The year in review has seen extraordinary circumstances unfolding across financial markets, resulting in a level
of dislocation in debt and equity markets not seen
in decades.

In this environment TCorp’s businesses and its conservative approach to risk management have held up extremely well. Importantly, we have been able to continue to provide cost effective access to debt markets to meet the increasing funding needs of our clients at a time when debt markets have been closed to many borrowers. This strong positioning of TCorp and sound risk management will be critical in ensuring the successful provision of debt finance to our clients in the period ahead.

Environment

The confluence of several significant themes has resulted in an economic and market environment that has challenged policy makers and regulators to an extent not seen for many years. The abrupt halt to the multi-year credit market boom and the subsequent de-leveraging process have sent shockwaves throughout western economies. This has occurred at a time when policy makers are dealing with resurgent inflationary pressures arising from higher oil and commodity prices and demand from the growing Asian economies. At various times through the year, debt markets, and even short term money markets, were effectively frozen and the threat of repeat events persists. Equity markets, particularly for financial and leveraged stocks, bore the full brunt of the market dislocation, with most major indices down between 15 per cent and 25 per cent for the year.

In this environment central banks have faced the difficult prospect of setting monetary policy to address the twin problems of rising inflation and slowing growth. Whilst the US Federal Reserve has concentrated on reducing interest rates and injecting liquidity to stimulate the economy, Australia’s primary emphasis had been on controlling inflation, with the Reserve Bank (RBA) lifting official interest rates by a total of 1 per cent over the year to 7.25 per cent per annum. Ten-year bond yields also trended higher during the year, peaking in June at a multi-year high of 6.8 per cent per annum.

Events since year end have seen a dramatic worsening in credit markets and the commencement of aggressive monetary policy easing.

Funding

The funding environment over the year was the most challenging in recent memory, with debt markets effectively closed to many borrowers, and the normal operation of liquid secondary markets being severely challenged on a number of occasions.

Despite this, TCorp was well placed to effectively implement its borrowing program. To fund the needs of our public sector clients during the year, we raised a total of $10.4 billion from domestic and offshore debt markets. Importantly, TCorp maintained high levels of liquidity before and throughout the credit crisis which took hold from August 2007. In this way, TCorp was able to be selective in the timing of issuance, avoiding issuing into markets during the most dysfunctional periods.

Highlights for the year include the commencement of TCorp’s Consumer Price Index (CPI) Linked Bond issuance program in November, with more than $900 million issued in two maturities of 2025 and 2035, and the successful launch of a new April 2019 Benchmark Bond series in May. The much anticipated Australian Government announcement in May of the elimination of interest withholding tax on domestic semi-government bonds was a welcome development which will further enhance the liquidity and investor participation in TCorp bonds over the coming period.

With its AAA rating as a semi-government issuer, TCorp is well positioned in these turbulent times as a ‘flight to quality’ investment for domestic and overseas fund managers. We are confident that the strong level of investor support will continue, enabling us to fund the growing needs of our public sector client base.

Business trends and performance

TCorp’s profit before tax was $31.8m. This is a very sound result in light of the significant volatility and credit challenges seen across the global and domestic fixed interest markets, and particularly in a year where many participants across the industry have reported significant losses. Importantly, TCorp transacts only with highly creditworthy counterparties and as a result has not suffered, nor expects to suffer, any credit losses arising from exposure on its financial assets or derivative positions. Our conservative credit policies and prudent liquidity management practices have underpinned a healthy balance sheet during this time of extreme market turmoil.

Nevertheless, as a major participant in the fixed interest markets, TCorp’s reported profit is subject to these market impacts. These conditions have caused, and will likely continue to cause volatility in TCorp’s reported annual results due to the requirements under the Accounting Standards to value all transactions at realisation value, regardless of TCorp’s intention to hold them to maturity. In the current year, these accounting requirements have given rise to unfavourable revaluation on some of TCorp’s funding transactions. These accounting revaluation impacts will reverse in future periods, and will net to zero over the life of each transaction.

TCorp’s performance as a manager of client debt portfolios was very pleasing for the year. We generated substantial savings for our 20 managed clients across $19 billion of debt portfolios, and outperformed all benchmarks by healthy margins. During the year, we worked with clients to review their portfolio construction and, where appropriate, introduced a component of CPI linked debt to diversify their funding mix.

The year in review was the most challenging for the funds management industry for many years, and TCorp’s funds management activities were not immune to these challenges. The strong trend in growth of funds in our principal vehicles, the Hour-Glass Investment Facilities, flattened over the year, reflecting negative returns in equity and property markets. These negative results occurred after four years of returns of 20 per cent per annum or more from the local sharemarket. As a result, TCorp’s Medium Term and Long Term Growth Facilities generated negative returns for investors over the year, in line with the market. However, we remain confident that the mix of investment managers, and the portfolios’ bias towards quality and value companies, will generate good outcomes for clients as we move through the cycle.

As a cash and fixed income fund manager, TCorp’s conservative approach has ensured that clients have had no exposure to the riskier quality credits or instruments, such as collateralised debt obligations (CDOs), that have been most exposed in the credit crisis. Consequently, TCorp’s managed funds have been a top-quartile performer over the year, despite having generated returns below their benchmarks. This results from the holdings of high quality bonds which have nevertheless been marked down in a valuation sense, but we expect to see a reversal of this benchmark underperformance.

TCorp’s Corporate Finance team continued to work closely with New South Wales Treasury and individual agencies on a range of financing proposals and initiatives. Given the challenging environment, the value added by TCorp’s financial expertise is even more important when assisting agencies to evaluate financing options.

It was another busy year for our Client Services team as we worked with a number of clients on significant financing projects and related risk management issues. We also launched an initiative aimed at providing a secondment program for TCorp professionals to work more closely with client authorities, assisting them with a range of financial risk management issues.

Operating framework

During the year, we continued to strengthen TCorp’s operating framework and risk management environment through a number of key initiatives.

The turmoil in financial markets highlights the need for robust risk management practices. Heightened market volatility tested many financial institutions’ risk and capital models, and in this environment TCorp’s framework proved to be very sound. Towards the end of the year, a review of TCorp’s capital needs was conducted, given the continued growth in the balance sheet and a prudent response to the increase in market volatility. As a result of the review, TCorp’s Board approved an increase in TCorp’s capital base from $43 million to $50 million, to take effect in the 2008/09 year.

We continued to review our IT resources during the year, reflecting the need to renew core systems and bed down key projects. TCorp has embarked on a significant project aimed at streamlining existing systems, databases and applications to improve functionality and efficiencies.

People

It was a busy year for TCorp in terms of encouraging skill building and supplementing existing strengths in our teams. To cater for the increase in our business activity, we selectively expanded our staff numbers across key front, middle and back office areas.

Later this year, we will farewell from the executive team one of TCorp’s original staff members, Oliver Bedford, who retires after a long and successful career with TCorp. We thank Oliver for his contribution throughout the evolution of TCorp.

TCorp would not have been able to achieve its very good outcomes in the turbulent financial environment had it not been for the professionalism and dedication of our staff. Their skills and experience, and alignment with TCorp’s objectives, were evidenced in a year when many participants in the finance industry have struggled. Our sincere gratitude goes to all staff and we look forward to building further on these strengths into the future. While the financial markets environment continues to look difficult, we are confident that TCorp’s positioning, our risk management philosophy and our professional teams enable us to continue to deliver for our clients and our shareholder.