the right choices for themselves on a relative-value basis.

Of course every investor looks at our market differently, including whether it is on a hedged or unhedged basis, so I don’t think I can speak to the investor base in its entirety. This goes to the importance of having a diverse investor base so that at any particular time someone, somewhere is going to find our bonds attractive on a relative basis.

Offshore investors have always been attracted to New Zealand and they have had several reasons to be so. In the past, they have always had the diversification benefit plus a yield pickup.

They no longer have the yield pickup, but they still have the diversification benefit of being in New Zealand.

We continue to pursue these investors, as they certainly remain important. What we have seen in the past year is that some offshore investors have reduced their holdings of LGFA bonds but others have increased theirs. There is still interest, though in aggregate it is slightly less than it was a year ago.

Investors now tell us LGFA securities are among the first bonds they will consider buying if they are looking at increasing their New Zealand dollar portfolio and they are one of the last they will sell if they are looking to exit New Zealand dollars.

We also have quite a diverse offshore ownership profile, so it is not as if we are relying on one geography or one type of investor from offshore. We will continue to be active in expanding our offshore investor capability.

We have chosen the euro market as our strategic offshore option and, incrementally, we look at the Swiss and certain Asian markets. The Australian dollar market tends to be a tactical option for us.

We will continue to target European interest. When it comes to Asian investors, we will look to Taiwan, Japan, Hong Kong and South Korea for longer-dated issuance.

There is still interest in Australian dollars although Japanese life-insurance demand has fallen away recently as the Australian curve has gone down.

We like to think the market will adjust to our increased planned volume, and we are seeing some evidence that this is correct. Capacity is not binary. It’s not true that an issuer can only do a hard volume limit or that what the LGFA, for instance, has done is the only possible outcome.

We offer Crown risk and a triple-A rating with Moody’s Investors Service – which notes no meaningful distinction from the Crown in a credit sense.

All in all, we are optimistic about achieving our volume aspirations in 2020 and beyond. Notwithstanding this, we are exploring a backup programme, subject to board approval. But it’s important to reiterate that our focus is on New Zealand dollars.

We would probably consider foreign-currency issuance if there was a pricing opportunity or if for some reason the domestic market closed or shrank for us, but our indications are that is not likely to happen. We will continue to monitor offshore markets as a potential source of funding but at this stage we still have no immediate intention to go offshore.

There has been a reduction in SSA [supranational, sovereign and agency] Kauri and NZGB issuance as well as a falling interest-rate environment, so investors are looking for additional yield. We have been fortunate in that we have been the only nonsovereign issuer of long-dated bonds, so we have been able to offer investors that wanted duration or to benefit from the steep yield curve a range of maturities to choose from.

We are never going to be able to issue NZ$1 billion lines in the local market. We don’t have a high enough credit rating for a lot of offshore investors. We also don’t follow New Zealand government or LGFA issuance maturities, otherwise we would be getting a lot of concentration in our issuance because we also fund through the LGFA.

How we get there is obviously important, and this takes into account the potential for near-term saturation and the rate of supply. Kauris are part of this, but overall we see those issuers’ presence in our market as beneficial rather than in direct competition with us.

The important thing to note is that SSAs are the discretionary issuer in our market, which means they can adjust to demand. Our funding is determined by the government’s policies and needs, whereas the Kauri issuers have greater flexibility to come and go as they please.

It’s true that SSAs are generally more tactical than domestic high-grade issuers. But they also add depth and provide relative benchmarks in our market, which we welcome.

We still haven’t had a clear message on whether regulatory changes mean more or less demand. Anyway, on the flip side, there is less SSA and NZGB issuance and the banks still have to hold high-quality liquid assets.

If there is less lending, one would think there would also be more cash around for liquidity books unless the banks also scale back their deposit taking.

We are unsure where this will eventually land but we are certainly watching because the banks are our largest investor group as a whole – as a combination of liquid-asset books and trading books. Even so, the changes probably have more of an impact on lower-grade than higher-grade credits across the corporate and nonbank financial market in New Zealand.

There is still very much a view that we are aligned with Australia, in particular around the Reserve Bank of Australia and its approach to monetary policy. The RBNZ is also now much more in step with global monetary policy. Investors recognise the fiscal strength of New Zealand relative to other countries around the world.

Possibly, some investors are becoming more opportunistic regarding New Zealand. But this is part of a longer-term focus. Global volatility is creating opportunities around the world, so investors tend to be a bit more active. This might explain why we have noticed an increase in secondary-market activity.

Given this, some were a little surprised by the rate at which OCR [overnight cash rate] cuts happened. But they acknowledged inflation was still below the RBNZ’s target and there may be some downside risks lurking.

How much more the government could do if required comes up from time to time when we meet investors.

The Treasury’s Living Standards Framework, which was developed over a decade, is focused on improving the wellbeing of New Zealanders. As this framework underpins economic and fiscal advice to the government, and with housing polling as the number one issue in New Zealand, it makes sense for us to promote this by issuing Wellbeing Bonds.

Our new name – Kāinga Ora – was gifted to us by the honourable Nanaia Mahuta, the minister for Māori development. It is about wellbeing – for which housing is key.

We are really excited about telling the wellbeing story in our 2020 impact report, as it provides a great incentive to broaden our story from narrow housing indicators to our intervention narrative and the real impact we are having on people’s lives.

The rest of the country has a lot of infrastructure requirements and much of that is also coming to terms with climate change and existing infrastructure renewals. Having said this, the rest of the country is not running at the same pace as the high-growth areas such as Auckland. The next big test will be when councils start working on their 10-year infrastructure and borrowing plans, at the end of this year.