In addition to providing cost efficient funding to the NSW Government, its agencies and PTEs, TCorp performs a key role in managing clients’ portfolios of outstanding debt.
This activity not only contains clients’ debt costs, but also provides debt structures that diversify risk and thus add strength to their balance sheets. TCorp agrees with each client the policies, benchmarks and risk constraints under which debt management is carried out.
Initially appointed as debt manager for NSW Treasury’s Crown debt portfolio, TCorp has since built up a debt management clientele representing a large proportion of the State’s major borrowers. At year end, TCorp was managing the debt portfolios of 20 clients with total portfolio volume of $19 billion.
While the largest client portfolio is the $9.1 billion Crown debt portfolio managed on behalf of NSW Treasury, other substantial portfolios are managed for agencies and PTEs, in the energy, ports, roads, transport and water sectors. The large scale of these managed portfolios reflects the fact that the businesses are required by the NSW Government to maintain specified levels of borrowings in their capital structure, reinforced by new borrowings to fund infrastructure development.
Innovation in debt management
During the year, TCorp refinanced more than $900 million of Crown debt with new CPI loans (with capital value linked to the Consumer Price Index). Strong demand from investors meant that this financing was sourced from the market at favourable pricing, resulting in interest costs savings in the Crown debt portfolio.
The strategy of introduction of CPI linked liabilities into the portfolio seeks to take advantage of the benefits of cost and risk diversification. This followed the recommendations of an independent review of the Crown’s debt portfolio benchmark.
The potential to expand the use of CPI linked debt by a broader range of clients, particularly for PTEs with revenue streams linked to the CPI, is currently being explored. This may lead to further client demand for CPI linked funding.
Management techniques and outcome
In addition to providing cost efficient physical funding that meets individual client benchmarks for maturity and liquidity, TCorp uses derivatives to manage the interest rate risk of the actively managed debt portfolios. The active management style adopted is a low risk approach that seeks to achieve or better budgeted borrowing costs over the medium term while taking advantage of shorter term movements in market interest rates.
Strategic portfolio positions are based on TCorp’s modelling of the macroeconomic drivers and fundamental valuations for interest rates. These positions are intended to reduce borrowing costs over an interest rate cycle and are supplemented with tactical management strategies that take advantage of market volatility over shorter timeframes. All active interest rate risk management is conducted using approved derivative products and in line with individual client risk limits. Positions are implemented within a transparent, disciplined framework that is rigorously monitored and reported to clients.
TCorp is well placed to offer active interest rate risk management, given its expertise in this area and its role in global capital markets. The active management of interest rate risk for client debt portfolios is conducted in-house to create economies of scale and provide cost effective outcomes. Active client mandates achieved borrowing costs on average 18 basis points better than benchmarks over the year.
Other treasury risk management transactions, including foreign exchange and commodity hedging, were executed on behalf of clients during the course of the year.