Debt Market Update H1 2021 - assets.kpmg
Transcript of Debt Market Update H1 2021 - assets.kpmg
OVERVIEW• Australia’s economic recovery was well underway in H1 2021 with
signs of growth proving to be stronger than previously expected. In particular, early activity in the first quarter of 2021 was demonstrative of positive business sentiment, with companies looking to execute on their investment strategies resulting in higher levels of market activity.
• Private investment rebounded stronger than expected over the previous half due to a recovery in demand, higher capacity utilisation and accommodative financing conditions. Strong household and business balance sheets pointed to an increase in consumption and capital expenditure with easing in COVID-19 containment measures.
• The recovery is now expected to be disrupted again by widespread intermittent State lockdowns that will likely continue until COVID-19 related public health challenges related to the latest delta variant outbreak are stabilised.
• With the majority of the 2020 COVID-19 induced policies beginning to subside, the Federal Government recently announced its four-phase plan detailing pathways out of restrictions and the reopening of the economy based upon the achievement of target vaccination rates.
• The effect of the RBA’s monetary policy settings continue to support the economy. Forward guidance regarding the cash rate in the medium term continue to provide support for investment, liquidity and market expectations.
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• In H1 2021 Australian reference rates remained broadly unchanged at the shorter end of the curve (less than three years).
• There was greater volatility for longer dated tenors (15 years and beyond) with a steepening of the curve in Q1. However, markets stabilised in Q2 resulting in a flattening of the curve broadly in line with Q4 levels.
• The Reserve Bank continues to support low rates to encourage further lending and spending in the economy to counter the economic impact of COVID-19, maintaining the target Official Cash Rate at 0.10 percent.
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3M 6M 9M 12M
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18M 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y
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AUD Swap Curve
Source: Bloomberg (July 2021)
Q4 2020 Q1 2021 Q2 2021
0.02% 0.02%
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Bank Bill Swap Rates
0.17%
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Source: Bloomberg (July 2021)
AUSTRALIAN REFERENCE RATES
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Liability limited by a scheme approved under Professional Standards Legislation.
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• The Markit iTraxx Australia Credit Default Swap (CDS) Index has remained steady in the 2021 calendar year after spiking in March 2020 at the onset of COVID-19.
• Australian CDS spreads in H1 2021 tracked between ~55 and ~65 bps. The index closed at ~57 bps at the end of the half.
• As the economy continues to rebound from the setbacks of 2020, there are remaining local and global challenges associated with managing the consequences of the pandemic, which has required the Government to navigate a path that takes into account both immediate needs and the longer term.
• The Federal Government indicated in the 2021 budget that economic recovery had surpassed expectation, although a degree of fiscal and monetary policy measures are expected to remain. For additional insight, please refer to KPMG Chief Economist Dr Brendan Rynne’s commentary here.
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Australia 5Y CDS Spread
Source: Bloomberg (July 2021)
CREDIT RISK INDICATORS
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• The Australia 10-year Treasury yield increased sharply over Q1 2021, rising above 1.90 percent p.a in February highlighting optimism regarding economic recovery and increasing inflationary expectations.
• The yield has marginally decreased by ~40 bps in Q2, although at a milder pace, bringing 10-year yields broadly in line with pre-pandemic levels.
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Australian 10Y Treasury Yield
Source: Bloomberg (July 2021)
GOVERNMENT BONDS
• Treasury issuances have significantly decreased compared to 2020, given the Government’s reduced stimulus measures.
• However, Q1 and Q2 2021 issuance remain higher than in pre-pandemic years, reflecting continued fiscal support packages.
• The weighted average yield and tenor of Government issuance increased due to the wind down of some fiscal policies in response to COVID-19.
Q1, 19.929
Q2, 33.200
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Australian Government Bond Issuance
Volume (LHS) Avg. Yield (RHS) Avg. Tenor (RHS)
Source: AOFM (July 2021)
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Liability limited by a scheme approved under Professional Standards Legislation.
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• Since its November 2020 meeting, the RBA has maintained the cash rate target at 0.10 percent and has stated that it will not increase the cash rate until actual inflation is consistent with its 2-3 percent target.
• The asset purchase program or “quantitative easing” policy formed a key part of the RBA’s COVID-19 response and the central bank significantly increased its government bond purchases in 2020.
• Q1 2021 saw further government bond purchases as an extension to the policy, to reduce effective interest rates and encourage lending and borrowing across the economy.
• The RBA announced at its August 2021 meeting that the existing bond purchase program would continue with flexibility, and at a lower pace of purchases until a reconsideration of policy settings later in the year.
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RBA Holdings of Government Securities
Australian Government Semi-Government LTM Average
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Source: RBA (July 2021)
RBA POLICY RESPONSES
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Liability limited by a scheme approved under Professional Standards Legislation.
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• Take-up of the RBA’s Term Funding Facility (TFF) ramped up at the beginning of Q4 2020, before levelling off during Q1 2021 as volatility subsided in credit markets.
• The TFF closed to new drawdowns on 30 June 2021, after an increase and extension was announced in September 2020.
• Consequently, drawdowns accelerated in Q2 2021 as institutions drew upon remaining allowances, and the facility closed at $188 billion of funds outstanding.
• The TFF successfully reduced banks’ cost of funds and subsequently, interest rates in Australia. Additionally, a decline in bank bond issuances also benefitted other institutions issuing debt. Investor appetite was redirected to other securities such as asset-backed securities and non-bank corporate bonds, given the fewer bank bonds on offer.
RBA Term Funding Facility Uptake
Total Drawdowns Total Funding Allowance
Source: RBA (July 2021)
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Liability limited by a scheme approved under Professional Standards Legislation.
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• There was modest refinancing and LBO-based lending activity in the syndicated loan market as stronger competitors emerged with tactical buyout opportunities in H1.
• TPG Telecom led the way after securing a total of A$4.75 billion for an amendment and extension of outstanding facilities, whilst Ramsay Health Care refinanced A$1.5 billion in facilities.
SYNDICATED LOANS
Notable H1 2021 Australian Syndicated Loan Issuances
Borrower Date Amount (A$m) Tenor (yrs.) Pricing (bps)
PEXA 1-Jul-21 335 4 Undisclosed
Ramsay Health Care 22-Jun-21
500 3 BBSY + 135
500 4 BBSY + 145
500 5 BBSY + 155
TPG Telecom 2-Jun-21
2,070 3 BBSY + 125
1,720 5 BBSY + 145
960 5 BBSY + 145
Orora 28-May-21 350 3 Undisclosed
Kathmandu 26-May-21100 3 Undisclosed
165 3 Undisclosed
G8 Education 17-Feb-21
200 2 BBSY + 210
100 2 BBSY + 180
50 2 Undisclosed
Telstra 22-Jan-21 1,000 3 BBSY + 100
Source: LoanConnector, Bloomberg (July 2021), Debtwire
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Liability limited by a scheme approved under Professional Standards Legislation.
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• Australian syndicated loan volumes experienced a decrease in Q2 2021, off already declining volumes. However, companies are expected to have dry powder to support an anticipated uptick in M&A activity.
• In calendar year 2020 over 100 ASX listed companies accessed additional funding via equity issuances, the highest number of companies that had ever raised equity in a single year and totalling almost $40 billion.
• In addition, several companies accessed public bond markets and some added bilateral bank debt facilities for increased liquidity.
• Activity saw last twelve-month (LTM) deal count edge lower to 153 while LTM volume was also down from Q1 2021 levels in a relatively subdued end to the financial year.
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Australian Syndicated Loan Volume
Quarterly Volume (LHS) LTM Volume (LHS) No. of deals, LTM basis
Source: LoanConnector (July 2021). Data has been converted from USD to AUD.
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Liability limited by a scheme approved under Professional Standards Legislation.
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• Australian dollar-denominated corporate bond issuances increased compared to Q1 2021 with relatively more corporates tapping the bond markets.
• Highlights for the half include Wesfarmers’ issue of the first sustainability-linked bond in the Australian medium term note market, with an oversubscribed total issuance of A$1,000m.
• US-based Verizon Communications also approached the Australian market raising A$1,250m to fund its US 5G network licenses.
CORPORATE BOND ISSUANCE
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A$ Corporate Bond Issuance
Quarterly A$ Bond Volume LTM Average
Source: Bloomberg (July 2021)
Notable H1 2021 Australian Corporate Bond Issuance
Borrower Date Amount (A$m) Tenor (yrs.) Pricing (bps)
Wesfarmers (A-) 23-Jun-21650 7 194
350 10 255
NBN Co (A+)22-Jun-21
2-Jun-21
200 6 185
350 7 215
Peet 4-Jun-21 75 5 487
WestConnex 31-Mar-21 650 10 315
Verizon Communications
3-Mar-21
600 7 235
500 10 300
150 20 385
Source: Bloomberg, Thomson Reuters (July 2021)
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Liability limited by a scheme approved under Professional Standards Legislation.
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• Australian Corporate BBB spreads trended lower as sentiment over the economy continued to improve throughout Q4 2020 with the easing of COVID-19 restrictions in many parts of the country and continued economic stimulus.
• Although lockdown measures have continued in Q2 2021, spreads have remained relatively stable and are recovering to pre-pandemic levels.
• Investment grade corporate bond spreads reflected improved market confidence. The 10-year BBB spread normalised, after inversion with the 7-year yield spread since May 2020.
• Factors potentially influencing the inversion included investor demand for longer-dated investments in a low-yield environment, high-quality issuers being able to issue more at the 10-year tenor and a relaxation of collateral credit quality requirements for repurchase agreements by the RBA.
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Australian Corporate BBB Spreads (bps)
AU 3Y Spread AU 5Y Spread AU 7Y Spread AU 10Y Spread
Source: Bloomberg (July 2021)
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Liability limited by a scheme approved under Professional Standards Legislation.
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MARKET COMMENTARY• Market activity in H1 2021 was buoyant as companies looked
to capitalise on progressing investment (organic and inorganic) following a year of rationalisation and adjustment in 2020 as a result of the pandemic. Rising business investment alongside increased consumption had lifted GDP projections to pre-pandemic levels. Consumption expenditure was expected to become the largest driver of growth as households strengthened balance sheets and liquidity positions during the pandemic. Business investment had also recovered with the vast majority of capital expenditure spent on plant and equipment.
• The Reserve Bank has continued to communicate over recent months that it would not increase the cash rate target until economic conditions improve and inflation is sustainably within the target range of 2 percent to 3 percent p.a. Based on its current outlook for the economy, these conditions are not likely to be present until 2024. The RBA has noted that it does not expect the cash rate to be increased for at least the next three years.
• The Australian economy was showing positive signs of recovery, supported by strong economic tailwinds over the beginning of the 2021 year. The continued rollout of the vaccination program and State Governments’ responding swiftly and assertively to contain any detected COVID-19 cases had allowed economic activity to broaden. However, given the breadth and length of the current lockdowns it is expected that Australia’s economic recovery will be interrupted over the short and medium term delaying the expected bounce back. Additional commentary from KPMG Chief Economist Dr Brendan Rynne on potential impacts is available here.
• A depth of liquidity remains in the Australian market and financiers’ appetite for new opportunities is increasing as a pathway to economic recovery becomes clearer and bank provisions are wound back. There is still a degree of caution around credit and structure vis-à-vis pre-pandemic levels, however borrowers are also being supported by non-bank lenders where appetite can be broader than the credit spectrum of traditional regulated bank financiers, unlocking a breadth of creative funding options.
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Liability limited by a scheme approved under Professional Standards Legislation.
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FinlandAri Kiuru
SwedenChristian Terslow
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AustriaStefan Rufera
GermanyThomas Dorbert
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UKTim Nicholson
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PhilippinesMichael H Guarin
Scott Mesley Partner Head of Debt Advisory, Australia Melbourne P: +61 3 9288 6748 E: [email protected]
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The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation.
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