Year-to-date domestic bond issuance near NZ$6 billion; Can it reach NZ$10 billion as corporates eye US private placements?

By Gareth Vaughan

Total domestic bond issuance this year could, potentially, get back near the giddy heights of 2007 and 2008, but major local corporates are still eyeing up the low borrowing costs on offer in the United States private placement market.

According to ASB, a total of NZ$5.7 billion has been raised in the local bond market so far in 2011 with banks, including domestic covered bond issues behind NZ$3.2 billion worth, corporates NZ$734 million, local councils NZ$1.15 billion, and so-called kauri issues, or overseas issues from the likes of German agribusiness lender Rentenbank, NZ$600 million. BNZ puts the year-to-date figure slightly lower than ASB, at NZ$5.5 billion.

Either way, it's only about NZ$1 billion shy of the NZ$6.5 billion raised in the full 2010 year and is well ahead of the NZ$1.2 billion of equity raised on the sharemarket so far this year.

Further bond issuance is anticipated with one senior capital markets source suggesting a full year figure of NZ$10 billion raised shouldn't be ruled out. That level hasn't been breached since 2008 when NZ$10.8 billion was raised following NZ$11 billion in 2007. In 2009 NZ$7.8 billion was raised and in 2006, NZ$6 billion.

"The strange thing this year is that at any given time supply has been looking light," the source said. "It still doesn't feel like there's any big pipeline. But I wouldn't be surprised to see(a full year total of  (NZ$8 billion or $9 billion or maybe NZ$10 billion."

"NZ$8 billion is achievable, and I wouldn't rule out NZ$10 billion. The limiting factor won't be demand. It will be how many issuers come along."

Fergus McDonald, Tyndall Investment Management's head of bonds and currency, said he expected a steady stream of debt issues to the market through the balance of the year without the market being inundated.  He suggested there could be about NZ$3 billion worth to come yet in 2011 but doesn't expect a lot more to come from the banks given lending growth is weak and the major banks are now well funded.

"The mortgage market has been pretty sluggish and they (the banks) are struggling to maintain the size of their balance sheets so perhaps the funding pressure's not as great as it was," McDonald said.

A potential bond issue from national carrier Air New Zealand, which would be its first since 1991, is one potential deal likely to catch the eye of retail investors.

"Air New Zealand has great brand recognition," McDonald said. "(But) a lot of money has been made and lost out of international airlines. it's very much a cyclical business and so it may have a greater appeal from the retail sector rather than the institutional market."

Air New Zealand is due to report its June year financial results on Thursday August 25 and may reveal details of any bond issue then.

Another factor that could boost bond issuance is the passing of the Local Government Borrowing Bill which will establish the Local Government Funding Agency (LGFA), or council bond bank. The Bill was reported back to the House by the local government and environment select committee last month with the recommendation it be passed with few changes. The Bill comes with local authority debt tipped to double over the next five years to more than NZ$11 billion, and will allow both the LGFA and new Auckland Council to borrow in currencies other than the New Zealand dollar.

Meanwhile, more kiwi corporates are tipped to follow the likes of SkyCity and Powerco to the US private placement market. Another senior capital markets source suggests New Zealand issuers may raise more than US$1.3 billion in the US private placement market over the next six to nine months.

So far this year SkyCity and Powerco are the only local corporates to issue debt there, raising a combined NZ$420 million. However, late last year Auckland International Airport, Vector, Transpower and Mighty River Power raised a combined US$682 million.

"The US private placement market is looking very attractive to corporates," the second senior capital markets source said. "It's by far the cheapest still. US 10-15 year money is 30-40 basis points cheaper (per annum) than local five-seven year money. That's quite a lot when you consider the extra term you get there."

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