* Kauri bonds struggle as relative pricing advantage fades
(Recasts with reopening of market via KBN tap)
By John Weavers
SYDNEY, May 8 (IFR) - Norwegian local government funding
agency Kommunalbanken Norway is set to become the first foreign
issuer to raise debt in New Zealand since the so-called Kauri
bond market stalled in late February.
The Aaa/AAA (Moody's/S&P) rated agency will make a NZ$50
million ($34 million) minimum tap of its NZ$325 million 4.00%
August 20 2025 Kauri bond via sole lead manager ANZ.
So far this year, only four sovereign, supranational or
agency (SSA) issuers raising just NZ$1.3 billion ($910 million)
from five trades.
This is less than half the NZ$3.2 billion issued in the same
period last year, when 10 SSAs accessed the New Zealand bond
market in 14 separate deals.
In the whole of 2016, issuance of Kauri bonds, the nickname
for local Kiwi dollar offerings from foreign issuers, reached
NZ$4.8 billion, which was well below the 2014 annual record of
NZ$6.3 billion, which was matched the following year.
Glen Sorensen, syndication manager at ANZ Bank New Zealand,
said the contraction had been largely supply-led, as more
potential SSA issuers utilise the strong US dollar and, to a
lesser extent Kangaroo, markets where spread compression has
been greater so far this year.
On the buyside, the declining absolute yield pick-up for
high-grade New Zealand paper has dented offshore demand.
Non-residents held 42.4 percent of the NZ$28.7 billion
outstanding Kauri bonds in March 2017 versus 47.5 percent of the
NZ$25.6 billion total a year earlier, according to Reserve Bank
of New Zealand data.
The five-year New Zealand government benchmark bond spread
over US Treasuries was close to 300 basis points (bps) in
November 2013, but dropped subsequently to 195 bps at the end of
2014, 120 bps at the end of 2015 and 75 bps at the end of 2016.
The spread narrowed further in 2017 and was quoted at 62 bps
With Kauri supply falling, domestic high-grade investors
have sought alternative assets, thereby increasing the local
bids for sovereign and Local Government Funding Agency bonds,
both of which are rated AA+/AA+ (S&P/Fitch).
This increased demand has put downward pressure on central
and local government bond yields to the extent that the
sovereign's 5.5 percent April 2023s were yielding 2.67 percent
last week, 33bp below local swap rates.
This downward yield pressure is set to increase as net
central government supply turns negative. For fiscal year
2016–17, ending on June 30, domestic sovereign bond sales are
projected to amount to NZ$8 billion, and NZ$2.5 billion of this
is to be raised through inflation-linked paper.
With NZ$2.2 billion of redemptions due in the 12-month
period, the New Zealand Debt Management Office sees net issuance
of NZ$5.8 billion for the current fiscal year, before
redemptions exceed gross issuance in the following four years by
NZ$2.1 billion, NZ$4.5 billion, NZ$1.3 billion and NZ$5.1
Furthermore, almost 20 percent of outstanding government
bonds are index-linked and, as such, appeal to a specialist
investor base. They are not a relevant Kauri alternative for
high-grade nominal bond investors.
Kauri supply is usually front-loaded with, for example,
NZ$5.1 billion of 2015’s NZ$6.3 billion whole-year total raised
between January and June, but Sorensen believes there is scope
this year for a better second half of primary activity than is
“Kauri supply has traditionally been very light at the end
of calendar years, but, given the solid amount of Kauri and LGFA
redemptions in December 2017, as well as the maturing NZ$7
billion NZGB 6.0 percent December 15 2017s, there will be plenty
of high-grade money around looking to refinance,” he said.
(Reporting by John Weavers; Editing by Daniel Stanton and