Cheaper borrowing costs spur NZ corporate bond sales, AMP Capital says

Tuesday 20th October 2015

New Zealand's relatively cheap local borrowing costs are spurring companies to raise cash by selling bonds, according to fund manager AMP Capital Investors (New Zealand).

The Wellington based firm, which manages more than $19 billion of assets, predicts more companies will tap New Zealand's corporate bond market as low interest rates encourage them to borrow locally. Managing director and head of fixed income Grant Hassell told a briefing in Wellington the fund manager had started increasing its exposure to New Zealand corporate debt, which it had previously avoided because local credit spreads - the gap between bond and benchmark rates - hadn't widened as they had elsewhere in the world.

Hassell compared Fonterra Cooperative Group's 2021 bond issued in Australia with its New Zealand 2020 counterpart, where the Australian bond was about 120 basis points above the benchmark rate, while the New Zealand security was almost 80 basis points above its benchmark. "For the same credit risk you get half a percent more investing in Australia in Fonterra than you do New Zealand."

The lower interest rate, or coupon, offered to New Zealand investors has stemmed from local investors moving funds out of term deposits and into bonds of well-known companies, he said.

"I think you're going to see entities like Fonterra coming to the New Zealand market, going 'it's cheaper for me to borrow in New Zealand, I want to borrow more'," Hassell said. "What happens when you borrow more? Your spread start adjusting back to the global spreads."

Infrastructure investor Infratil, power company Contact Energy and casino operator SkyCity Entertainment Group have gone to the NZX's debt market to raise funds in recent months, offering annual interest rates between 4.4 percent and 5.25 percent for terms between six and eight years.

The NZDX has struggled to attract much interest in recent years, with New Zealand's utility dominated stock market offering stable dividend returns to investors against a backdrop of low interest rates eroding the lure of bank deposits. The number of debt market transactions accounted for just 2.2 percent of trading activity on the NZX last month, although some $1.78 billion of new debt has been issued in the year to date compared to $570 million of new equity though initial public offerings and compliance listings.

Hassell said the listed market will be for the first port of call for an increase in corporate bond issuance, and after a soft September quarter for equities, that might increase the allure of listed debt.

AMP Capital's investment portfolio is underweight in global and New Zealand bonds, and overweight in global and emerging market equities, commodities, cash and foreign exchange, with neutral positions in Australasian equities and listed property and infrastructure.

Keith Poore, head of investment strategy, said the correction in equity markets during the September quarter wasn't the start of a bear market, with global stocks not expensive on a price-to-earnings basis, China looking more likely to experience a soft slowdown, US interest rates poised for a gradual rise, and the international banking system in better shape than it has been in the past.

BusinessDesk.co.nz

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