In brief
The Reserve Bank of Australia (RBA) has announced it will broaden the range of eligible collateral for purchase under its repurchase arrangements to include Australian dollar investment grade corporate bonds and commercial paper.
In order to take advantage of the RBA's support, corporate treasurers and their financial advisers should consider applying to have their securities eligible for purchase by the RBA, bearing in mind the eligibility criteria we have summarised in this note.
Background
This important announcement by the RBA is aimed at kick-starting demand for corporate bonds in the COVID-19 environment.
The move by the RBA follows other central bank initiatives that have been put in place to support liquidity in offshore corporate debt capital markets. The support provided by the RBA under this initiative is aimed at providing liquidity and improving confidence in the Australian corporate bond market, which has been severely constrained by the onset of the COVID-19 pandemic.
The RBA's announcement follows its earlier liquidity support to the government bond market, by standing in the market and purchasing Australian Government bonds and semi-government securities. This earlier support was significant and timely, and was aimed at providing pricing benchmarks for other securities in the Australian financial system. The domestic corporate bond market has, however, remained largely inactive. In light of that, the additional support provided by the RBA through this new announcement on repo eligibility has been welcomed by the market.
Over the past few months, as Australian corporates have grappled with the impacts of COVID-19, we have seen treasury teams and boards focus heavily on access to capital. While a select few Australian corporates have issued in the euro capital markets, most Australian companies looking to bolster their capital structures in light of COVID-19 have done so either through the equity markets or by implementing additional bank lines. The re-commencement of the Australian domestic debt capital markets for corporates will provide an important avenue for them to refinance additional debt taken on at this time.
Our experience through the GFC suggests that diversity of funding options is critical during times of economic uncertainty. The COVID-19 situation is likely to be no different. Issuance windows will come and go and market participants will need to be ready and nimble. The RBA's announcement should provide further impetus for corporates looking to access the Australian debt capital markets to ready themselves for an issuance by either putting in place a new program or ensuring any existing programs are fit for purpose.
What securities are now eligible?
The RBA has eligibility criteria that must be met in order for securities to be eligible for purchase by the RBA under a repurchase agreement (a Repo). The criteria and associated methodology is set out in the RBA's Technical Notes for Domestic Market Operations and can be found here.
The criteria that must be met for a security to be eligible will vary according to the nature of the security.
In summary, the minimum eligibility criteria are:
- the security is A$-denominated and is lodged and active in the Austraclear clearing system (but not as a so-called 'Euro Entitlement', being a security deposited with an international Central Securities Depository such as Euroclear or Clearstream);
- the RBA does not consider the security to be highly structured;
- the security must not enter the ‘closed period to maturity’ during the term of the Repo (this being the time between the final record date to the maturity date of the security); and
- a call notice must not have been issued in respect of the security.
Australian Government bonds or securities issued by state-borrowing authorities are automatically eligible if they meet the above minimum criteria.
Other securities, including corporate bonds and commercial paper, will be subject to further eligibility criteria as well as the RBA's approval process. The RBA will not accept any corporate securities under a Repo until the approval process is complete and the securities appear on the RBA's 'Current List of Eligible Securities' (which can be found on the RBA website via the link above).
In addition to the minimum eligibility criteria listed above, the RBA has stated that corporate bonds and commercial paper must meet the following criteria in order to be eligible for Repo:
- the security must be senior and unsubordinated;
- at least two of the recognised credit rating agencies (being Standard and Poor's, Moody's or Fitch) must provide a credit rating for the security or the issuer; and
- the security must have an average credit rating of at least:
- BBB− for long-term debt securities; or
- A-3 for short-term debt securities.
The RBA has published the methodology for determining the 'average credit rating' of a security, which is set in the Technical Note linked above. Of particular significance in the current COVID-19 environment, the RBA has noted that for the purposes of determining the average credit rating, any security placed on review for possible downgrade (ie negative watch) shall be treated an immediate one notch downgrade; and
- if the security has a maturity of less than 12 months, the issuer must be an Australian company. While not expressly stated in the RBA's policy, this criterion implies that the issuer of a security with a maturity of greater than 12 months need not be an Australian company. This is an area of the policy to be confirmed.
Making an application to be included in the list of eligible securities
Prior to corporate bonds and commercial paper becoming eligible for purchase by the RBA under a Repo, an application must be made using the Application Form for Eligible Securities.
The application is not extensive and should not be time consuming. It requires the input of basic information to identify the securities (ie name of issuer, maturity, ISIN and other identifiers etc.) and the core features of the securities (ie coupon type, coupon, status, call / put rights etc.). The RBA requires the information to be included in the application to be verifiable from other sources, and expressly provides that it is up to the applicant to demonstrate that the security meets the RBA's requirements
For short-term debt securities, the RBA has said it will generally be sufficient for the applicant to demonstrate that the program, rather than individual securities, meets the RBA's eligibility requirements. content