TCorp has a mandate to provide cost efficient funding to the NSW Government and its agencies, and also has a key role in managing those clients’ portfolios of outstanding debt. This activity is carried out subject to policies, benchmarks and risk constraints agreed with each client.
Providing an efficient debt management service
Initially appointed as debt manager for NSW Treasury, TCorp has since built up a debt management clientele representing a large proportion of the State’s major borrowers. At year end, TCorp was managing the debt portfolios of 19 individual clients with total portfolio volume of $19 billion. Three of these clients started using the service during the year under review.
While the largest client portfolio is the $9.2 billion Crown debt portfolio managed on behalf of NSW Treasury, other substantial portfolios are managed for government businesses, mostly SOCs in the energy, roads, transport, ports and water sectors. The large scale of these managed portfolios reflects the fact that the businesses are required by the NSW Government to maintain specified levels of gearing (borrowings) in their capital structure, reinforced by new borrowings to fund infrastructure development.
In addition to providing cost efficient physical funding that meets individual client benchmarks for maturity and liquidity, TCorp uses derivatives to manage the interest rate risk of the actively managed debt portfolios. The active management style adopted is a low risk approach that seeks to achieve or better budgeted borrowing costs over the medium term while taking advantage of shorter term movements in market interest rates.
Strategic portfolio positions are based on TCorp’s proprietary modelling of the macroeconomic drivers and fundamental valuations for interest rates. These positions are intended to lower borrowing costs over an interest rate cycle and are supplemented with tactical management strategies that take advantage of market volatility over shorter timeframes. All active interest rate risk management is conducted using approved derivative products and in line with individual client risk appetites and limits. Positions are implemented within a transparent, disciplined framework that is rigorously monitored and reported to clients.
TCorp is well placed to offer active interest rate risk management, given its expertise in this area and its role in global capital markets. The active management of interest rate risk for client debt portfolios is conducted in-house to create economies of scale and provide cost effective outcomes. Active client mandates achieved borrowing costs in line with benchmarks over the year.
Other treasury risk management transactions, including foreign exchange and commodity hedging, can also be executed on clients’ behalf.