debt market update h1 2021 - assets.kpmg

OVERVIEW• Australia’s economic recovery was well underway in H1 2021 with

signs of growth proving to be stronger than previously expected. In particular, early activity in the first quarter of 2021 was demonstrative of positive business sentiment, with companies looking to execute on their investment strategies resulting in higher levels of market activity.

• Private investment rebounded stronger than expected over the previous half due to a recovery in demand, higher capacity utilisation and accommodative financing conditions. Strong household and business balance sheets pointed to an increase in consumption and capital expenditure with easing in COVID-19 containment measures.

• The recovery is now expected to be disrupted again by widespread intermittent State lockdowns that will likely continue until COVID-19 related public health challenges related to the latest delta variant outbreak are stabilised.

• With the majority of the 2020 COVID-19 induced policies beginning to subside, the Federal Government recently announced its four-phase plan detailing pathways out of restrictions and the reopening of the economy based upon the achievement of target vaccination rates.

• The effect of the RBA’s monetary policy settings continue to support the economy. Forward guidance regarding the cash rate in the medium term continue to provide support for investment, liquidity and market expectations.

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©2021 KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation.

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• In H1 2021 Australian reference rates remained broadly unchanged at the shorter end of the curve (less than three years).

• There was greater volatility for longer dated tenors (15 years and beyond) with a steepening of the curve in Q1. However, markets stabilised in Q2 resulting in a flattening of the curve broadly in line with Q4 levels.

• The Reserve Bank continues to support low rates to encourage further lending and spending in the economy to counter the economic impact of COVID-19, maintaining the target Official Cash Rate at 0.10 percent.

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3M 6M 9M 12M

15M

18M 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y

12Y

15Y

20Y

25Y

30Y

AUD Swap Curve

Source: Bloomberg (July 2021)

Q4 2020 Q1 2021 Q2 2021

0.02% 0.02%

0.06%

0.04%

0.08%

0.12%

0.16%

0.00%

0.02%

0.04%

0.06%

0.08%

0.10%

0.12%

0.14%

0.16%

0.18%

0.20%

3M 6M 9M 12M

Bank Bill Swap Rates

0.17%

0.19%

0.15%

0.03%

0.11%

Q4 2020 Q1 2021 Q2 2021


AUSTRALIAN REFERENCE RATES



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• The Markit iTraxx Australia Credit Default Swap (CDS) Index has remained steady in the 2021 calendar year after spiking in March 2020 at the onset of COVID-19.

• Australian CDS spreads in H1 2021 tracked between ~55 and ~65 bps. The index closed at ~57 bps at the end of the half.

• As the economy continues to rebound from the setbacks of 2020, there are remaining local and global challenges associated with managing the consequences of the pandemic, which has required the Government to navigate a path that takes into account both immediate needs and the longer term.

• The Federal Government indicated in the 2021 budget that economic recovery had surpassed expectation, although a degree of fiscal and monetary policy measures are expected to remain. For additional insight, please refer to KPMG Chief Economist Dr Brendan Rynne’s commentary here.

40

50

60

70

80

90

Jun

20

Au

g 2

0

Oct

20

Dec

20

Feb

21

Ap

r 21

Jun

21

Australia 5Y CDS Spread


CREDIT RISK INDICATORS



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https://home.kpmg/au/en/home/insights/2021/05/federal-budget.html?budgetID=1&nocache=true

• The Australia 10-year Treasury yield increased sharply over Q1 2021, rising above 1.90 percent p.a in February highlighting optimism regarding economic recovery and increasing inflationary expectations.

• The yield has marginally decreased by ~40 bps in Q2, although at a milder pace, bringing 10-year yields broadly in line with pre-pandemic levels.

H2 End 2020

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

Sep

20

Oct

20

Nov

20

Dec

20

Jan

21

Feb

21

Mar

21

Ap

r 21

May

21

Jun

21

Australian 10Y Treasury Yield


GOVERNMENT BONDS

• Treasury issuances have significantly decreased compared to 2020, given the Government’s reduced stimulus measures.

• However, Q1 and Q2 2021 issuance remain higher than in pre-pandemic years, reflecting continued fiscal support packages.

• The weighted average yield and tenor of Government issuance increased due to the wind down of some fiscal policies in response to COVID-19.

Q1, 19.929

Q2, 33.200

0

2

4

6

8

10

12

14

A$0bn

A$50bn

A$100bn

A$150bn

A$200bn

A$250bn

A$300bn

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Year

s / %

Yie

ld p

.a.

Australian Government Bond Issuance

Volume (LHS) Avg. Yield (RHS) Avg. Tenor (RHS)

Source: AOFM (July 2021)



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• Since its November 2020 meeting, the RBA has maintained the cash rate target at 0.10 percent and has stated that it will not increase the cash rate until actual inflation is consistent with its 2-3 percent target.

• The asset purchase program or “quantitative easing” policy formed a key part of the RBA’s COVID-19 response and the central bank significantly increased its government bond purchases in 2020.

• Q1 2021 saw further government bond purchases as an extension to the policy, to reduce effective interest rates and encourage lending and borrowing across the economy.

• The RBA announced at its August 2021 meeting that the existing bond purchase program would continue with flexibility, and at a lower pace of purchases until a reconsideration of policy settings later in the year.

A$0bn

A$50bn

A$100bn

A$150bn

A$200bn

A$250bn

RBA Holdings of Government Securities

Australian Government Semi-Government LTM Average

Jul 1

9

Au

g 1

9

Sep

19

Oct

19

Nov

19

Dec

19

Sep

20

Oct

20

Nov

20

Dec

20

Jan

20

Feb

20

Mar

20

Ap

r 20

May

20

Jun

20

Jan

21

Feb

21

Mar

21

Ap

r 21

May

21

Jun

21

Jul 2

0

Au

g 2

0

Source: RBA (July 2021)

RBA POLICY RESPONSES



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• Take-up of the RBA’s Term Funding Facility (TFF) ramped up at the beginning of Q4 2020, before levelling off during Q1 2021 as volatility subsided in credit markets.

• The TFF closed to new drawdowns on 30 June 2021, after an increase and extension was announced in September 2020.

• Consequently, drawdowns accelerated in Q2 2021 as institutions drew upon remaining allowances, and the facility closed at $188 billion of funds outstanding.

• The TFF successfully reduced banks’ cost of funds and subsequently, interest rates in Australia. Additionally, a decline in bank bond issuances also benefitted other institutions issuing debt. Investor appetite was redirected to other securities such as asset-backed securities and non-bank corporate bonds, given the fewer bank bonds on offer.

RBA Term Funding Facility Uptake

Total Drawdowns Total Funding Allowance

Source: RBA (July 2021)

A$0bn

A$50bn

A$100bn

A$150bn

A$200bn

A$250bn

Jun

20

Jul

20

Au

g 2

0

Sep

20

Oct

20

No

v 20

Dec

20

Jan

21

Feb

21

Mar

21

Ap

r 21

May

21

Jun

21



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• There was modest refinancing and LBO-based lending activity in the syndicated loan market as stronger competitors emerged with tactical buyout opportunities in H1.

• TPG Telecom led the way after securing a total of A$4.75 billion for an amendment and extension of outstanding facilities, whilst Ramsay Health Care refinanced A$1.5 billion in facilities.

SYNDICATED LOANS

Notable H1 2021 Australian Syndicated Loan Issuances

Borrower Date Amount (A$m) Tenor (yrs.) Pricing (bps)

PEXA 1-Jul-21 335 4 Undisclosed

Ramsay Health Care 22-Jun-21

500 3 BBSY + 135

500 4 BBSY + 145

500 5 BBSY + 155

TPG Telecom 2-Jun-21

2,070 3 BBSY + 125

1,720 5 BBSY + 145

960 5 BBSY + 145

Orora 28-May-21 350 3 Undisclosed

Kathmandu 26-May-21100 3 Undisclosed

165 3 Undisclosed

G8 Education 17-Feb-21

200 2 BBSY + 210

100 2 BBSY + 180

50 2 Undisclosed

Telstra 22-Jan-21 1,000 3 BBSY + 100

Source: LoanConnector, Bloomberg (July 2021), Debtwire



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• Australian syndicated loan volumes experienced a decrease in Q2 2021, off already declining volumes. However, companies are expected to have dry powder to support an anticipated uptick in M&A activity.

• In calendar year 2020 over 100 ASX listed companies accessed additional funding via equity issuances, the highest number of companies that had ever raised equity in a single year and totalling almost $40 billion.

• In addition, several companies accessed public bond markets and some added bilateral bank debt facilities for increased liquidity.

• Activity saw last twelve-month (LTM) deal count edge lower to 153 while LTM volume was also down from Q1 2021 levels in a relatively subdued end to the financial year.

50

100

150

200

250

AU$0bn

AU$20bn

AU$40bn

AU$60bn

AU$80bn

AU$100bn

AU$120bn

1Q18

2Q18

3Q18

4Q18

1Q19

2Q19

3Q19

4Q19

1Q20

2Q20

3Q20

4Q20

1Q21

2Q21

Australian Syndicated Loan Volume

Quarterly Volume (LHS) LTM Volume (LHS) No. of deals, LTM basis

Source: LoanConnector (July 2021). Data has been converted from USD to AUD.



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• Australian dollar-denominated corporate bond issuances increased compared to Q1 2021 with relatively more corporates tapping the bond markets.

• Highlights for the half include Wesfarmers’ issue of the first sustainability-linked bond in the Australian medium term note market, with an oversubscribed total issuance of A$1,000m.

• US-based Verizon Communications also approached the Australian market raising A$1,250m to fund its US 5G network licenses.

CORPORATE BOND ISSUANCE

A$0bn

A$2bn

A$4bn

A$6bn

A$8bn

A$10bn

A$12bn

A$14bn

A$16bn

2Q21

1Q21

4Q20

3Q20

2Q20

1Q20

4Q19

3Q19

2Q19

1Q19

4Q18

3Q18

2Q18

1Q18

A$ Corporate Bond Issuance

Quarterly A$ Bond Volume LTM Average


Notable H1 2021 Australian Corporate Bond Issuance

Borrower Date Amount (A$m) Tenor (yrs.) Pricing (bps)

Wesfarmers (A-) 23-Jun-21650 7 194

350 10 255

NBN Co (A+)22-Jun-21

2-Jun-21

200 6 185

350 7 215

Peet 4-Jun-21 75 5 487

WestConnex 31-Mar-21 650 10 315

Verizon Communications

3-Mar-21

600 7 235

500 10 300

150 20 385

Source: Bloomberg, Thomson Reuters (July 2021)



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• Australian Corporate BBB spreads trended lower as sentiment over the economy continued to improve throughout Q4 2020 with the easing of COVID-19 restrictions in many parts of the country and continued economic stimulus.

• Although lockdown measures have continued in Q2 2021, spreads have remained relatively stable and are recovering to pre-pandemic levels.

• Investment grade corporate bond spreads reflected improved market confidence. The 10-year BBB spread normalised, after inversion with the 7-year yield spread since May 2020.

• Factors potentially influencing the inversion included investor demand for longer-dated investments in a low-yield environment, high-quality issuers being able to issue more at the 10-year tenor and a relaxation of collateral credit quality requirements for repurchase agreements by the RBA.

0

20

40

60

80

100

120

140

160

180

200

Jun

20

Jul 2

0

Au

g 2

0

Sep

20

Oct

20

Nov

20

Dec

20

Jan

21

Feb

21

Mar

21

Ap

r 21

May

21

Jun

21

Australian Corporate BBB Spreads (bps)

AU 3Y Spread AU 5Y Spread AU 7Y Spread AU 10Y Spread




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MARKET COMMENTARY• Market activity in H1 2021 was buoyant as companies looked

to capitalise on progressing investment (organic and inorganic) following a year of rationalisation and adjustment in 2020 as a result of the pandemic. Rising business investment alongside increased consumption had lifted GDP projections to pre-pandemic levels. Consumption expenditure was expected to become the largest driver of growth as households strengthened balance sheets and liquidity positions during the pandemic. Business investment had also recovered with the vast majority of capital expenditure spent on plant and equipment.

• The Reserve Bank has continued to communicate over recent months that it would not increase the cash rate target until economic conditions improve and inflation is sustainably within the target range of 2 percent to 3 percent p.a. Based on its current outlook for the economy, these conditions are not likely to be present until 2024. The RBA has noted that it does not expect the cash rate to be increased for at least the next three years.

• The Australian economy was showing positive signs of recovery, supported by strong economic tailwinds over the beginning of the 2021 year. The continued rollout of the vaccination program and State Governments’ responding swiftly and assertively to contain any detected COVID-19 cases had allowed economic activity to broaden. However, given the breadth and length of the current lockdowns it is expected that Australia’s economic recovery will be interrupted over the short and medium term delaying the expected bounce back. Additional commentary from KPMG Chief Economist Dr Brendan Rynne on potential impacts is available here.

• A depth of liquidity remains in the Australian market and financiers’ appetite for new opportunities is increasing as a pathway to economic recovery becomes clearer and bank provisions are wound back. There is still a degree of caution around credit and structure vis-à-vis pre-pandemic levels, however borrowers are also being supported by non-bank lenders where appetite can be broader than the credit spectrum of traditional regulated bank financiers, unlocking a breadth of creative funding options.

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https://newsroom.kpmg.com.au/australias-gdp-likely-drop-10b-following-extended-covid-19-restrictions/

OUR GLOBAL DEBT ADVISORY OFFICESKPMG’s Global Debt Advisory team of over 120 professionals helps our clients achieve optimal financing outcomes across the entire spectrum of debt products.



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FinlandAri Kiuru

SwedenChristian Terslow

ItalyMassimo Bronzoni

PolandAlina Woloszyn

AustriaStefan Rufera

GermanyThomas Dorbert

NetherlandsMaurice Jongmans

UKTim Nicholson

DenmarkJan Hove Søresnen

IrelandHazel Cryan

BelgiumIvan Costermans

SpainGonzalo Montes Amayo

BrazilAlan Riddell

CanadaNeil Blair

USMichael Rudolph

KenyaNigel Smith

UAERavi Suri

South AfricaBoitumelo Ngutshane

IndiaSiddarth Suri

ChinaRainbow Wang

RussiaStepan Svetankov

JapanKoichiro Tanaka

South KoreaKwang-Seok Kim

New ZealandJesse Philips

MalaysiaEmily Choo

AustraliaScott Mesley

PhilippinesMichael H Guarin

Scott Mesley Partner Head of Debt Advisory, Australia Melbourne P: +61 3 9288 6748 E: [email protected]

Conrad Hall Partner Debt Advisory Brisbane P: +61 7 3434 9105 E: [email protected]

Linda Blore Partner Debt Advisory Melbourne P: +61 3 8663 8333 E: [email protected]

Tony Moussa Partner Debt Advisory Sydney P: +61 2 9455 9842 E: [email protected]

The information contained in this document is of a general nature and is not intended to address the objectives, financial situation or needs of any particular individual or entity. It is provided for information purposes only and does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to influence a person in making a decision, including, if applicable, in relation to any financial product or an interest in a financial product. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

To the extent permissible by law, KPMG and its associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any loss or damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement or otherwise).

©2021 KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation.

Liability limited by a scheme approved under Professional Standards Legislation. August 2021. 742641225DTL.

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debt market update h1 2021 - assets.kpmg

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