2016 Year in Review: Capital Financing

Steve Lambert, EGM Capital Financing, explains, innovation and volatility again dominated 2016. Markets were challenged by social, political and economic events which brought about new opportunities for our customers. We delivered insights and solutions to help them face into the increasing environment of disruption and regulation.

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2016 saw the theme of volatility and innovation continue, the importance of Asian investors and the growing power of self-managed superannuation for non-institutional investors
in the domestic bond market.

Last year in our Year in Review 2015 overview I spoke about two common themes being innovation and volatility. Volatility saw markets closed at various times due to many factors, often global in nature. In respect
to innovation there was a strong move in how people needed to find solutions to overcome this volatility and other challenges.

In some respect those two themes continued in 2016. The first few months of 2016 saw the low point of commodity prices and a lot of uncertainty over global growth generally and Chinese growth specifically. The market rebounded in March and we broadly saw a more friendly issuing environment through the remainder of the year. Markets became focused on elections and their aftermath domestically and the US as well as the Brexit vote. Geopolitical issues in the Middle East, China sea, North Korea and Russia all distracted and impacted markets during the year. At the end of 2015 we spoke of the types of geo-political risk we saw potentially being the back drop for 2016. Most of that played out, markets opened, they closed; they created opportunities and we saw all of this in 2016 and we have similar expectations in 2017.

Australian corporate borrowers were less active in 2016 than we saw in 2015. The syndicated loan markets were down approximately 20% in 2016 compared to 2015. The corporate bond market in 2016 broadly experienced a similar decline. Partly this decline is due to the transition of Australians economy post the mining boom; challenges in the construction industry and; the debate over foreign
investment. Overall the bond markets produced similar volumes domestically year on year.

Two key themes we are seeing in the Australian domestic market is one; the continued rise of the importance of Asian investors and; two the rise of the power of self-managed superannuation with the growth of noninstitutional investors in the domestic bond market.

Australia continues to run current account deficits; hence we need to borrow money overseas to create a capital account surplus. The importance of Asian investors in funding Australia has been consistent since the Global Financial Crisis, be it through loans and/or bonds. The importance of the offshore market cannot be underestimated. Every year the percentage of the domestic market that is purchased from Asian investors grows and the number and the variety of the investors from Asia are becoming more diverse both geographically and from the type of institution. We are also seeing more activity from the Asian offices of a number of European or US fund managers. I don’t see this changing in 2017.

The other big theme is the power of self-managed superannuation and the power of the growth of noninstitutional investors in the domestic bond market. Traditionally we saw this demand in the hybrid and convertible market but increasingly these investors are providing liquidity in the senior debt for all types. 2016 was the year where this went from a consistent, albeit small, bid for new issues, into being a more significant part of most book builds. A number of infrastructure related issuers saw strong bids in 10 year FRN’s from this sector and I think this will be a continuing theme in 2017 as more self-managed superannuation move towards fixed income, a seriously underweight asset class.

Innovation is weaved into both of these themes. NAB is extremely proud to bring the first green bond from a commercial bank at the end of 2014. In 2015 we saw that transaction replicated by other banks both domestically and offshore. In 2016 the green bond market stepped up another level, in April we saw the first green certified securitisation transaction for Flexigroup, following we saw a tranche of that securitisation for green qualifying assets. In July we saw the first green bond from an Australian Government Authority, Treasury Corporation of Victoria. This market is certainly becoming more topical for Australia and a reflection on the growing investor appetite for assets that are socially responsible.

This market will continue to grow as investor’s continue to have the desire for investments that are attractive in their own right and equally have purpose.

As we finish 2016 there is continuing discussion about Australia’s sovereign rating, S&P have Australia on negative outlook since July. This has particular relevance for all financial institution borrowers and ultimately for other non-financial borrowers. I believe this discussion will get more attention during 2017. There will be lots of election discussions next year as well, so while the US election is out of the way, we will see elections in France, the Netherlands, Germany (both state and federal) as well as an interesting independence referendum (think Scotland) in Catalonia. It will be interesting this year to see how the new US administration deals with the ongoing foreign policy issues around the globe. This will create the usual propensity for markets to react, whether this is from instability in North Africa and the Middle East or one of a number of other spots around the world it is hard to say. The key is for issuers to expect volatility and be ready to issue in windows when the markets are open.

Thank you for allowing us to work with you during the year. We look forward to working with you in 2017.

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