Dwindling OCR hike prospects stokes bonds interest

Wind turbines at Trust Power's Tararua Windfarm near Palmerston North. Trust Power is preparing to raise $100m through a corporate bond issue. Photo / Dean Purcell

Dwindling prospects for further interest rate hikes by the Reserve Bank this year may stoke interest in corporate bonds as investors seek certainty of income.

Economists have pared back their expectations for central bank Governor Alan Bollard's tightening track after a string of soft data was compounded by the collapse of financier South Canterbury Finance and the Christchurch earthquake. Markets expect Bollard to hike the official cash rate 59 basis points over the next 12 months, according to the Overnight Interest Swap curve.

With markets firmly entrenched in a downbeat assessment of so-called risk assets, interest in corporate debt has reignited, with a flurry of small issuance in recent weeks, including Goodman Property Trust's private placement, Greenstone Energy, TrustPower, and Manukau City Council, according to Grant Hassell, head of fixed interest at AMP Capital Investors.

"There's an acceptance that the Reserve Bank looks to be on hold, and corporate bond deals are offering some value,"
he said. "With risk off, more investors are looking at income assets."

Debt issuance is way down in 2010, based on securities that trade on the NZX, with some $1.2 billion raised in the year through August, compared to $3.02 billion a year earlier, when interest rates were at record-low levels.

Hassell said corporate debt was looking more attractive than government debt, even with companies already tidying up their books in response to the global financial crisis, while many sovereigns were still in the process of doing so.

George Crawford, Goodman NZ chief financial officer, said an institution asked the property investor to add a private placement to its $150 million retail bond last year, which it accepted to help push out its funding maturity profile.

Goodman raised $45 million in a seven-year bond paying 7.58 per cent per annum, compared to the 7.75 per cent interest payment on the five-year retail bond which was launched last November.

Infratil-controlled TrustPower flagged an intention to raise up to $100 million, though it hasn't put a price on the offer, while the Infratil-NZ Super Fund joint venture Greenstone is looking to raise up to $200 million at an annual 7.35 per cent for six years. Manukau City's seven-year issue is looking to raise $350 million at 6.45 per cent.

Andrew Michl, senior fixed interest manager at ING New Zealand, said the recent bond issuance was small, mainly soaking up what demand there was. Any large issuance will need to put up more attractive returns to bring in investors, he said.

"If they wanted to raise two or three hundred million, they'd need a higher offer," Michl said. "Seven and a half, eight percent for retail issuance would help it up."

Siphoning off demand for bonds is the deposit war among banks, which has pushed up 12-month rates to as high as 5.6 per cent, according to Michl.

"You've got to get some premium to justify holding money out," he said.