The following article is published in collaboration with IFR Asia.

The unprecedented quantitative easing (QE) measures introduced by Australia's central bank in early November have created ideal conditions for a boom in corporate issuance in 2021.

The Reserve Bank of Australia's emergency measures, laid out in response to the ongoing Covid-19 pandemic, included a lower cash rate target of 0.1 per cent, a three-year Australian government bond yield of around 0.1 per cent, and the purchase of AUD100 billion (USD74 billion) in government bonds of maturities of around 5 to 10 years.

Those measures confirmed the introduction of QE in Australia, but it was the launch of the central bank's Term Funding Facility (TFF) for banks in the first wave of the Covid-19 outbreak in March that sowed the seeds for a corporate credit boom. With rates for new drawings set at just 10bp, the TFF has quickly replaced the bond markets as the funding vehicle of choice for Australia's banks.

"In the past years around 60 per cent to 70 per cent of bond issuance in Australia has been from banks, with a preference for senior unsecured bonds either in G3 currencies or through private placements," said Andrew Duncan, head of debt capital markets for Australia and New Zealand at HSBC. "With the TFF, we expect to see a real change in issuance patterns."

The fall-off in senior bank issuance, however, does not mean a quiet year for Australian bond markets.

"We are likely to see corporate borrowers stepping up with bigger deal sizes, fed by the absence of supply from the major banks," Duncan added. "This could be a once in a lifetime opportunity for corporates not just from Australia but from around the world to issue in Australian dollars."

Long-term demand

Companies keen on longer tenors are likely to turn to the capital markets for their fundraising needs, according to Pauline Chrystal, portfolio manager at Kapstream Capital.

"The five-year bracket is already competitive, and we do not expect to see much supply there, but for companies in certain segments like utilities, which require longer tenors or that have significant funding requirement, we will see issuers come to market," she said.

Those factors, alongside the issuance from companies that may have been scared away from issuance during 2020 given the persistent market volatility, as well as demand from investors moving away from government exposure, could result in a flush corporate bond market.

"Any non-financial in the seven-to-ten-year bracket has been and will be fair game for us in this market," said Matthew Macreadie, investment director in global fixed income at Aberdeen Standard Investments. "But the TFF has driven bank financing costs down, so we stay neutral on senior bank exposure, as there is not a lot of value on offer."

Non-financial corporate issuance has reached over AUD17 billion in 2020, despite the disruption of the pandemic, and 2021 is expected to build on that volume.

"We are positive on 2021," Macreadie said. "Corporates will grow their capex load over the next year as the Australian economy starts to recover, and they will need funding from loans and the bond market. There is demand for credit products; anything with spread is attractive."

This kind of demand could reboot the corporate Kangaroo market, which has fallen out of favour with global corporations since attracting the likes of Apple and Intel in 2015. And heavy redemptions in 2021 will also add fuel to the bond market engine, ensuring investors will be looking to take up any new supply.

Sustainable progress

A solid part of the pipeline for 2021 will have an environmental, social or corporate governance angle, according to HSBC's Duncan. Local companies are paying more attention to their carbon footprints, and the Covid-19 crisis has only increased the focus on socially responsible practices at every level of society. Kapstream's Chrystal said the firm is seeing several enquiries from clients on ESG investment.

"Now it is no longer about sticking a label on a bond, but really about engaging issuers on their policies and get our ESG concerns answered," she said. "This is a significant trend we are seeing, and it has resulted in a number of ESG deals."

One such issuer was Lendlease, which launched an oversubscribed AUD500 million green bond in late October, just ahead of RBA's QE measures, with over 100 investors participating.

"The deal was about telling our ESG story, and focusing on the strength of our business," said Michael Larkin, group treasurer at Lendlease. "We believe the deal being a green bond was a significant factor in its success: half the book was from investors that have dedicated green funds or a stated preference for ESG."

With Lendlease having some AUD113 billion in global development projects in the pipeline, with every one of them targeting a high green standard rating, ESG funding will remain central for the issuer.

"It is not hard to foresee a future where a significant proportion of our funding is in some kind of ESG format," Larkin said.

According to Macreadie at Aberdeen Standard, one segment that could use some more attention in Australia is that of ESG transition bonds, which are designed to help carbon-intensive businesses reduce their emissions.

"We have a preference for transitional bonds rather than sustainability bonds," Macreadie said. "Coal companies in Australia would be better suited for transition-style bonds, but issuance has been slow on those, unlike for sustainability bonds."

That being said, surging demand for green investments is expected to drive an increase in ESG issuance across the spectrum.

"Despite the pandemic, clients continue to push on carbon reduction targets, and the volatility has not slowed down the importance of these goals for our clients," Macreadie said.

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