Bring back the (trail) blazing COMMETS

Philip Bayley
The New Zealand corporate bond market stands out as one of the few that has continued to function throughout the crisis. This raises the interesting question of why this is so. The answer appears to lie in the fact that New Zealand has a retail bond market that most issuers are happy to tap.

New Zealand's retail investors have shown a healthy appetite for high-quality bonds (especially after having their fingers burnt on high-risk finance company debentures) and have bought bonds with terms to maturity of five years and longer, locking in attractive fixed yields in what is now a falling interest rate environment. And who can blame them for doing so, particularly when the bonds still offer liquidity by being listed on the NZX.

It's a pity that Australian retail investors do not have the same opportunities. Ours is a wholesale market, which is accessible to retail investors only via a fund manager. But as we noted last week, fund managers are currently bleeding as retail investors withdraw their funds to place on deposit with the banks.

This is one reason there has been no real corporate bond issuance in the domestic market since mid August. At almost three months, this is the longest period of inactivity in the primary market since some time before 1999.

Yet despite the fact that mums and dads can't get their money into the banks fast enough, CBA Chairman, Dr John Schubert, felt compelled last week to publicly complain that the CBA has to compete against second tier banks (and presumably other ADIs) that are offering 8 per cent and more on deposits. The CBA does not have to look to New Zealand to find a possible solution to its problem; it can look into its own relatively recent history.

In 2001 the CBA issued ASX-listed corporate bonds known as COMMETS. These were aimed at retail and middle market investors with a minimum subscription size of $5000. If, for example, the CBA were to issue COMMETS now, for say five years, the bonds could probably be placed at a yield of swap plus 150 basis points or less, using most recent New Zealand pricing as a guide.

This yield equates to less than 6.9 per cent and would be attractive for the bank because it could lock in medium-term funding, at a time when it is very hard to do so, and do it at a rate that is considerably less than what is being offered on some shorter term deposits. It would also be attractive to retail investors for exactly the same reasons that their New Zealand counterparts find it attractive.

Another option for the CBA would be to swap the funds raised from the bond issue back to floating rates benchmarked against the 90-day bank bill rate (which is more than likely what it would do anyway). The 90-day bank bill rate currently sits at just under five per cent, which would provide an immediate saving of around 40 bps against the five-year swap rate.

Such cost effective funding as this may make it easier to pass on cuts in the official cash rate, in full.