Corporates turn more to bond market

Issuance trend increases with tightening capital rules for banks on the horizon

New Zealand corporates are increasingly turning to the bond market as tighter capital requirements for banks loom.

The Reserve Bank’s capital review proposals include requiring bank shareholders to increase their stake so they absorb a greater share of losses should their bank fail, and ensuring banks more accurately calculate how much capital they have.

An announcement from the Reserve Bank is expected in the first week of December, with implementation of any new rules starting from April next year. There will be a transition period of a number of years before banks are required to fully comply with any new rules.

While the Reserve Bank’s proposals are still just that — proposals — the big banks seem resigned to a new, tighter regime at some point.

The only questions are around the exact the level of capital required and the timeframe for their implementation.

Frank Jasper, chief investment officer at Fisher Funds, said tighter capital adequacy rules for banks had been an ongoing global trend.

“This is more than just about the Reserve Bank’s proposed tightening capital rules,” Jasper said.

“Every time there is new Basel (Bank for International Settlements) rules or new banking standards, the rules get tighter on how banks manager their risks.

“The Reserve Bank is another layer on that cake, which makes the trend far more real,” Jasper said.

There were seven transactions over the last two weeks of August, raising $1.9 billion, ANZ said it its Debt Capital Market report.

“Retail focused transactions remain elusive as the market adjusts to lower term interest rates and elevated bank deposit rates,” it said.

ANZ said total year to date issuance stood at $12.4b and was running ahead of same time last year.

The 2018 calendar year was a record, with issuance in that year coming to $17.1b.

Harbour Asset Management senior credit analyst Simon Pannett said issuance had picked up in recent weeks, with issues from Metlifecare, Kiwibank and Spark.

Auckland International Airport is expected to be in the market with a wholesale deal shortly.

Early this year, TR Group, New Zealand’s largest truck and trailer leasing firm, raised $75m from a 4-year fixed rate bond.

The company, which has five divisions, is cautiously eyeing expansion into Australia.

“We’ve seen a couple of new issuers come to market which is nice, but it would be even nicer to see more companies like TR Group,” Pannett said.

“In theory, the Reserve Bank’s bank capital proposals may help develop a broader and deeper bond market if banks charge more to corporate borrowers, making bonds relatively more attractive,” Pannett said.

“I say in theory because the Asian banks such as HSBC and Bank of China are providing a fillip at the topend of town whereas often small to mid-sized corporates are too small to justify the fixed costs of issuing a bond,” he said.

“We really need a solution for the the mid-market.”

The Reserve Bank’s review began more than two years ago, when it published an issues paper and opened its first round of public consultations.