Banks looking offshore for wholesale funding in 2010
As is typical at the start of a new year, investors, issuers and intermediaries in the bond market turn their thoughts to likely issuance volume and the composition of that issuance over the coming year. With A$101 billion of corporate bonds issued in the domestic market in 2009, and this being well ahead of the previous record of A$62 billion set in 2006, it is unlikely that 2010 will see a new record set.For one thing, 47 per cent of the issuance seen last year came from the domestic banks. At the end of January 2009 the banks accounted for 100 per cent of the issuance year to date, but this proportion steadily fell as the impact of the financial crisis progressively waned. Leaving aside the GFC-affected years of 2008 and 2009, issuance by the banks has, on average, accounted for around only 25 per cent of the total issuance in the market. Add to this the fact that the banks have only around A$15 billion of maturities due in the domestic market this year, and it is reasonable to expect that the banks will resort to their more typical reliance on the offshore markets for their wholesale debt funding.The caveats here must be that there is no double dip or return of the GFC and that the basis swap does not move so wide that offshore issuance becomes simply too prohibitive. While the latter seems a more plausible event, it may not significantly change things, given that the domestic market tends to factor in the basis swap when pricing bank issuance, i.e. funding in the domestic market may not be significantly cheaper no matter how wide the basis swap moves. (This could be partially mitigated by the banks reverting to government-guaranteed issuance, facilitating the buying of each other's bonds, but this is a limited option.) If this eventuates the banks will simply have to pass on the cost increases to their customers and look for alternative sources of debt such as deposits and/or retail bond issuance and securitisation, as demonstrated by Westpac in December. (Covered bond issuance would be another option, if it becomes available.)So, with the banks unlikely to be such significant issuers in the domestic market this year, the door is open for greater issuer diversity, something that investors will welcome with open arms. Moreover, the market is facing total maturities this year of A$50 billion that will have to be rolled over before finding a home for any new funds available for investment. As reported below, the supranationals and agencies have made a strong start to the year, but too much should not be read into this. This is not unusual. Between 2004 and 2007 issuance by supranationals and agencies accounted for anywhere from 50 per cent to 100 per cent of total issuance, in the month of January. This can probably be explained by their Treasurers not being on holidays and the international investors, who buy much of this paper, similarly being at work throughout