Outright yield interest sparks offshore bid for Australian credit
The nascent revival in Australian credit issuance appears to be spreading beyond domestic borders. Private banks in Asia – particularly Singapore – are showing increased interest in high yielding, quality Australian dollar fixed income with a particular focus on subordinated financial debt, intermediaries say.
The motivating force is that many private banks are flush with Australian dollar liquidity they need to put to work. In fact, market participants say competition for preferred asset classes – particularly from domestic investors – is increasingly fierce.
Sources say the dual currency deposit (DCD) product has been driving liquidity into Australian dollars. DCDs – a structured product that gives simultaneous exposure to two currencies by accepting deposits in one currency while earning the interest rate of another – are popular among Asian private banks’ clients.
In the event of significant exchange-rate movement, the DCD’s FX option overlay triggers, converting the deposited money to the weaker currency. Market participants say a significant amount of DCDs held by private banking clients this year have been converting to Australian dollars, as the currency weakened against the Singapore dollar.
This has caused private banks to accumulate large Australian dollar reserves in 2022 and in turn increased demand for assets denominated in the currency that provide good yield. Ongoing Australian dollar weakness means investors are not keen to convert their holdings back to Singapore dollars and realise a loss.
“There is natural demand from the private banking space for Australian dollar. Whenever high-yielding product comes to market – whether it is an additional tier-one or tier-two deal – clients will look for it,” says Rogerio Bernardo, global head of fixed income syndicate at DBS Bank in Singapore.
The Australian dollar reached a 12-month peak against the Singapore dollar in early April this year, at just more than S$1.03 (US$0.73). It fell by nearly 10 per cent, peak-to-trough, in three months and stood at about S$0.95 by early September (see chart).
Source: Bloomberg 2 September 2022
Meanwhile, outright yield on Australian dollar tier-two transactions has increased. ANZ’s fixed-to-floating rate A$1.45 billion tier-two tranche, which priced on August 3, had an issue yield of 5.906 per cent, while National Australia Bank (NAB)’s 26 July 10-year non-call five-year transaction yielded 6.322 per cent.
Australian intermediaries say it is no surprise that Asian demand has rallied around higher yield. “These investors are attracted by outright yield and it has been a long time since they had the opportunity to invest in a major bank at 6 per cent,” one syndicate source tells KangaNews. “[Private banks] are looking for absolute return in fixed-rate instruments and they are not concerned with fluctuations in BBSW.”
Edric Tan, executive director and head of debt syndicate, Asia Pacific at Standard Chartered in Singapore says the bid can be further enhanced by the fact some private bank investors can add leverage. By adding 50-60 per cent to their investments via leverage, private bank clients can enhance their returns to double-digit type area. Tan says this is attractive relative to other available instruments.
LIMITED ALLOCATION
Asian distribution of the ANZ and NAB deals was complementary: around 10 per cent in both cases . The reason why this figure is not higher may be that demand from private banking clients in Asia does not necessarily translate into allocations in primary transactions.
One factor in underallocation may be the perception that private bank investors are less sticky and more willing to take short-term profit, which can create secondary volatility and suppress performance. But Bernardo argues that this is not an accurate reflection of this investor base’s proclivities.
“Private banks are just like any other investor,” he insists. “Of 100 private banking investors that buy bonds, maybe 10-15 per cent choose to trade – most of them do not. They may choose to trim or adjust to some extent, but this is normal.”
The existence of a larger Asian bid could help attract other issuers to the Australian dollar market, though. Tan says the optics of potential yield from offshore issuers exploring the Australian dollar subordinated debt market are superior to G3 equivalents, which adds to the appeal for investors.
“On an after-swap basis back, compared with where US dollar and euro issuance is landing compared with Australian dollars at the moment, leveraging off the Australian dollar investor dynamic can help open up cross-currency arbitrage for issuers,” Tan tells KangaNews.
