Australia Debuts Bonds Tied to Alternative Gauge in Global Trend
Australia Debuts Bonds Tied to Alternative Gauge in Global Trend
(Bloomberg) -- An Australian borrower priced floating-rate bonds that are linked to an alternative to the market’s benchmark rate for the first time, the latest in a global move away from scandal-damaged gauges including Libor.
The South Australian Government Financing Authority on Thursday priced the note over the Reserve Bank’s benchmark rate, known as Australian Interbank Overnight Cash Rate, or AONIA. That was instead of the market’s benchmark, the locally-set bank bill swap rate that’s commonly referred to as BBSW.
Global regulators are coming up with alternatives to scandal-tainted reference rates, and authorities Down Under are no exception, looking for something other than BBSW, which has had its share of problems in recent years. While it may take time for the market to become accustomed to the new reference rates, there’s demand for their use, according to UBS Group AG.
“One of the challenges with interest-rate reform globally is that the extensive use of incumbent instruments is very much ingrained as part of financial markets in all products,” said Tim Galt, head of Asia-Pacific DCM syndicate at UBS, the arranger of the South Australia floater deal. “It’s probably the challenge that time does justice to.”
S&P Global Ratings said in April that an Australian interest rate benchmark such as AONIA should be considered as a near risk-free alternatives to the bank bill swap rate, which includes risk premiums such as credit and liquidity. An official at the Reserve Bank of Australia said in March he expects some migration away from BBSW toward the central bank’s operational target for monetary policy with the backdrop of transition of Libor to risk-free rates internationally.
“There are other market participants who, for hedging and other reasons, have interest in seeing alternative benchmarks develop,” said Galt at UBS. He said he expects other such deals, “maybe other state issuers or other financial issuers.”
SAFA priced over A$500 million ($349 million) for the one-year notes initially launched at A$100 million.
As a government entity, “we considered ourselves to be in a position where we should be considering risk-free rates as a more appropriate way in managing our floating-rate risk,” said Andrew Kennedy, the director of treasury services at SAFA. “We should be using an appropriate tool that reflects government risk, and in this case that happens to be AONIA, instead of the existing product of BBSW, which embeds credit risk.’’
To contact the reporter on this story: Mariko Ishikawa in Sydney at mishikawa9@bloomberg.net
To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Ken McCallum, Finbarr Flynn
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