New Zealand - the bond market we'd like to have

The listed bond market in New Zealand recently experienced one of its busiest weeks, with three new issues, totalling a potential NZ$500 million, announced. This occurred in the same week in which five issues totalling NZ$1.25 billion, were undertaken in the wholesale market, and New Zealand’s Local Government Funding Agency successfully increased the volume of bonds outstanding under four existing lines, by NZ$175 million.

In the same week, no new issues were announced in the listed bond market in Australia, and only A$775 million of bonds were sold in the wholesale market. But to be fair, ANZ completed the book-build for its Capital Notes 2 with A$1.3 billion of orders taken.

Nevertheless, when it comes to listed corporate bond markets, New Zealand’s market is often cited as being a successful market, and one that Australia should seek to emulate. So why does New Zealand have a successful listed bond market?

The first answer is that New Zealand has a very small and shallow equity market. There are just 151 companies listed on the New Zealand Stock Exchange (NZX) and the capitalisation of the NZX 50, the market’s main index, stands at only NZ$85.2 billion.

In comparison, the capitalisation of the S&P/ASX200 Index is A$1.5 trillion.

At 4.5 million people, the population of New Zealand is less than one-fifth that of Australia but the capitalisation of its main share market index is little more than a twentieth of Australia’s; and that doesn’t allow for exchange rate differences.

Small super pool strengthens the appeal of bonds 

Secondly, Australia has a compulsory superannuation system, which for many beneficiaries relies on institutional investors to manage those savings. Until recently, New Zealand did not have a compulsory system, and even now the level of compulsory savings as a proportion of wages, is small.

Without a compulsory superannuation system, New Zealanders have had to save for their own retirement or rely on the pension. With a small equity market, retirement savings have mostly found their way into “deposits” of one sort or another.

Up until the advent of the GFC, New Zealanders invested heavily in local finance company debentures, which were colloquially referred to as deposits. This says a lot about the lack of perceived risk in relation to these investments.

Finance company debenture investments peaked at nearly NZ$10 billion in June 2007, and at the time were offering higher rates of return than bank term deposits.

Another deposit option for savers was and remains, listed corporate bonds. Listed on the NZX or more precisely, the New Zealand Debt Exchange (NZDX), these securities have been a popular way to invest in local companies and get a return commensurate with finance company debentures.

Listed corporate bonds also provide savers with a great opportunity to diversify risk.     

Few institutional investors

Another explanation is the small number of institutional investors in New Zealand.

As New Zealanders have largely relied on their own ability to manage their savings, the number of large institutional investors in New Zealand is small, at around a dozen, while Australia has some 30 to 40, depending on the definition of large. A relatively small number of institutional investors in New Zealand and a poor allocation to fixed income assets in Australia (around 10% of superannuation assets), has limited access to wholesale corporate bond markets for companies in both markets.

There is some A$374 billion of corporate bonds outstanding in the wholesale market in Australia and NZ$52.4 billion outstanding in New Zealand, but Australian companies account for around 10% of the bonds outstanding in their local market, while New Zealand companies do a little better at almost 20%.

Both wholesale corporate bond markets are heavily utilised by foreign issuers targeting bonds at foreign investors and the need of domestic banks for high quality liquid assets. These foreign issuers account for about 30% of the corporate bonds on issue in New Zealand and around 40% in Australia.

Also, unlike Australian companies, New Zealand companies find it much harder to access international bond markets. They lack the scale and therefore the borrowing needs to attract international investors at an economically viable cost.

New Zealand companies have the equivalent of NZ$24 billion of bonds outstanding in international markets, while Australian companies have around A$160 billion outstanding. So what other options does this leave open to New Zealand companies to obtain long-term funding?

The local banking market has not been so willing to lend to New Zealand companies.

The local banking market is dominated by the big four Australian banks, which tend to view lending to New Zealand companies in much the same way as investors in international bond markets. So this just leaves New Zealand’s savers, those to whom many of the companies would be familiar household names.

While some companies target these investors through unlisted bonds sold over the counter, many opt to list their bonds on the NZDX, which provides investors with greater secondary market liquidity and should therefore, encourage greater demand in primary issuance. And with a reliance on name recognition to sell the bonds, few carry credit ratings, which are not necessarily meaningful to investors anyway.

So how successful is New Zealand’s listed corporate bond market?

The bonds listed on the NZDX have a face value of NZ$13.5 billion. This compares with a face value of A$41 billion for the bonds listed on the ASX. 

So despite having a population less than a fifth the size of Australia’s but with similar demographics, New Zealand’s listed corporate bond market is one-third the size of Australia’s.

But wait, the differences don’t end there.

Of all the debt issued on the NZDX, 69 issues are senior ranking, while just 17 are subordinated and/ or perpetual hybrid issues. In Australia, we have just eight issues that rank as senior debt and 57 that are subordinated and/or hybrid issues.   

The comparative dollar values of the senior ranking listed bonds are even starker. Those listed on the NZDX sum to NZ$8.6 billion; the Australian total is less than A$1.8 billion.  

Sky Network Television bond issue

One of the recently announced bond issues to be listed on the NZDX, comes from Sky Network Television Limited. Sky intends to issue up to NZ$100 million of seven year bonds.

Sky has issued a Simplified Disclosure Prospectus, as allowed in New Zealand, which nevertheless, is signed off by all directors. The prospectus amounts to no more than 52 pages, and even less when all the full page glossy pictures are deducted.

The number of full page glossy pictures may be cause for some concern.

The coupon to be paid on the bonds will be disclosed when the book-build for the issue is completed today (not disclosed at time of writing). However, with Sky announcing a 22% lift in first half profits, the bonds are likely to be highly sought after.

As a guide, yields on senior-ranking bonds listed on the NZDX can range up to 8.5% per annum, with many exceeding 6%, at the present time. If Australian investors are interested in the Sky Television bonds, Sky is an approved issuer under New Zealand’s Approved Issuer Levy regime, which means the investment will be exempt from interest withholding tax in New Zealand.

If Australian investors are interested in other NZDX listed bonds, an interest withholding tax exemption may not always apply and exchange rate risk needs to be considered too, especially with the New Zealand dollar at cyclically high levels against the Australian dollar. An Australian broker with the ability to deal in New Zealand will also be required. 

Philip Bayley is a former director of Standard & Poor's and now works as an independent consultant to debt capital market participants. He also writes on matters concerning debt capital markets and banking for various publications and is associated with Australia Ratings.