Roger J Kerr points out there is a good opportunity for corporates to issue significant new fixed income bonds, but he also sees the inhibitions

 By Roger J Kerr

The lack of new corporate bonds being issued over recent months in the NZ debt capital markets to satisfy strong fixed-interest investor demand has to be of some concern for the health of the market going forward.

Fixed-interest investors seeking some acceptable credit enhanced return are being forced to scratch around in the secondary market for small parcels of bonds or alternatively accept lower yield returns by investing in AAA credit rated Kauri bonds or AA+ LGFA bonds.

Such is the investor demand one would think corporate borrowers above BBB would be attracted to issuing their debt whilst base interest rates and credit spreads are low.

Savvy corporate borrowers should always be prepared to issue new bonds when the market window is open and demand is hot, even if they have no debt raising or refinancing planned for this time.

Somewhat surprisingly there have been no new issues for weeks and months.

There are some very good reasons why the issuance of corporate debt has dried up:

- Corporate are not raising new debt for expansion/acquisition at this time and all bank facility refinancing that is going on is highly competitive between the banks and thus corporate borrowers are able to lower fees/margin pricing.

- Most the of the large corporate borrowers have issued into the US Private Placement (“USPP”) debt market in recent years to get the tenor they desire (12 to 15 years) which is not available from the domestic bank and debt capital markets. Unless local institutional investors/fund managers convince their sponsors to change their investment mandates to allow 10 to 15 year corporate bonds for BBB and A counterparty names this situation is not going to change.

- Corporate borrowers being uncertain as to the level of their long term core debt and therefore they are not prepared to lock into less flexible non-bank debt structures.

Thinking through this situation is a worry in itself; it tells you that our large companies are very unsure of their long-term business growth strategies and balance sheet capital management position.

Five years on from the GFC there still appears to be a lot of lazy and under-geared corporate balance sheets around.

The shareholders of these companies should be asking the tough questions if the company cannot get a business return above the cost of capital (which is super low due to low risk-free Government bond interest rates) funds should be returned to shareholders to deploy for a better return elsewhere.

Return of capital to shareholders through special dividends has grown enormously in the US over recent years, yet we have not seen the same pressures from institutional investors as shareholders here in this country. The corporate bond market needs a shareholder activist like Brian Gaynor to kick fund managers and Boards into action. Paying a special dividend and financing it through a long-dated corporate bond issue at 6% cannot be that hard! All large companies should know what their appropriate optimal and sustainable debt levels should be.

The sad part for the domestic debt market is that many smaller fixed interest investors will exit the market and put their money into commercial and industrial property investment assets to get their 5% to 6% cash income return that way. 

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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com