QTC not yet factoring in asset-sale plans as peak debt approaches
- Thursday, 05 June 2014
Queensland Treasury Corporation (QTC)'s post-state budget funding update does not factor in the state government's plan to reduce debt by A$25 billion (US$23.2 billion) via a series of asset transactions. However, even before these transactions become a reality – which is conditional on the state government winning re-election in the next year – analysts note Queensland's improving fiscal path leading to an expected decline in debt levels from 2016-17.
Specifics on which state-owned assets might be sold, leased or entered into "private sector participation" arrangements can only be found outside the budget papers. However, the papers say: "At their current book value, the asset transactions proposed could potentially reduce debt and deliver proceeds to a value of A$33.6 billion."
In a separate statement released on the same day as the state budget, June 3, Queensland's state treasurer, Tim Nicholls, says the assets being considered for sale are the Ergon Energy retail business, SunWater industrial pipelines, state electricity-generation businesses and "other non-core business functions such as a coal mine".
The ports of Townsville and Gladstone are potentially up for long-term lease, as is the Mt Isa Rail Line. Electricity networks excluding retail businesses – Powerlink, Energex and the rest of Ergon Energy – are being considered for private-sector investment via hybrid instruments with government retaining 100 per cent ownership of ordinary shares.
The state government is pledging to use A$25 billion of the asset-sale proceeds to pay down its debt from an estimated A$80 billion, with the balance used to fund the "strong choices investment programme" which includes a number of infrastructure projects. However, the government plans to seek an electoral mandate to forge ahead with the asset sales, and as such its budget projections – and QTC's funding update – do not factor in any asset-transaction proceeds.
For 2014-15, QTC now expects to have a term-debt requirement of A$8.0 billion comprising A$4.7 billion of new issuance and A$3.3 billion of refinancing. The total requirement for each of the remaining three forecast years is expected to be higher, although the new-money requirement forecasts for years two, three and four are actually substantially lower (see table below). The 2014-15 funding year is the last in the forecast period with a new-money requirement of more than A$1.2 billion.
QTC indicative term-debt funding programme (A$bn)
| 2014-15 | 2015-16 | 2016-17 | 2017-18 | |
| New money | ||||
| State (inc. general government and government-owned corporations) | 3.8 | 0.4 | 0 | 0.3 |
| Local government and other entities | 0.9 | 0.8 | 0.7 | 0.7 |
| Total new money | 4.7 | 1.2 | 0.7 | 1.0 |
| Net term-debt refinancing | 3.3 | 9.5 | 8.4 | 9.2 |
| Total term-debt requirement | 8.0 | 10.7 | 9.1 | 10.2 |
Source: Queensland Treasury Corporation June 4 2014
Lines of communication
Assuming the state government is both re-elected and achieves its plans, Richard Jackson, executive general manager, funding and markets at QTC in Brisbane, anticipates no significant change in the way the treasury corporation goes about its investor-relations work. "We will still have a reasonable total requirement in the context of the semi-government sector. So we will continue to be just as active in terms of our on- and offshore marketing," Jackson explains.
This includes the US investor base with which QTC has engaged via the addition of 144A language to its domestic bond programme. Jackson says the state treasury corporation has seen new investors coming into its primary deal flow thanks to this addition – often, as tends to be the case in the US market, with large tickets. Even more significantly, he adds, QTC's US investor base tends to now be more confident around secondary-market activity thanks to the programme's 144A capability.
It is important for QTC to maintain lines of communication even with existing investors, Jackson notes, and not to be complacent about reinvestment. He comments: "It's still a very competitive market from an issuer's perspective, albeit conditions have been conducive in recent times. We want to keep all our investors informed and we certainly can't assume our clients will stay in our curve as we refinance just because they're existing holders. That is not least because the nature of demand may change, too – investors naturally look for different assets depending where we are in the cycle."
QTC is, for instance, not rushing to dial back its use of syndication for bond issuance even as its new-money requirement falls after 2014-15. Jackson says QTC will continue to use the execution means which best fit market conditions, though he also notes the reduced ability of dealer banks to take down volume of paper in tenders.
The Queensland government's plans around state assets give a particular impetus to maintain transparency. The government has laid out a clear path on asset transactions but the commencement of the process is conditional on securing a new mandate at the state election, which is likely to take place in early 2015. QTC's expectation is that asset-transaction proceeds will only be factored in to its funding plans when their receipt is confirmed.
Jackson tells KangaNews that QTC has worked to communicate key dates and their significance to investors, including the state budget and the likely timing of the election. The purpose is to mitigate any future surprises and to maintain investor comfort around issues like liquidity in the QTC curve.
Having returned from a late May investor update in Asia, Jackson says: "If anything the area of most interest for the Asian investor base is not around potential state-asset activity but the potential impact on liquidity of the strong bid from Australian banks. We are also quite comfortable on this issue – there has, for instance, been no feedback from the market in general of from bank investors that they are seeing any stresses."
Thumbs up
The Queensland state budget received fairly comprehensive approval from the Australian analyst community – despite the fact that the budget actually delivered a smaller expected operating surplus for 2014-15 and what an ANZ research note calls only "minor" policy changes.
RBC Capital Markets' Sydney-based fixed income and currency strategy, Michael Turner, writes in his own post-budget note: "The direction of Queensland's state finances remains encouraging following significant structural reform over the past couple of years; debt begins to decline by 2016-17 with QTC subsequently a refinancing story from this point onwards."
Altaz Dagha, associate director, rates strategy at Westpac Institutional Bank in London, notes that Queensland's net debt to GSP ratio is expected to peak – at 13.6 per cent – in 2014-15 and then start to contract towards 12.0 per cent at the end of the forecast period, in 2016-17.
Ratings static
There was no rating action in the wake of the Queensland budget. Standard & Poor's Ratings Services (S&P) affirmed its stable AA+ rating on the state, while Moody's Investors Service (Moody's) did the same for its negative Aa1 assessment.
In line with their rating outlooks, S&P highlights the medium-term improvement in Queensland's budget performance while Moody's places slightly more emphasis on the near-term financial performance.
S&P believes the budget "reveals an improved budgetary position compared with the forecasts released in the state's fiscal 2014 mid-year fiscal and economic review" from December 2013. The improvement is "mostly on the back of improved cash operating balances", the rating agency adds.
The path back to triple-A status is likely to be a long one, though, as S&P concludes: "Given Queensland's strengthening operating position, we expect the state's debt burden to improve gradually over the forward estimates. We expect the state to generate after-capital-expenditure surpluses toward the later years of the forward estimates, which should reduce the state's borrowing requirement. That said, we estimate that Queensland's tax-supported debt as a percentage of consolidated operating revenues, while stabilising, is likely to remain more than 120 per cent over the medium term."
Moody's, meanwhile, suggests that the Queensland budget "projects a deterioration in its financial performance in 2014-15 and over the next four years when compared [with] last year's projections". The rating agency acknowledges, however, that "the projections still forecast a significant narrowing in the deficit in 2014-15 and the achievement of a balanced budget in 2015-16".
