The privatization of the final parcel of Telstra (known as T3) has now been postponed. What does this mean for the future of the government bond market, considering the Treasurer had planned to use the proceeds from T3 to pay off government debt?
Johnson: There will be some rethinking of the government's anti-debt policies and soon they will be telling us why we can live with $50 billion worth of commonwealth bonds, which is how much debt is currently outstanding. They don't have much choice really because of the drought and the slowing economic conditions. After a while I think shrinking surpluses and a desire to get the economy moving again will probably lead to the government increasing its debt level to say around $70 billion.
What does the postponement of T3 mean for investment banks in Australia who saw this as the biggest deal in the pipeline?
If you are an equity house with a very high cost structure then this a real blow to your earnings potential. We focus mainly on debt and debt derivatives so it doesn't affect us hugely.
Does a niche investment banking strategy work in the Australian market?
We have rebuilt this business over four years after the Barclays group sold all of its investment banking infrastructure down here to ABN AMRO. As the new Barclays Capital I think our success shows that you can achieve quite a lot with a few good men and women, a strong brand and a global infrastructure. You don't need a lot of people to do this business, you just need good people. Our corporate client list speaks for itself.
What deals characterized 2002 for Barclays?
There was a lot of acquisition finance completed this year and because we had predicted this 18 months ago we were in the right place to take a lead on the deals. We were working on the sale of Sydney Airport for nearly two years. We've also done a lot of work for Westfield on their acquisition program including the purchase of Rodamco North America this year. And we were involved with the financing of Broadcast Australia. There has been a lot of inward investment from Asia and we have a particular expertise in this flow of capital.
How important are your Asian connections in distributing Aussie paper?
They are paramount. Australian borrowers are relying more and more on flows from Asia. The trading banks are funding more than half of their long-term debt programs by one off placements in Singapore, Hong Kong and Japan. Since we have strong sales desks in these countries this has become an important business for us.
You are also involved in securitization and locally there has always been a lack of diversity in the asset classes that are securitized. Do you see this changing?
Cobley: Not in the short term. The trading banks dominate these markets and the only homogenous consumer assets that they are ready to securitize are mortgage assets. The banks are awash with funds and tend to securitize assets as a diversification of funding play rather than a capital relief technique - though capital relief is an obvious benefit of taking mortgage assets off balance sheet. Under the current banking regulations, banks do not get capital relief for securitizing credit card receivables and it is more challenging securitizing small business loans or motor vehicle leases. Until this changes the Australian market will be dominated by mortgage assets.
Turning to the utilities sector, there are rumours that the American investors in Australian power are now trying to sell their stakes?
When the American firms first bought into the power stations it was against the advice of their financial advisors, there was a lot of competition for the assets and they ended up paying too much. They then tried to run them flat out to sell more power causing power prices to collapse. Now they are all trying to sell at the same time. TXU's European business is in default; CMS and NRG have had their credit downgraded, so these companies are in a lot of trouble.
Who is going to buy the assets?
I don't know. I have been talking to potential buyers for some time and I still haven't been able to pick a winner. These are hugely expensive assets and the vendors want to get a price that doesn't cause them too much financial pain. But eventually I think they will have to suffer significant write-downs. This is a litmus test for the rest of Asia and I think the Singaporean and Korean governments have put their power privatization programs on hold because of what they have seen in Australia.
So there aren't any local buyers to absorb these assets?
In Korea there are three likely domestic buyers of the power stations, so they may have more luck offloading the assets. But in Australia there is only one and that is Alcoa, the biggest buyer of electricity in Victoria. So there may be some rationale for Alcoa to buy these stations except that it already has long-term preferential off-take contracts signed with the Victorian government.
If they can't sell, what are the options for vendors?
There will probably be a lot of financial restructuring going on next year. I think the Loy Yang A power plant will be restructured, and possibly the Epic power station. Some others in South Australia could also be reworked such as Flinders which is another NRG asset. And it is possible that some of the investors who participate in these restructurings will be Asian investors. Companies like Sime Darby, Genting, Tenaga, Hong Kong Electric and China Light and Power have all shown interest in the local sector.
What does 2003 hold in store for Barclays Capital?
There will be a lot of activity in the financial services sector. There seems to be an insatiable demand offshore for residential mortgage backed securities. Banks are getting increasingly sophisticated about how they manage their capital and there will be a proliferation of quasi-equity instruments used to boost Tier 1 and Tier 2 capital. We will be pushing these products strongly. In general though, we will be selling a lot more of our paper offshore. A north meets south strategy.