The ‘megatrends’ reshaping Asia Pacific debt markets

At NAB’s 2018 Asian Debt Capital Markets Conference, experts, issuers and investors zeroed in on the forces that will build connections and foster future opportunities.

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Read the full 2018 Asian DCM Conference write up

A more uncertain global environment will do little to derail the megatrends creating opportunities in Asia Pacific for Australian and New Zealand issuers, and Asian investors alike, according to participants at National Australia Bank’s (NAB) 2018 Asian Debt Capital Markets Conference.

With the global interest rate environment shifting, volatility is foremost on many issuers’ minds. But as Geoff McMurray, General Manager, Capital Management & CRO at chemicals firm Incitec Pivot Ltd, pointed out, “volatility is nothing new,” and simply highlights the need for firms to cultivate diversity in their investor bases. “It’s about making sure you have capacity in your funding markets and not just keeping yourself tied to one market where there’s no capacity to fund if things change.”

 Wealth to put to work

The drive to diversify will encourage more issuers to focus on the fast-growing Asia Pacific region, where investors have strong appetite for Australian and New Zealand debt. A recent poll of Asian and European investors by NAB and Asiamoney found that around 28 percent plan to increase their Australian bond portfolios over the next year.¹

 “Asian investors make up a significant part of all transactions providing depth, diversity and liquidity in the Australian bond market,” said Cathryn Carver, Executive General Manager, Corporate & Institutional Banking at NAB.

There are several factors that explain the appeal of Australian and New Zealand debt, including both markets’ track record of growth and stable governance, attractive yields and diversification opportunities.

Infrastructure, ESG in focus 

The interests of issuers and investors are increasingly aligned in several key sectors, including infrastructure. As Peter Jolly, Global Head of Research at NAB, noted, infrastructure in Australia is not keeping up with the rapid expansion of the population, “which is good, as it means opportunity for growth.”

Education is another promising field.  The links in the sector between Australia and the rest of Asia Pacific are a natural reflection of shifts in Australia’s student base, with China alone now accounting for 29.5 percent of the country’s international students². Institutions like Australian Catholic University (ACU) are turning to the bond markets to finance research programs and institutes, often with social or environmental components.

Asian investors are also increasingly open to different currencies, supporting issuer diversification goals. Issuers at the conference noted rising investor interest in US-dollar denominated Regulation S (Reg S) issuance, in line with the exploding popularity of the format in the region.

“In the last couple of years, Asian markets have been maturing and investors are willing to invest (in Reg S issuance) if the credit rating is right,” said Mr. McMurray of Incitec Pivot. “We’ve done a Reg S transaction that was very successful. In terms of ranking markets, Asia is now one of our highest priorities.”

The interests of Australian and New Zealand issuers are also converging on sustainable assets. Environmental, social and governance (ESG) factors are becoming a significant consideration for investors, with 25.8 percent of those in the NAB/Asiamoney poll intending to increase their ESG bond exposure.

“Investors are showing increasing interest in corporate issuers’ ESG policies and we’ve also seen a real pickup in interest in the last 12-18 months from Australian and New Zealand corporates in exploring issuing in ESG formats,” said Melissa Gribble, Head of Capital Markets Origination FI at NAB. “Going forward we’re expecting a pickup in issuances from sectors that have so far been underrepresented from a specific funding perspective despite a strong focus on ESG initiatives, such as infrastructure and utilities.”

Fundamental forces, now and in future

One question is whether the broadly positive factors creating a more integrated regional debt market are vulnerable to volatility spikes or macroeconomic shocks. But the consensus at the event was that the forces fostering regional connections are too fundamental to be reversed completely. As Mr. Jolly noted, strong population and hence infrastructure growth are set to continue, while the push towards greener policies and renewable energy sources represents a new source of growth region-wide.

This means the bonds between Australian, New Zealand and Asian issuers and Asia Pacific investors will continue to expand in the future. Investors will continue to seek out Australian assets for their “yield, stability, consistency and sustainability,” Ms. Carver said, while the depth and dynamism of the region’s investor base will stand issuers “in very good stead; contributing to building infrastructure and helping to ensure vibrant communities.”

Hear from some of this year’s participants about the benefits of the event

¹Yield hungry investors head to Oz

² Universities Australia