Light on the horizon for Kauri market

The Reserve Bank of New Zealand’s liquidity policy review stalled Kauri issuance in 2023 while cross-currency swap pricing has kept the market uncompetitive for global borrowers. But there is still optimism about the market’s long-term prospects and support for its role as an issuance option.

SORENSEN Historically, the Kauri market tends to run hot and cold – but it has been particularly frosty for a while now. What needs to change in the second half of 2024 to improve primary issuance prospects?

FUJIMOTO First and foremost, we need a better cross-currency basis. As a US dollar issuer, we can’t escape from this reality and we cannot pay up to issue here.

New Zealand is a critical market and we take care to keep it going, which is why we issued NZ$2 billion (US$1.2 billion) last year – which is quite significant. We want to issue a similar size in 2024, but as an institution we can’t pay up to do so. We are confident there is demand.

No market has been closed for more than a year – so we are optimistic. The market comes and goes, but it will open again. We are confident

and are monitoring closely. We want to be in the market and are not committed to a specific duration. Hopefully the basis improves and a window opens so we can do not only one but hopefully a few transactions this year.

HELLERUP The Kauri market offers us good diversification. Two issues are important. The first is relative value. The government has been issuing a lot and swap spreads have tightened, which means investors would need to buy us closer to NZGBs [New Zealand government bonds] if we were to issue.
As Chihiro highlighted, when we issue here we need to swap the currency, meaning the cross-currency swap is the other part. It needs to move closer to where we can issue in euros and US dollars.

New Zealand is not an arbitrage market but it needs to be better aligned with what we can do in other markets.

BILL I hope expectations will be adjusted and the extra layer of demand will finally return. We are around 3-5 basis points away from our US dollar benchmark pricing – the gap has narrowed, even though our levels were arguably tight versus US dollars.

DAVISON As recently as a month ago, some borrowers were saying pricing in New Zealand dollars was 7-8 basis points away. The adjustment is quite material.

BILL It is looking better but we are not there yet. We need to be close to on par with US dollars for us to consider issuing, but we are very conscious of the pent-up demand. Our conversations with investors earlier this year were super conducive. We have always been supporters of the market and will try to use an issuance window when it becomes available.

DAVISON On the cross-currency basis, my understanding is that there are two headwinds that are particularly relevant. The first is that New Zealand banks have barely been active offshore. There is also a technical factor to do with the way the RBNZ [Reserve Bank of New Zealand] is accumulating FX reserves. Is there anything on the horizon that might change the way the basis is disfavouring Kauris?

RADICH Clearly, there are some structural changes going on with the RBNZ. At the same time, there is not a lot of need for the banks to fund – arguably, the FLP [funding for lending programme] went on for too long, and the banks are still sitting on a lot of funding from it.

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