During the year TCorp advanced a substantial volume
of new lending to major NSW public-sector clients as
they invested in new and upgraded infrastructure for
the State’s future.
Financing our clients as they build for the State’s future
During the year, TCorp advanced a substantial volume of new lending to major NSW public sector clients as they invested in new and upgraded infrastructure for the State’s future.
The sectors of State enterprise requiring the most new lending were electricity supply, water catchment and supply, and development of the rail network.
Although State Owned Corporations (SOCs) operating in these areas drew down substantial new funds over the year, the net increase in TCorp’s aggregate loans to clients was relatively modest because at year end the NSW Government provided $960 million to a major client to pay down loans advanced by TCorp in 2006/07 and previous years.
Under the NSW Government’s State Infrastructure Strategy, capital spending over the next four years is projected to total $49.6 billion, and this will be the major driver in an estimated $22 billion rise in TCorp’s loans to clients over that period. In addition to the continuing build up of financing for the sectors mentioned above, there will also be substantial lending for port development.
How TCorp lends to clients
As in the example of the Transport Infrastructure Development Corporation (TIDC case study), the client has employed loan types selected from the portfolio of standard loan products built up by TCorp to finance its public sector clients. These standard products include:
- fixed interest loans with semi-annual interest payment, repayable on a fixed maturity date. Interest coupons and maturity dates normally correspond with those of TCorp Benchmark Bonds issued to professional investors;
- floating rate loans with interest rates periodically adjusted in line with market rates on bank bills, again with a fixed maturity date; and
- the Come-and-Go Facility which provides ready access to short term finance. Clients can draw down or repay funds on same day notice, enabling them to rely on TCorp for short term liquidity rather than hold substantial investments for liquidity purposes with associated credit and market risks.
If these standard loan facilities do not completely meet a client’s requirements, TCorp can consider structures such as loans repayable by regular instalments of principal.
Further, although TCorp to date has not issued ‘real rate’ loans to clients (e.g. CPI-indexed loans), there is potentially the ability to do so, subject to determining the appropriateness of this type of funding for the client and investor appetite for the proposed underlying bonds.
Because TCorp borrows with the benefit of the NSW Government’s guarantee, interest rates on loans are finely priced. Rates on new fixed-interest loans are based on the current TCorp Benchmark yield curve in the Australian fixed-interest market, plus a small margin representing TCorp’s administration fee. (Most Government business enterprises also pay to NSW Treasury an annual guarantee fee based on their average volume of loans, but TCorp is not involved in charging or collecting this fee.)
Changing pattern of borrowers
TCorp is providing an increasing volume of loans to the State’s commercial enterprises (mainly SOCs), while the volume of loans to the Crown Finance Entity has declined over the past decade but remains substantial.
The NSW Government’s policy is that SOCs should have commercial capital structures (i.e. debt-to-equity ratios) that compare with those of private sector peers, and that the commercial enterprises should invest in new and upgraded infrastructure, a trend that will continue.
The largest borrowers from TCorp at June 2007 were the Crown ($10.5 billion), followed by electricity generation and distribution ($10.4 billion), water catchment and supply ($3.9 billion) and public transport ($1.2 billion).
Although funding for the NSW Government and its businesses constitutes nearly the whole of TCorp’s lending book, TCorp also acts as the NSW Government’s agent in providing funds for private sector cooperatives. Such loans totalled $25 million at June 2007.
Funding TCorp’s loans to clients
TCorp’s lending to the NSW Government and its commercial businesses is funded through TCorp debt issuance in the constantly evolving capital markets. We have developed a range of offerings that suit investor requirements, backed by the strength of the State’s AAA credit rating, to deliver cost-effective funding for our clients.
TCorp recorded another successful year in its funding activities, with strong investor demand, particularly from offshore, for Global Exchangeable Bonds, enabling us to achieve our required funding task.
For the 2006/07 year, TCorp completed a borrowing program of $2.9 billion. This reflected the requirement to finance client net borrowing of $2.0 billion and to refinance existing liabilities of $1.4 billion. TCorp had pre-funded $0.5 billion of the 2006/07 requirement in the 2005/06 financial year. TCorp capitalised from the strong offshore investor demand and pre-funded $2.5 billion of the 2007/08 funding requirement in the 2006/07 financial year.
The year’s funding activities were executed in an environment where Australian interest rates increased in response to concerns about higher inflation and the prospect of the Reserve Bank of Australia (RBA) increasing the cash rate. This scenario was confirmed during the year when the RBA increased the official cash rate twice to the current level of 6.25%. The longer term TCorp interest rates (based on the August 2014 maturity) increased from 6.05% to 6.695%. The increasing trend in Australian interest rates was also in line with higher global interest rates over the year.
Benchmark Bond issuance
TCorp’s Benchmark Bond program continues to be the cornerstone of our funding strategy because it provides price transparency and liquidity to our public sector borrowing clients and institutional investors in TCorp bonds.
Benchmark Bond issuance is concentrated in a small number of maturity dates (Benchmark Bond series), generally over a 10 year period. Benchmark Bonds are marketed to domestic investors and to offshore investors as Global Exchangeable Bonds. The Benchmark Bond program is then supplemented by a more specifically directed issuance, particularly to offshore investors under TCorp’s Euro Medium Term Note (EMTN) program.
Benchmark Bond outstandings increased over the year. Continued strong demand, especially from offshore investors, led to Global Exchangeable Bond net outstandings increasing by $3.4 billion. The outstandings
in Domestic Benchmark Bonds fell by
$0.8 billion.
In February 2007, a new Benchmark Bond series was launched as part of the strategy to pre-fund the maturity of the March 2008 series. Following a tender to launch the new Domestic Benchmark Bond October 2009 series, a total of $835 million was issued. At the end of June, a total of $1.1 billion of the Domestic Benchmark Bond series was on issue. A new Global Exchangeable Bond October 2009 maturity was also launched in February and outstandings were increased to $250 million by 30 June.
The increased use of TCorp stock for liquidity management follows changes announced over recent years by the RBA, expanding the range of securities that can be used as eligible stock with the Bank in liquidity management and Real Time Gross Settlement arrangements. Increasing the range of eligible securities was a response to the significant decline in Commonwealth Government securities on issue. Investment by financial institutions in TCorp stock is also supported by the very low call on capital for TCorp Bonds under prudential capital adequacy requirements.
Offshore issuance
TCorp operates in the international debt capital markets to achieve investor diversification and to provide cost savings to the Benchmark Bond curve, and over time has used offshore issuance to smooth the maturity profile. TCorp secured $2.2 billion through the rollover of deals undertaken previously.
The strong growth over recent years in TCorp’s offshore sourced Benchmark Global Exchangeable Bonds was again experienced in the year under review. At year end, the face value of outstandings totalled $14.6 billion, a net increase of $3.8 billion over the year. Attractive investment fundamentals, underpinned by NSW’s AAA credit rating, continued to win new investment, particularly from Japanese and European institutional investors.
Strong demand from international investors for TCorp Bonds over recent years has had the effect of increasing the proportion of offshore-sourced funding relative to onshore-sourced. Success in offshore markets has been supported by favourable A$ interest rate differentials (particularly when compared with US$ and yen interest rates) and a stable currency. Notwithstanding the likely prospect of a relatively stable Australian dollar, the recent narrowing of the interest rate differential may dampen offshore investor demand and therefore the ratio of onshore to offshore demand can be expected to settle around current levels.
In recent years, given strong investor demand for longer term bonds, TCorp has not been an active participant in short term promissory markets.
TCorp will continue to maintain both the domestic promissory note and offshore commercial paper programs should the need for short term funding arise.
TCorp’s funding strategy constantly evolves in response to changing market dynamics and investor requirements. Maintaining strong relationships with our borrowing clients, dealer panel members, financial market institutions and investors has been critical in helping us accomplish our funding needs. We thank our dealer groups and investors for their continued support.