Yielding to Australian infrastructure needs
The Australian Office of Financial Management (AOFM) has announced the Federal government’s first 30-year bond. Sized at A$7.6bn, and paying a yield to maturity of 3.27 per cent, the benchmark transaction continues AOFM’s strategy of developing the long-end of the yield curve for Commonwealth Government Securities (CGS).
This further extension of the CGS yield curve is clearly good news for sponsors and market participants in infrastructure projects looking for alternative funding options and structures, but for whom the lack of an appropriate benchmark line at or around the 30-year mark has been an inhibitor when considering long-term bonds as a competitive part of the funding mix. Enabling long term bonds to be priced, through new longer-dated benchmark lines, and the associated promotion of market liquidity in these securities through the concentration of issuance across those lines, is likely to provide a real alternative funding source that is well matched to the funding needs of infrastructure projects (including green projects, such as energy, water and waste infrastructure).
Some of the more obvious benefits for sponsors, in particular, if a bond solution becomes viable for these types of projects are as follows:
- matching long-term revenue generating assets with long-term funding;
- the removal of shorter-term refinancing risk associated with current bank debt funding, with bonds typically being repaid as a single bullet on maturity;
- if structured to pay a fixed rate of interest, lock in that interest rate over the life of the bond, reducing interest rate risk; and
- providing competitive pricing tension vis-à-vis alternative funding sources.
What is particularly positive about this issue by the AOFM is the fact that the longer-dated debt has reportedly attracted some investors into the Australian market who are focused on longer tenor investments. These types of investors (which include insurers, superannuation funds and fund managers, both in Australia and overseas) are actively searching the capital markets for positive yields in a low growth and low-interest rate global environment. One area where demand for long-dated debt, such as that associated with infrastructure projects, may increase is in relation to the developing market in Australia for annuities. As Australia’s population ages, long-dated infrastructure debt matches well with these types of retirement income products that require longevity risk protection.
Australia is not alone, though, in seeing an increased focus on attracting investment in infrastructure products. Another notable example is the European Union, with developments, such as the recalibration of the Solvency II framework. This recalibrated framework, aimed at channelling funds into the EU infrastructure sector for “qualifying infrastructure investments” (eg, debt securities that present preferable risk characteristics), provides for associated lower capital charges for insurance companies that hold these types of securities.
All of this should be good news for the continuing development of the Australian bond market and global bond markets more generally. It is also likely to be welcomed by sponsors and market participants in infrastructure projects looking for alternative funding options and structures.