Capital Markets report: Integrating with the global approach

Chapman Tripp's Luke Ford.

COMMENT:

New Zealand bond markets developed in isolation and with their own unique characteristics. But the international investor presence has grown over the years and is vital to our continuing development. So the question arises: can we maintain our distinctive features and still attract offshore interest at the levels we need?

Venturing into international waters

The number of New Zealand companies with specialist European bond programmes has remained fairly static but the US private placement (USPP) market is an increasingly popular choice for long tenors and long conversations with US wholesale investors.

Issuers are also tapping offshore investors from their New Zealand domestic programmes. That can be as simple as marketing "domestic" bonds overseas — a typical list of selling restrictions in an offer can target potential investors across Europe, Asia, even the Middle East.

Asian and European private placements have recently grown in popularity, taking a domestic programme and bolting on the necessary moving parts to work with offshore clearing systems. So far this offshore element has been primarily limited to high grade issuers of rated bonds. However globalisation, low interest rate environments and a welcome focus on non-financial metrics (particularly sustainable finance and impact investment) mean offshore investors are looking further afield for yield and social returns, and smaller issuers are looking to connect with them.

We are not the only ones looking for such investment. Australia has long had a closer connection than New Zealand to Asian markets and China is actively encouraging foreign direct investment while opening up international access to its domestic markets.
As we look to attract more investors to our shores (at least virtually), we need to ask what they are looking for. A market needs interested buyers and interested sellers.
We have a lot of positives to offer.

We have a thriving local retail investor base that provides liquidity and competes with our largest wholesale investors on the same transactions. Our regulation is generally geared to reducing barriers to issuance (particularly for repeat issuers).

The market is also becoming more sophisticated, participating in transactions that would have previously skipped New Zealand entirely. Examples from last year include locally targeted 10-year plus deals from the Local Government Funding Agency (LGFA), Chorus, Kāinga Ora, the Government, the World Bank, and Auckland Council's 30-year green bond (to be followed this year by a 30-year Government bond). This all provides important NZ dollar liquidity to encourage international investors.

Because of our market's relative youth, we have been able to adapt more easily to technological change. Unlike in Europe, for example, we don't create a physical bearer bond for each issuance and lock it in a safe. We don't even create a physical registered certificate like common Asian market practice. Everything is electronic and online.
But our markets also pose many challenges for investors used to international market practice. This can include longer offer periods to accommodate our retail investors and technical differences in settlement, underwriting and announcement practices — the list goes on.

Much of our historic bond documentation is unlike anything overseas. Offshore arranger and investor desks covering many jurisdictions often have little time or inclination to analyse the risks of unnecessary differences.

There is also New Zealand's dogged commitment to withholding taxes for non-resident investors — although they have now been eliminated from every major international bond market.

NZX-listed retail bonds get a pass through special exemption, but the wholesale market and anyone looking to issue offshore must jump through hoops to explain such taxes to non-resident investors and put them on a level playing field.

Doing it right

New Zealand innovates best when we start with the end goal in mind — providing a product that offshore investors want to buy (and don't have to think too hard to understand). We have a number of working models to demonstrate this.

The Kauri bond market typically accounts for 20 per cent to 40 per cent of New Zealand bond issuance by volume, according to Kanga-News data, having grown rapidly since 2004 when it took up existing international programmes as a documentation base, providing a seamless experience for international investors.

Kāinga Ora's wellbeing bond funding model takes the best parts of an international sustainable bond programme format and adds the twist of compliance with Treasury's living standards framework.

And LGFA (a platform to group a number of councils behind a single issuer) was created to provide the local government sector with high-grade scale in the global market.

To maintain momentum, we need to remove the remaining barriers (particularly where we are the only jurisdiction still imposing them); integrate with international approaches and innovate from that base.

● Luke Ford is a partner in Chapman Tripp.