Boring past left behind as capital market matures

By Andy Morris

Friday 12th May 2000

Domestic capital markets have a dull and boring past but are undergoing some exciting changes with increased investor appetite and a number of new products.

Both investors and borrowers will reap benefits - investors will have a greater choice while borrowers will ultimately receive lower fund costs.

The bank debt market has undergone strong expansion over the past six to 12 months despite challenges for borrowers from takeover and mergers of banks reducing the number of participants. And banks demand more in return for committing balance sheet funding lines.

Despite this, some banks have expressed unprecedented levels of interest in recent large scale bank debt financings - over $1 billion in several cases. Pricing has tended to stabilise over recent months despite the liquidity pressures resulting from overstated Y2K concerns.

The excitement and innovation in the market stems from bank subordinated debt issues (the first for three years); the reemergence of floating rate note issues and the use of credit derivatives by domestic institutional investors.

Domestic banks have issued subordinated debt before but investors became wary of this product following unexpected problems with the callable structure.

Another new product that is appealing to investors, and will ultimately reduce the cost of borrowing to corporates, is credit derivatives. They synthetically transfer credit risk from one party to another by a credit default or total return swap, though New Zealand investors prefer the credit-linked note. Investors receive a higher return than a vanilla instrument while sellers tend to be counterparties looking to manage their credit exposures to various sectors.

Andy Morris is director of origination for Westpac Institutional Bank.

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