In a year when credit markets experienced a severe loss of liquidity, TCorp demonstrated its financial strength, backed by New South Wales’ AAA credit rating, in raising substantial new borrowing to fund the infrastructure programs of major New South Wales public sector clients.
State enterprises requiring the greatest volumes of new funding were those engaged in electricity supply, water catchment and supply, and development of the rail network. The largest single project for which financing commenced during the year was the Sydney Desalination Plant. At the same time, TCorp’s financing of the major Epping to Chatswood Rail Line project was moving towards completion.
TCorp’s aggregate loans to clients showed a net increase of $2.6 billion over the year (after year end debt paydowns in the rail sector of $156 million, funded by the Government).
Under the New South Wales Government’s State Infrastructure Strategy, capital spending over the next four years is projected to total $57.6 billion, and this will be the major driver in an estimated $23 billion rise in TCorp’s loans to clients over that period. In addition to the continuing build-up of financing for the sectors already mentioned, there will be substantial lending for port development, including the major project at Port Botany in Sydney.
How TCorp lends to clients
TCorp provides a range of efficient standard loan products for public sector clients. These include:
- medium and long term fixed interest loans with semi-annual interest payments, repayable on a fixed maturity date. Interest coupons and maturity dates normally correspond with those of TCorp Benchmark Bonds issued to professional investors;
- Floating rate loans with interest rates periodically adjusted in line with market rates on bank bills, again with a fixed maturity date;
- the Come & Go Facility, which provides ready access to short term finance. Clients can draw down or repay funds on same-day notice, enabling them to rely on TCorp for short term liquidity, rather than hold substantial investments for liquidity purposes with associated credit and market risks;
- long term “Consumer Price Indexed” (CPI) loans with a fixed percentage interest coupon, but with the capital value adjusted periodically in line with CPI. This product was introduced during the year and has already been adopted in significant volume in the Government’s Crown debt portfolio. These new loans replaced an equivalent value of normal (“nominal”) fixed interest loans, and proved to be cost effective while providing risk diversification. They may also be an appropriate form of funding for public sector businesses whose revenue is subject to regulatory frameworks in which CPI movements are a major factor.
Where clients’ funding requirements are not completely met by these standard products, TCorp can consider providing other structures, for example loans with regularly reducing principal.
Because TCorp borrows with the benefit of the New South Wales Government’s guarantee, interest rates on loans are finely priced. Rates on new fixed interest loans are based on the current TCorp benchmark yield curve in the Australian fixed interest market, plus a small margin representing TCorp’s administration fee. (Most public trading enterprises (PTEs) also pay New South Wales Treasury an annual guarantee fee based on their average volume of loans, but TCorp is not involved in charging or collecting this fee.)
Changing pattern of borrowers
The NSW Government’s continuing investment under the State Infrastructure Strategy resulted in TCorp’s volume of loans to clients – mainly to State Owned Corporations (SOCs) – increasing strongly. The volume of client loans now stands at $30.3bn, an increase of $2.6bn over the year.
The largest borrowers from TCorp at June 2008 were the Crown Finance Entity ($10.6 billion), followed by electricity generation and distribution ($11.7 billion), water catchment and supply ($4.9 billion) and public transport ($1.3 billion).
Although funding for the New South Wales Government, its agencies and PTEs constitutes most of TCorp’s lending book, TCorp also acts as the New South Wales Government’s agent in providing funds for private sector cooperatives. These loans totalled $37 million at 30 June 2008.
Funding TCorp’s loans to clients
TCorp’s lending to the New South Wales general government sector and PTEs is funded through debt issuance in the constantly evolving capital markets. We have developed a range of offerings that suit investor requirements, backed by the strength of the State’s AAA credit rating, to deliver cost effective funding for our clients.
TCorp recorded another successful year in its funding activities, with strong investor demand for Global Exchangeable Bonds, enabling us to achieve our required funding task.
For the 2007/08 year, TCorp completed a borrowing program of $10.4 billion. This reflected the need to finance net client borrowing of $2.9 billion and to refinance existing liabilities of $6.5 billion. TCorp had pre-funded $2.5 billion of the 2007/08 requirement in the 2006/07 financial year. Capitalising on strong domestic and offshore investor demand following the credit crunch, TCorp pre-funded $3.5 billion of the 2008/09 funding requirement in the 2007/08 financial year.
The year’s funding activities were executed in an environment where Australian interest rates increased in response to concerns about higher inflation and the prospect of the Reserve Bank further increasing the cash rate. This scenario was confirmed during the year when the Reserve Bank increased the official cash rate four times to 7.25 per cent per annum at year end. The longer term TCorp interest rates (based on the March 2017 maturity) increased from 6.66 per cent to 7.02 per cent per annum.
Benchmark Bond issuance
TCorp’s Benchmark Bond program continues to be the cornerstone of our funding strategy because it enables TCorp to access broad investor demand, both locally and offshore, for large and actively traded lines of AAA rated government bonds. The liquidity of the TCorp bond market provides a high level of price transparency and is a very cost efficient source of funding for our public sector borrowers. Benchmark Bond issuance is concentrated in a small number of maturity dates (Benchmark series), generally over a 10 year period. Benchmark Bonds are marketed to domestic investors and to offshore investors as Global Exchangeable Bonds. The Benchmark Bond program is then supplemented by a more specifically directed issuance, particularly to offshore investors under TCorp’s Euro Medium Term Note program.
Benchmark Bond outstandings increased over the year by $1.3 billion. Continued strong demand, especially from domestic investors, led to Domestic Benchmark net outstandings increasing by $1.4 billion (market value). Global Exchangeable Bond outstandings (market value) decreased slightly from$14.4 billion at 30 June 2007 to $14.3 billion at 30 June 2008.
In May 2008, an April 2019 Benchmark Bond series was launched. Following a tender to launch the new Domestic Benchmark Bond, a total of $602 million was issued.At the end of June, a total of $696 million of the Domestic Benchmark series was on issue. A new Global Exchangeable Bond April 2019 maturity was launched in June and outstandings as at year end totalled $293 million.
Following the announcement of its CPI Bond program, in November TCorp issued $250 million of a new 2.75 per cent per annum 20 November 2025 series through a tender at a real yield of 2.775 per cent. A further issue of a 2.50 per cent per annum 20 November 2035 series was undertaken in December for an amount of $210 million at a real yield to investors of 2.485 per cent per annum. By the end of the financial year, the outstandings of the 20 November 2025 series increased to $531 million and the 20 November 2035 series increased to $372 million.
On 20 May 2008 the Federal Government announced its intention to abolish interest withholding tax on semi-government bonds. The required new legislation is expected to be tabled in the federal parliament before the end of 2008. Once legislation is passed this will allow TCorp to concentrate new issuance into the existing domestic Benchmark Bond series. Once implemented this will allow TCorp to significantly increase the liquidity of the existing Domestic Benchmark Bond program.
Following the passage of the legislation TCorp will look for opportunities to consolidate the outstandings of the Exchangeable Bond program into Domestic Benchmark Bonds. However, the Exchangeable Bond program will continue to be maintained until all bonds issued under the program have matured in 2019.
Offshore issuance
TCorp operates in the international debt capital markets to achieve investor diversification and to provide cost savings to the Benchmark Bond curve, and over time has used offshore issuance to smooth the maturity profile.
New issuance
Opportunities for non-benchmark issuance were limited over the year reflecting the very strong demand for Benchmark Bonds, TCorp will continue to closely monitor market opportunities over the coming year.
Strong demand from international investors for TCorp bonds in recent years has increased the proportion of offshore sourced funding relative to onshore sourced. This trend was reversed in the 2007/08 year as, following the credit crunch, demand increased from domestic investors. This trend is highlighted in Benchmark Bond program outstandings. In June 2007, the Global Exchangeable Bonds accounted for 53.7 per cent of the Benchmark Bond program and by June 2008 accounted for 48.0 per cent.
In response to changing market conditions over the year, TCorp increased activity in the short term promissory note markets. By 30 June 2008, TCorp had $3 billion of domestic promissory notes outstanding. There was no activity in the offshore commercial paper market over the year.
TCorp’s funding strategy constantly evolves in response to changing market dynamics and investor requirements. Maintaining strong relationships with our borrowing clients, dealer panel members, financial market institutions and investors has been critical in helping us accomplish our funding needs. We thank our dealer groups and investors for their continued support.