Your Quarterly E-Zine
Edition 11 • December 2019

This website contains the latest edition of Forsyth Barr Focus, a quarterly on-line magazine written by senior members of Forsyth Barr's investment team.

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The retail fixed income investor has been inundated over the last three months with New Zealand companies issuing corporate bonds. The question is, why the sudden increase in new issues?

Since the Global Financial Crisis (GFC), Central Banks around the globe have required the banking system to hold more capital. Banks are then forced to make an appropriate return on that capital for their shareholders; however, the return New Zealand banks are receiving on their corporate loan books is not adequate.

Companies are left with two choices. If they want to have their funding remain with a bank, then the cost of those funds will have to increase, (i.e. an increase in interest rate). Alternatively, a company could loan funds from a different source (i.e. the corporate debt market, via the issuance of bonds).

Over the course of 2018, we have seen over 25 corporate bonds issued to New Zealand retail and institutional investors, raising around NZ$4.3 billion. Nearly all of the funds have been raised to repay bank debt, as opposed to funding new acquisitions or growth initiatives.

This has been great for both the issuer and the investor, as it achieves a degree of diversification for the issuer along with (in many cases), longer-term debt. New Zealand fixed income investors also receive the benefit of diversification in their investment portfolios, in most cases earning a higher interest rate than that which could be derived from a bank term deposit.

Higher capital requirements recently implemented on the Australian banks is also likely to find its way to New Zealand, meaning further new issuance could be likely in 2019. Issuance for one of the ‘Big Four’ banks is generally much larger than from a corporate, given Balance Sheet size.

Having a plethora of fixed income issues can be helpful for investors, especially given each new issue is priced based on the overall market characteristics at the time. The market supply and demand dynamic plays a large part in setting a fair and reasonable price. From an investor’s point of view, this means that if there are numerous issues in the market, issuers will need to appeal to a shrinking pool of funds, which can influence pricing.

Retail fixed-income investors do face competition from institutional investors who have an ongoing flow of KiwiSaver funds to invest. Companies also have options when deciding to refinance, which includes going directly to institutional investors. This can often result in funds being raised more quickly and cost-effectively. Some companies also have the ability to borrow offshore from the United States, Europe, Australia and Asia, meaning that the retail investor is often unable to drive any perceived supply advantage home.

Matt Sturmer
Senior Analyst, Fixed Interest

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