Progress in work

It is not hard to extrapolate worst-case scenarios. Higher rates could put pressure on households, especially if wage growth continues to lag. Conversely, a cycle of wage and price increases could push inflation beyond central banks’ ability to control it. The spectre of stagflation is once again on economists’ lips.

At the same time, the appetite to deal with another crisis is close to an all-time low. There will not be much sympathy for capital market participants in the wider world, but the reality is that people in our industry work hard and have been through a protracted period of, in most cases, working even harder.

We are just starting to re-establish some sort of normality in our working lives and might be forgiven for having anticipated a reasonably calm period of adjustment. No such luck. Time and again when I speak to market participants they admit to being tired – of the demands placed on them by pandemic working conditions, and now by more challenging and volatile funding conditions.

On the other hand, issuers, arrangers and investors are achieving things our market could not have dreamed of a decade ago. One only needs to look at issuance numbers for proof. I was genuinely surprised to learn, for instance, that the Australian credit and Kangaroo markets were both on record issuance pace by the end of the first quarter (see chart).

Granted, the bulk of issuance came during a particularly fertile first six weeks or so of the year and the market has slowed since the tanks rolled into Ukraine. There are also clear signs that issuance volume alone is not necessarily a signifier of a happy and healthy market.

The securitisation sector is another that looks positive at first glance. Q1 issuance – of more than A$12 billion (US$9.4 billion) across 16 public transactions – has been high despite expected headwinds for the asset class. In fact, deal flow this year is almost double that from Q1 2021 in volume and number of deals – and 2021 will go down as a best-ever contender for securitisation in Australia.

Beneath the numbers, however, lies a more challenging story. Securitisation market participants acknowledge that the range of active investors has narrowed significantly and deals are clearly harder to get away this year than last. Pricing, meanwhile, has continued to drift wider. From margins in the mid-to-high double figures basis points over swap through much of 2021, securitisers are now paying well into the 100s – often with the need to include super-senior tranches in transaction structures.

Issuers may still be making hay, in other words, but the sun has stopped shining. One could view ongoing deal flow more as the product of issuers’ absolute need to maintain wholesale funding volume than any sort of indication of a conducive market.

Further support for this hypothesis comes from the true corporate sector. Australian dollar corporate issuance volume has been slow to get started in 2022: just A$1.4 billion of corporate bonds printed locally in the first three months of the year, in one of the weakest starts since the financial crisis. Perhaps it is the case that issuers with a more discretionary approach to wholesale funding are simply stepping back from the market.

It is important to view issuance patterns with an appropriate perspective, however. For one thing, it did not take a genius to recognise in 2021 that funding markets were enjoying a purple patch. The absence of competing supply, an economic rebound that would have shocked most observers in March 2020 and all-time low rates and credit margins made issuance an appealing option.

Corporate borrowers responded, pushing just shy of A$20 billion of new issuance into the domestic market – close to an all-time record and A$3.5 billion more than any year bar 2017. Some of this issuance was likely redirected from the US private placement market in particular, though even this is a sign of the growing appeal and reliability of the domestic option.

More to the point, at least a few corporate issuers undoubtedly printed transactions in 2021 to take advantage of market conditions and thus likely reduced their need to return this year. Anecdotally, most – though far from all – Australian corporate treasurers have over time become more convinced about the resilience and availability of the local market even in more challenging conditions.

This marks a sea change from the post-financial-crisis period. After 2008 saw virtually no corporate issuance in Australia (congratulations to the University of Wollongong for ensuring the “virtually” is required) the market spluttered back to life over the next few years. The gradual accumulation of transaction milestones was all but offset by a substantial trust deficit between corporate borrowers and fixed-income investors.

Nor was the direction of travel consistent. Corporate issuance in Australia rose to A$12 billion in 2012 – virtually doubling the total from any previous year – but it did not take another substantial step forward in volume for another half decade. When it did – reaching A$20 billion in 2017 – it promptly collapsed the following year, to less than A$10 billion.

The question must be whether corporate issuance is set for another embarrassing retreat in 2022. My suspicion is that it will not, or at least that if it does the drivers will rest much more on the issuer side than demand. For one thing, a slow start to the year has not always been the precursor of disappointing full-year volume. In 2020, the emergence of COVID-19 meant there was just A$1.2 billion of corporate supply by the end of April, but the annual total reached a relatively healthy A$16 billion (see chart 2).

More significantly, the market has changed enormously in the past five years let alone decade-plus. Corporate issuers often comment that doing an Australian dollar transaction in the years following the financial crisis was effectively a club process, in which liquidity typically depended on the support of a handful of large, active investors.

This has changed over time, in particular due to the involvement of offshore investors and the unceasing growth of domestic funds under management. Australian debt market participants are growing old waiting for local asset allocation norms to rebalance in favour of income product, but the sheer scale of the domestic savings pool means assets under management keep stacking up regardless.

The scale and consistency of real-money demand was more apparent than ever during the pandemic years. With bank issuers largely silenced by the term funding facility (TFF), investors hungrily chased alternative credit exposures. The securitisation asset class was perhaps the most obvious beneficiary.

More recently, the significance of the real-money bid is perhaps most clear in the changing shape of bank benchmark deals since the end of the TFF. A sector that used to be overwhelmingly floating rate has been reshaped by the demand of asset managers in Australia and offshore, to the extent that new deals in 2022 have included an unprecedented proportion of fixed-rate notes.

This is at least in part the product of market dynamics – specifically the belief held by many fund managers that market pricing of future rate hikes has overshot the likely RBA cash rate trajectory. But it clearly gives the lie to any perception that bank issuance is primarily supported by issuers’ peers rather than real money.

It is difficult to be too optimistic in a world where market users are freely throwing around words like ‘stagflation’. Clearly, some risk events would be big enough to overwhelm any market, especially one – like Australia – that remains relatively small on a global basis.

What probably can be said, though, is that the local market is now larger, more diverse and more mature. The old complaints – that it was always the first to close and the last to open, and that it chased global pricing wider but was slow to retreat when tightening began – could well be a thing of the past.