For those of you who read my articles a few weeks ago, we can observe the new financial market initiatives in the Commonwealth Government warchest being stockpiled and deployed since the advent of COVID-19. Through the Government’s two key arms of financial market participation, the Reserve Bank of Australia (RBA) and the Australian Office of Financial Management (AOFM), amongst other things, new initiatives are:
RBA
| Initiative | Purpose |
| Cash rate of 0.25% | Boost cashflow to business and the indebited household sector |
Interest rate targeting of three year Commonwealth Government bonds (CGS) of 0.25%
| Further to cash rate targeting above, the RBA has extended interest rate targeting along the yield curve. The RBA will realize this targeting by purchasing 3 year CGS on market, as required. This is not Quantitative Easing as the CGS are being purchased on market and not from the Government |
| $90 billion 3 year Term Funding Facility (TFF) at 0.25% | Like Cash Rate targeting, the objective of the TFF is to lower funding costs and extend the term of funding to ADIs to three years who in turn are hoped to on-lend to small business |
Inject large amounts of liquidity via re-purchase agreements, including the use of corporate bonds as security
| Particularly in the early part of the COVID-19 crisis, the RBA injected unprecedented levels if liquidity into the financial system. One key method is by re-purchase agreements (repos) whereby the RBA will lend cash to ADIs with that lending secured by “Eligible Securities”. “Eligible Securities” have included, amongst other things, CGS, State Government bonds, supra national bonds, RMBS. This week, the RBA agreed to accept investment grade corporate bonds. This is new news and never been done before |
Establish Foreign currency swap lines
| In co-operation with the US Federal Reserve, the RBA has access to up to USD 60 billion for the provision to ADIs needing USD |
| Increase supply of bank notes | The RBA running short of banknotes made available to the Australian public could conceivably lead to a run on banks undermining confidence in the Australian financial system. The RBA has ensured there is the inventory and logistical support to enable cash to be made available through ADIs. This availability is evidenced by cash balances at ADIs increasing dramatically |
| Increased co-operation with other arms of government and Agencies | Given multi faceted initiatives by the RBA, increased coordination is required |
AOFM
| Initiative | Purpose |
$15 billion Structured Finance Support Fund (SFSF)
| Designed to support non-bank lending, the SFSF is focused to provide warehouse funding support |
| Australian Business Securitisation Fund (ABSF) | Like the SFSF, the ABSF will be targeted to provide Warehouse and term securitization funding structures where the underlying receivables are loans to SMEs |
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Of the above, a number of which have been the subject of prior articles, the latest initiative, that investment grade corporate bonds are now able to be the subject of repos, is highly significant: it means there is a lender, the RBA, who can lend directly into the corporate sector. Apart from the US Federal Reserve and the ECB, this has never, ever been done in Australia. Historically, via the repo market, the RBA lent to ADIs who on-lent to their customers, which may or may not have been corporates.
Given the above initiatives, both RBA and AOFM, showing strong perception of need, have been intermediating market dislocation and doing an excellent job with preeminent horsepower.
In a time of financial market dislocation, the remediation initiatives of the RBA and AOFM described above, has a trickle down effect to benefit the whole of credit markets. This trickle down effect eventually benefits all corporates looking to refinance including funding being provided to non investment grade corporates. Higher liquidity, amongst other things, means better credit risk.
About FIIG Debt Capital Markets
The Debt Capital Markets team assists both rated and unrated corporates & Financial Institutions (FI) in securing long-term and flexible bond financing in the Australian market. FIIG is a leader in the Australian unrated debt capital market, establishing our service with an unrated bond offering in 2012 unique to the domestic market.
FIIG typically arranges and distributes bonds via Australia’s over-the-counter (OTC) domestic bond market where there is no need for a prospectus. Bonds are distributed to over 5,000 wholesale investors that trade bonds with FIIG.
FIIG acts as a Sole or Joint Lead Arranger and has significant primary placement capabilities as a co-arranger. FIIG has raised more than $2.8bn in both the rated and unrated market.
FIIG can assist Corporate & FI Borrowers in the following areas:
• FIIG Private Debt placement service as part of a structured financing solution in deal sizes of $10m+; or
• FIIG Debt Capital Markets via our $25m+ unrated bond arranging service.
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