A decade of development

The KangaNews-Westpac Corporate Debt Summit debuted in 2011, with a relatively small audience and a market that could not yet take consistent supply of corporate bonds for granted. In the decade since, the event and the market have grown and diversified. By 2019 – the last year before COVID-19 put the in-person event on hiatus – registrations had more than trebled, to nearly 600, and the event’s agenda covered not just corporate debt but a raft of issues relevant to the economic and business environment.

Along the way, landmarks include the introduction of an annual ‘view from the C-suite’ session, the view from the US private placement sector, coverage of the emergence and accession to the mainstream of sustainable debt and – perhaps most importantly – the background of a more confident and consistent Australian issuance environment.

2011

“We continue to be in the early phase of development domestically and the market suffers from dislocation from time to time. The US market is currently open to investment-grade issuance. The Australian market is also open, but to a much smaller extent. It is a little bit chicken and egg: the more issuance we get, the more interest we will see from investors.”

“Many funds have mandates that will not let them invest in bonds longer than five years as they need to be able to switch out – into equities. We need to challenge the accepted notion that we should have 60-70 per cent allocation into equities, especially with people coming into the retirement phase of their life cycle. People in the bond market need to have a longer-term view with confidence of having more money to put to work – this is the real key to getting more triple-B and longer-tenor issuance.”

“We see more consistent and worthwhile deal size being achievable for many issuers these days, and a greater range of credits accessing the market. That said, the local market still has some challenges. We still cannot get significant volume in tenors beyond five years, while there remain issues around execution and the lead time required to issue. We remain cautious about the domestic market but we are confident it will develop further.”

“Prior to the financial crisis, domestic corporate deals were being issued on a weekly basis and one of the main concerns was making sure we were not going to clash with our peers by issuing at the same time. Whereas now such deals are few and far between so we are unable to make an informed assessment of the market based on consistent deal flow.”

“Over the last 18 months we have tried to accommodate Asian investors. As a percentage of the book they are never large and they do not drive deals. However, we like to think that somewhere in the next five or 10 years Asian demand will really pick up.”

“To see greater allocation to fixed income we would need to see sustained good performance from the asset class. This has happened – but it will be hard to repeat unless rates fall further. Investors are currently not scared enough to move much of their allocation out of equities. Headline risk in fixed income – particularly around CDOs, mortgage funds and property debentures – needs to subside.”

“The relationship between issuers and investors has had a very rocky road, particularly in the last few years. There are significant points of contention regarding different covenant structures, legal structures and onshore versus offshore issues. Communication is definitely an area where Australian investors have always been down the list of priorities. The last three years have done a lot to change the environment – companies are a lot more thoughtful about the entire spectrum of their investor base, not just equity holders.”

2012

“If you have a long-term business plan where you want to raise debt over an extended period, relationships are important. We can develop those long-term relationships in the USPP market, as we can with the banks in Australia. But the domestic bond market just doesn’t seem to have the volume to support the things we want to do.”

“The market has lengthened in tenor, from what was a 3-5 year market prior to the financial crisis to what is now comfortably a 5-7 year, and occasionally a 10-year, market. If we want to be a real funding option for corporates we need to be able to offer some tenor.”

2013

“Five or six years ago, execution risk was high. But I get the sense from talking to other borrowers that it is a lot lower now and I’d like to think we would attract interest if we were to issue. However, if we go offshore we can get 10-, 12- and even 15- or 20-year issuance. Five years only matches what we can achieve in bank funding.”

“What we really need is to identify an investor base locally that is prepared to allocate funds to domestic high-yield names and industries. This would save our borrowers the time and effort of going to the US and the cost of swapping the proceeds back to Australian dollars.”

2014

“I see a lot of issuers run to the US because they are scared to test the market here. Many of them are scared to do a nondeal roadshow because they presume it will be viewed as a failure if they don’t bring a deal off the back of it.”

“Super funds, many of which are our clients, face a real dilemma. They have yield thresholds that were set when rates were much higher. Our experience is that these have not been adjusted too much even though rates have collapsed. We suggest these clients lock in spread, go floating rate and take a long-term view of what the risk-adjusted return should be.”

“It is very much an issuer’s market. If I was a triple-B rated company I would be issuing as much debt for as long as possible given where spreads are. The challenge is that right at the time in which we have been calling for more triple-B issuance – and a longer-dated market – investors are becoming less willing to hold higher-beta names purely on a valuation basis.”

“If there is one thing that would improve the Australian market, it would be if an issuer could always assume it is open for business. Corporates are just not geared up to doing things instantly and there will often be a long gestation period before we are ready to launch. We would like to know a particular market will still be open after we receive board approval to issue into it.”

“There is inevitably a size factor that has an impact on domestic-market discussions, whether it is a vanilla corporate deal or something more structured. But I don’t think it is a question of a lack of capability in the domestic market: I think it is getting the right opportunities to the right people.”

2015

“The loss of royalty income in Queensland and Western Australia will ultimately translate into a need to sell off public assets. In fact, the only thing I am sure of is that pressure on state fiscal performance will ultimately mean a better outcome for infrastructure and service providers.”

“While some say ‘one-off’ deals from BHP Billiton and Apple might distort the domestic issuance figures, I argue the contrary. In my view, the Australian market is now firmly on the global stage and these deals are proof points that the local market can and will deliver.”

“One of the big questions about balance-sheet repair following the financial crisis was whether it was going to be cyclical or structural. Across the rated universe, it has been more structural than cyclical. We are not seeing any strong desire to gear up, while leverage remains at modest levels – this is a function of boards and management continuing to be conservative.”

“We saw no top-line growth in the most recent reporting season. Corporate Australia is not investing for the future and leverage – being defined as debt to facilitate growth – is not there.”

“As an A-rated credit we can generally achieve clean swap lines out to 15 years. But an ability to issue in the local market at 10 years provides a convincing alternative to offshore funding.”

“Provided we maintain lowest-cost production, volume should remain. As long as China is still fundamentally demanding 900 million to 1 billion tonnes of steel per year – which for its continued urbanisation we believe it should – demand for iron ore should persist.”

2016

“The effectiveness of QE has probably come to an end globally. Led by the US, since 2015 we have seen corporates putting less into capex – even with QE ongoing – and using more cash for dividends and share buybacks, or stockpiling it for potential M&A. While it appears there is too much money in the system, the indications also are that there are too many uncertainties for corporates to be comfortable investing.”

“The market has faced significant headwinds in the past 12 months, and although volume is largely unchanged its makeup is quite different. But I believe the fact we have been able to welcome sizeable transactions from global, blue-chip issuers demonstrates the growth of the domestic option’s breadth and depth.”

“I believe it will still fall to institutional investors to take on the role, from the banks, of lending to corporations and creating a more vibrant bond market in Australia. Retail investors tend to have a yield focus in fixed income, which makes it less likely that they will become drivers of demand for senior debt.”

“Australia has managed to produce stable growth of around 3 per cent for many years, in the face of some huge cycles. One of the key hopes if we want to maintain this has to be that we continue to build on growth in services exports – which will be highly sensitive to appreciation in the Australian dollar. It will be absolutely critical for the Australian economy to benefit from the development of the Asian middle class.”

“It is not as simple as just saying an older superannuation member profile means more investment in corporate debt. Even if you plan to retire at 65 you have to think about investing for another 20 or 30 years – and that is a long time not to be allocated to growth assets.”

“A common reaction to the emergence of fintech from people in financial services is fear: ‘oh my goodness, we are all going to be replaced by machines’. But we are just not going to get to a point in the foreseeable future at which machines can do everything we do. The real question ought to be how we augment our processes, using technology to do what we do better.”

2017

“It is important to understand that the structure of our market has changed significantly – by default we have more liquidity in our portfolios relative to 2007. In aggregate, portfolios are structured with pools of liquid assets and less-liquid credit assets. Investors referencing history should have a clear understanding that credit is not liquid during risk-off scenarios.”

“We are trading at post-crisis tight levels. In this environment we can usually expect to run into some type of liquidity event or dislocated markets. This time feels different, though: the technicals feel strong, bookbuilds are solid and secondary liquidity is supportive.”

“There is mountain of evidence to support the fact that more sustainable companies have performed more strongly over time, delivered stronger shareholder returns and strengthened their share price.”

“Institutional-investor cash flows have been directed into the USPP market at an increasing rate. Active investors have stepped up their game as they see USPPs as a preferred asset class, large European investors have decided to follow suit and the number of large-bid investors has continued to increase.”

2018

“I don’t think ESG is such a new concept. We have been building E, S and G factors into our analysis for many years. What we are doing now is more an extension of what we already had. Our approach historically has been to embed ESG into our research. The change has been to make what we had previously embedded more explicit.”

“The big mistake ahead of the financial crisis was the belief that risk had been sliced and diced and distributed to all the ‘right’ places. The mistake this time around could be the idea that unwinding QE will be quick or easily managed. When bonds have been issued at ridiculous prices it doesn’t take a credit event – it just needs funds to go red and redemptions to start, which stops cash flowing back into the primary market.”

“The biggest issue we are going to face in the next few years is the QE unwind. How we remove US$10 trillion of liquidity while taking rates from zero back to a long-term norm, in an environment where intermediation has all but disappeared, will be a huge challenge. I think what we will see is long periods of very low volatility studded with short periods of hyper volatility.”

“There is no give-up in performance in our sustainable bond fund. The myth that investors need to give up returns to invest sustainably is simply not true. We have proved this for four years.”

“Make no mistake, reporting on material ESG issues is becoming increasingly important, not just to interest groups but also to investors, regulators and stock exchanges. Initiatives such as TCFD and the Modern Slavery Act have changed the game.”

2019

“When we rate a credit lower internally than what the rating agencies have, 60 per cent of the time it is because we have assigned a high ESG risk factor. This is important to our internal rating and it feeds directly into portfolio positioning. Each time we have changed an ESG rating and subsequently changed our internal rating, it has resulted in altering the position of the credit in our portfolio.”

“It is currently an issuer’s market and borrowers have a multitude of funding choices. This is one of the reasons we are underweight in credit. We also see that we are late cycle and investors are increasingly chasing yield, so we are currently happy to be underweight.”

“The consumer is hesitant, notwithstanding tax and interest-rate cuts. We see this in our retail malls and in the residential market. We expect a long, slow recovery rather than a fast one for consumer spending, though the residential market is clearly off the bottom.”

“Investa has reached a point where we can call banks and ask for ‘grey pricing’ and ‘green pricing’ for a debt facility. At the moment, banks are wearing the price difference. I would like to see APRA introduce a new tier of capital to deal with this – and I think this is when we will see sustainable loans become commonplace.”

“The pie has become bigger so funds under management in fixed income are growing. Sometimes this means ticket sizes are growing but more commonly it means investors need to look more broadly at where they can source assets, including strategies where they can invest offshore to get the diversity they need.”

“We view loans and bonds with margins linked to sustainability performance principles as transition instruments. We expect them to be an important component of the Australian market for some time as we transition to a low-carbon and more sustainable economy. Once an entity’s sustainability performance goals have been met, it will potentially have assets it can use for issuance in a GSS bond.”

“We have had a number of 144A Australian issuers come back to the USPP market. It demonstrates what we on the buy-side have said for a long time, which is that the private market offers issuers a better option than the public market.”

2020

“While we were still cautious, we gained a lot of confidence from seeing the actions taken throughout the REIT sector including equity raises, withheld dividends and delayed capex. This got us comfortable to invest into the sector as early as May.”

PAULINE CHRYSTAL KAPSTREAM CAPITAL 2020

“The CFOs we have spoken to believe enforced social distancing and working from home has proven successful. They have been able to continue operating and, in the longer term, see this as an opportunity to revisit their tenancy requirements and potentially reduce costs.”

CRAIG PARKER S&P GLOBAL RATINGS 2020

“I recall being in Europe in early February and talking through what the risks could be as they were emerging. It soon became a case of ‘scenario planning on steroids’. Every week the impacts we were working through kept increasing.”

“We were surprised at how long it took some issuers in the sector to tap the local market after going to their banks to shore up liquidity positions. A lot of issuers were not confident that the market would be there, but there is a lot of capital floating around for corporates.”

HELEN MASON SCHRODER INVESTMENT MANAGEMENT 2020

“The domestic bond market has performed well in 2020 but it has a history of coming and going. Hopefully this is not the case going forward and it is the first market we look to – but it is certainly not the only one.”

“Mobility trends suggest we may see a level of disruption across transport modes for some time to come. It is an opportune time for governments and industry to work together to ensure we have efficient and resilient transport networks into the future.”

TOM MCKAY TRANSURBAN 2020

“We formed a clear view about how bad things would get. The unknown factor was for how long the downturn would persist and what the recovery would be like. Ultimately, though, if you want to get around Australia you need to fly. We believe there will be desire for travel – for leisure and, eventually, business too.”