Real money rolls in AOFM’s curve-extending new deal
The Australian Office of Financial Management says its new long-dated syndication was well sought after by investors including higher than usual participation from real-money accounts. The government debt management agency stuck to its plan to issue the new line before year end with options for clear execution windows starting to diminish.
The Australian Office of Financial Management (AOFM) printed its new 30-year benchmark bond – a 2054 maturity – on 17 October, at 37 basis points over EFP. Barrenjoey, Commonwealth Bank of Australia, J.P. Morgan, UBS and Westpac Institutional Bank were joint leads.
The transaction’s initial price guidance was 37-43 basis points over EFP, meaning it priced at the tight end of the marketing range. Getting a good price was not the AOFM’s only goal, though. “While we are satisfied with pricing as tight as we did our role is also to support liquidity and facilitate market functioning. This supports participation and investor diversity in the Australian Commonwealth government bond market while also underpinning the longer-term reliability of the government’s funding base,” Anna Hughes, chief executive at the AOFM in Canberra, tells KangaNews.
The orderbook was more than 3.5 times oversubscribed (see chart 1), which Hughes highlights as a particularly pleasing outcome. The deal size was A$8 billion – less than the A$15 billion the AOFM printed the last time it syndicated a curve-extending nominal bond transaction but reflective of the reduced sovereign issuance task for this year compared with when that trade priced, in 2021.
The book peaked at A$28.2 billion – a level of support that was largely flagged in pre-deal marketing. “In our discussions with investors over the past few weeks, the feedback was that we would have no issues printing the size of the book we were after – which was always going to be less than A$10 billion,” reveals Hughes. “The demand was anticipated as some investors have been keen for us to do the 30-year bond.”
The 47 per cent offshore distribution (see chart 2) falls into the range seen in AOFM syndications in recent years – all but two have had 40-60 per cent international placement – but is slightly less than previous long-dated bookbuilds. The 2047 bond the AOFM introduced in 2016 had 65 per cent offshore distribution in its syndication and the 2051 that debuted in 2020 had 67 per cent placed offshore.
More than 70 per cent of the new book comprised real money investors (see chart 3), including nearly 7 per cent to sovereign wealth funds. According to Hughes, this is the highest level of real-money participation in an AOFM syndication since the 2051 debut.
The global sovereign bond market has been subject to significant volatility of late, including a sell-off since late September. In this context, the AOFM emphasises the importance of maintaining transparency and, in particular, ensuring it completes what it has communicated to the market.
The AOFM’s issuance programme update in June 2023 included its expectation of issuing a new 2054 maturity bond in the last quarter of the calendar year. Hughes says the week chosen for execution provided the clearest execution window with minimal reporting or data releases to consider – especially given opportunities will likely dry up moving too far into December.
Looking ahead, the AOFM plans to issue its inaugural green bond around mid-2024 and Hughes says the volume of this trade will depend on identifying qualifying projects and the state of the funding task. Despite demand for the green bond at both ends of the curve, most feedback the AOFM has received notes that there are already a lot of longer-dated green bonds. Hughes comments: “Perhaps something shorter might be better. We must consider liquidity, and the most liquid part of our curve is around the 10-year point.”
Source: Westpac Institutional Bank 17 October 2023
Source: Australian Office of Financial Management 18 October 2023
Source: Australian Office of Financial Management 18 October 2023
