General manager of group funding for the Commonwealth Bank of Australia (CBA), John te Wechel, oversees a funding portfolio of about A$23 billion comprising of long-term debt and hybrid capital. Nearly 80% of this paper is held by offshore investors, with an increasing number of takers located in Asia. Each year the bank launches an average of between A$4 and A$7 billion in new deals. Here te Wechel talks about CBA's fundraising plans for 2004 and a deal completed just this week.
What has been your most recent deal?
te Wechel: This week we raised A$500 million in subordinated debt from the domestic market. The deal was structured as a 10-year non call five deal that will qualify as lower Tier 2 capital. Typically we are infrequent issuers of sub-debt though last year we did a transaction in the US and another in the UK to take advantage of the longer terms that were being offered at good rates. We haven't issued bank debt in the Australian markets for about two years so this week's deal was pretty significant. Given where spreads are and how they are tightening, we saw an opportunity to raise cost-effective funding and we took it.
Does this suggest there will be fewer opportunities in the foreign markets this year?
te Wechel: Not necessarily. The decision to issue locally had more to do with the funding opportunity here than the lack of an offshore option. About 85% of our balance sheet is in Australian dollars so it is always a good idea to issue in our local currency when we can. Issuing offshore requires us to swap back into Aussie dollars and this adds a cost - the swap spreads are always too wide. The reason we go offshore is to achieve a suitable level of investor diversification. We have had a significant offshore issuance program for 20 years.
So the bank has got off to a good start in 2004?
te Wechel: Our issuance schedule has been surprisingly robust this year. Aside from the domestic sub-debt deal, we have borrowed another A$1.5 billion from a mix of sources including a number of shorter-dated floating rate notes in sterling and euro. These were done in the form of block trades. We have also continued to tap the structured MTN market.
Do you expect this rapid issuance pace to continue?
te Wechel: Our balance sheet growth coupled with the amount of debt maturing this year should make this an active 12 months. At this stage we don't have a clear idea of which markets we will tap and in which currencies. We tend to approach our funding on a strategically opportunistic basis. Broadly we look for diversification but we like to be able to respond quickly to opportunities.
How has your offshore investor base changed in the last four to five years?
te Wechel: Because we have become very active issuers of structured MTNs our investor base has developed from one that was predominately institutional to one that taps into the high net-worth retail arena. This is where Asia comes into play in a significant way. Asia has been a key investor market for us over the last two to three years. Investors in the region like CBA because we have a long capital markets track record and they are comfortable with the name. Being from Australia where the economy is stable and the banking system is robust is also a plus. We get very good support from our distribution network.
What are your main distribution channels for offshore placements?
te Wechel: Our main offshore program is our euro MTN program and we work with a panel of dealers to distribute the paper. Last year we dealt with over 20 different houses. Our approach is to be user friendly and while the major houses are our more active distributors, the smaller houses also add great value and we will hang on to those relationships.
How does the liability side of your balance sheet read at the moment?
te Wechel: As the largest retail bank in Australia we are predominately funded by retail deposits with two-thirds of funding coming from this source. We supplement this with long-term and short-term wholesale debt. Our wholesale funding is fairly evenly mixed in terms of maturities and at present we have no plans to change this unless an opportunity presents itself to reduce the overall cost of our liability structure.
Who do you use as a pricing benchmark?
te Wechel: We tend to benchmark against other Australian bank issuers but also against similar-rated financial institutions around the world. All Australian banks have a good credit standing which means we price fairly closely. Depending on the timing of the deals, one bank might be able to price a little cheaper than another, but this evens out over time.
Last year you issued some innovative structured deals through your Medallion special purpose vehicle. What are your plans this year?
te Wechel: The vehicle usually issues mortgage-backed securities but last year we did the first SME credit-linked deal in the market. It was innovative because it was a synthetic securitization and provided investors with A$2.5 billion worth of credit exposure to small to medium enterprise commercial property loans. Investors saw this transaction as a very positive development for the market because it provided access to an asset class not usually available. There is potential to do more of this but we will have to gauge market appetite at the time. The benefit to the bank is that it reduces credit risk on our books and reduces the amount of economic equity that the bank is required to hold. There is a higher credit risk in this segment than with residential mortgages so it is more efficient for us to securitize these type of loans.
How much investor interest from offshore did you generate for this deal?
te Wechel: The bulk of the paper was sold onshore, but we did place around 10% with offshore investors.
