New Zealand's capital markets update - some healthy signs?

The announcement last week that Fonterra, New Zealand's largest company, had found its bond offer 267% oversubscribed signals the current strength of the retail bond market in New Zealand. At $800m in accepted applications, with indications that demand may have been much higher, the offer will be the largest corporate bond offer in New Zealand and follows successful debt offers from significant corporates such as Auckland International Airport, Genesis Energy, Wellington International Airport and others.

What does this mean, then, for the current health of New Zealand's capital markets?  There have been few options for investors rocked initially by the collapse of the local finance company sector and then the impact of the international financial crisis. The equity markets, in particular, have seen little in the way of new activity with only three new equity issuers coming to market in 2008 and only eight in 2007.

Introduction of Capital Markets Development Taskforce

In July 2008, the government announced the formation of the Capital Markets Development Taskforce. The purpose of the taskforce is to "develop and launch a blueprint and action plan to improve New Zealand's financial system for the benefit of the New Zealand economy and its business".

Releasing an interim report in November, the Taskforce's early proposals for change include building on the continuous disclosure requirements for listed companies to make it easier for them to raise capital without the burden of further, comprehensive disclosure documents. For private companies, the recommendations are likely to involve simplifying the process for raising smaller amounts of capital. For example, exemptions to the prospectus requirements along similar lines to the Australian regime which permits the offer to up to 20 people of up to A$2m over 12 months without a prospectus. 

Following the introduction of the trans-Tasman mutual recognition scheme for the offers of securities in 2008, we have seen a number of Australian issuers consider the use of the scheme to register Australian-compliant documents rather than face the burden of complying with the New Zealand regime. To date, this has provided increased flexibility in particular for Australian companies wishing to issue New Zealand employees with shares as part of remuneration plans.  However, the new regime is yet to have any significant impact on capital markets activity in New Zealand.

Debt securities proving popular

Debt securities from blue chip companies, on the other hand, are proving to be extremely popular with New Zealand investors facing plummeting interest rates for deposits with their local bank. With an official cash rate now at 3.5% and likely to go lower, a fixed rate bond offering in the range of 8% for three to five years has proved very attractive to investors looking for a new home for their funds in a market with a contracting array of investment options.

Similarly for the corporates offering bonds, turning to the debt capital markets opens up an ability to borrow when the banks are increasing margins or choosing not to lend at all. This holds true for the public sector, with state-owned enterprise Genesis Energy's $225m bond offer ($120 million of 5 year bonds carrying an interest rate of 7.25%, and $105 million of 7 year bonds carrying an interest rate of 7.65%) closing fully subscribed. Changes to the Securities Act exemptions for local authorities have encouraged councils to consider the debt capital markets for their infrastructure funding requirements.  Tauranga City Council raised NZ$50m, including $20m of oversubscriptions, in November 2008 (carrying an interest rate of 7.05%). Auckland City Council has announced plans to raise NZ$200m to refinance debt and apply to capital projects. A number of other councils are expected to follow suit.

But for how long?

However, it remains to be seen how long this flurry of debt activity will continue. Quality corporate issuers are attracting very high levels of demand, but it is likely that it will be a long time before the New Zealand market develops an appetite for the kinds of debt securities that were offered by the finance company sector 18 months ago.

The interest found in the retail investment market could also indicate further opportunities for the equity capital markets in the year ahead, particularly as private equity owners of New Zealand businesses face difficult questions about the financial position of their portfolio assets and likely exit strategies. These 'unnatural' long-term owners of corporate assets may find, if the recommendations of the Taskforce are implemented, a more streamlined and accessible New Zealand capital market waiting for them.

This article was written by Sacha Judd a partner in the Auckland office of Buddle Findlay, one of New Zealand's leading law firms. Sacha specialises in mergers and acquisitions, public offerings, takeovers and securities law, and corporate governance advice. Sacha can be contacted by phone: +64-9-363 0632 or email: sacha.judd@buddlefindlay.com.