- Greater number of corporate bond issuances an emerging trend
A predicted increase in the demand for infrastructure bonds will help drive an upswing in demand amongst retail investors in the Australian bonds market this year according to leading bonds market commentator James Hutton, Partner MinterEllison.
Mr Hutton said that while Australian retail investors have in the past readily invested directly or indirectly in equity investments in listed infrastructure operators, the appeal to hold investments in bonds issued by those operators had traditionally been limited to sophisticated investors only.
“With the prevailing low interest rate environment, retail investors and their advisers are looking to higher yields available on corporate debt compared to term deposits,” he said. “Brownfield infrastructure bonds with lower risk producing income from existing assets and stability of cash flow are likely to be attractive to retail investors.”
He said this was particularly likely for self-managed super-funds looking to diversify their investment portfolio in that fast-growing sector of the market.
Another trend identified by MinterEllison was the continued increase in the issuance of kangaroo bonds i.e. foreign bonds issued in the Australian market by international corporations which are denominated in Australian dollars and are subject to Australian securities laws.
“Most notably in June 2016, Apple launched its second kangaroo bond and this raised A$1.425 billion following its successful debut bond offer in August 2015 when it raised A$2.25 billion,” said Mr Hutton.
He pointed to other recent successful kangaroo bond issues including the A$1 billion issue by The Coca Cola Company and the A$1.4 billion issue by World Bank.
“We anticipate the appetite by Australian investors for such bonds to rise in 2017 given investors' desire to increase diversification whilst maintaining yield on their investments. It’s a ‘watch this space’ scenario for the first half of the year when we expect to see some further kangaroo bonds action,” he said.
Corporate Bond issuances in the Australian and New Zealand Markets – other emerging trends
In looking at broader trends in the bonds market in Australia and New Zealand, MinterEllison said that an annual increase in bond issues in Australia demonstrated a continued move toward less traditional debt financing and an increased confidence in Australian bank bonds. However, it also identified non-financial corporate bond markets as a key area to watch.
“The increase in quantity and value of bonds arguably does not reflect the relative weakness of the non-financial corporate bond sector, as recognised by the introduction of the ‘Simple Corporate Bonds regime’ in 2014,” said James Hutton.
“The attempted simplification of the corporate bonds regime in Australia was intended to improve the retail bond market, yet it has drawn criticism in some quarters. This includes questions around its efficacy in contrast with recent reforms undertaken in New Zealand designed to boost the likelihood of corporate bonds being seen by corporates as a commercially attractive alternative capital management tool.”
He said it was notable that over the last quarter of 2016, the Australian corporate bonds market was worth an estimated $15 billion, with 37 bond issues between October and December 2016.
“There has been an emerging trend in recent years seen particularly in issuances especially in the last quarter of 2016 – as well as throughout the year – that have highlighted Australia's ability to deliver meaningful corporate bond offerings to the global community,” said Mr Hutton.
He pointed to the October 2016 Plenary-led consortium's $1 billion refinancing of Victorian Comprehensive Cancer Centre (VCCC). The deal has a term of 24 years and includes investors from Australia and abroad. While Australian infrastructure has traditionally been funded by short-term bank debt, the VCCC bond deal is an example of a possible movement towards longer term bond financing.
This potential shift to longer dated bonds being offered and attracting investors is also supported by the emergence of 15 year bonds in the kangaroo market segment where traditionally bonds have a maturity of 10 years or less (for example 15 year bonds were issued by the African Development Bank and International Bank of Reconstruction and Development in December 2016).
In addition, the early 2016 kangaroo bond issuances of Coca Cola ($1 billion) and Apple ($1.425 billion) showed the international markets’ willingness to raise capital in Australia via corporate bonds.
MinterEllison noted that in November 2016 there were significant bond issuances from the major banks with ANZ ($1.077 billion), CBA ($1.98 billion) and Westpac ($1.4 billion). Indeed, the majority of bond issues across the last quarter of 2016 came from the major financial institutions.
Smaller value bonds were issued by QBE Insurance Group Limited at $543 million, Mercedes Benz Australia/Pacific Pty Ltd at $100 million, and Virgin Australia Holdings with a bond raising of $461 million.
The Finance sector contributed 334 bond issues, while the next highest contributing sectors were Industrials with eleven bond issues and Utilities with seven.
“These figures display the dominance of the bond market by financial institutions and the comparably small contribution other sectors made in the latter parts of 2016 and throughout the year,” said Mr Hutton.
Comparing the last quarter of 2016 with the end of 2015 in the bond market is revealing. There was a decrease in issuance and value of bonds for that quarter. Between October and December 2015, 79 bonds were issued totalling a value of $38.56 billion, while in the same time period of 2016, 37 bonds were issued with a value of $14.95 billion. The decrease appears to evidence a significant slowing of the bond market in the last quarter of 2016.
However, James Hutton noted that this does not accurately reflect the growth of the corporate bond market throughout the year which, as indicated above, saw increases in total number of issuances and value from 2015 to 2016. The market for corporate bonds was worth an estimated $145 billion in 2015, with 298 bonds issued, whilst in 2016 those numbers rose to around $200 billion with 374 bonds issued.
“The steady rise could be attributed to increased confidence in Australian bonds and a greater willingness for global investors to diversify their portfolios on Australia's shores,” he said. “The recent increases in bonds issuance and global investment in Australian bonds indicates growing investor confidence in Australia's bond market.”
MinterEllison also recognised that Australian non-financial corporate bond issuance was low in 2016, with little change from previous years; yield for financial and non-financial bonds was also low as interest rates remain subdued in Australia.
“It’s significant that, despite the upward trends in the bond market, non-financial bond contributions remain extremely low, despite the Australian government reforms which introduced the ‘Simple Corporate Bonds regime’ three years ago,” said Mr Hutton.
He said the need for further reform was apparent with comparisons drawn between the apparent effectiveness of recent reforms introduced in Australia versus those previously introduced in New Zealand.