Telstra shares closed unchanged yesterday at $3.35 as investors thought again about the National Broadband Network and its implications for the Telco.
The market ardour for Telstra cooled noticeably after Tuesday’s 4% surge.
Worries about funding, the benefits and whether the company might be a loser, contributed to the quieter tone.
More than 118 million shares were traded, 150 million less than Tuesday.
Helping calm the market was comments like these from leading broking and investment firms, Goldman Sachs JBWere and Merrill Lynch which cast doubt on the ability of the federal government to fund the $43 billion cost of the NBN.
And Citigroup said the government will build it regardless of the financing pressures.
In reports to clients the firms say the funding will be a big ask so much so that it will boost the expected debt position of the federal government substantially.
The government says it will provide 51% of the $43 billion cost (not inflation adjusted).
That will in fact rise to close to $50 billion at current inflation rates.
That could mean the government is up for around $22 billion in extra bond sales, but that will be more because it will finance the whole project, and therefore any delays in getting partners from the private sector, will add to the funding burden.
But with the National party supporting it in the Senate, plus strong support from the Liberal Party Premier of Western Australia and the party’s Tasmanian leadership, the plan looks like being approved, at this stage it must be stressed.
The entity will borrow in its own right as does Australia Post.
The Government return will be measured economy wide, not just as a simple financial transaction.
According to sources in Canberra, the government justify the project as investing in this ‘major nation-building infrastructure to stimulate jobs in the short-term and pay a dividend to the Australian people through enhanced productivity and innovation in the long-term.’
But the financing isn’t expected to be a real problem from the mechanics of financing the cost through bond sales.
The government’s bond sales are being run though the Australian Office of Financial Management (AOFM).
Its CEO, Neil Hyden said yesterday that he is not seeing any signs of exhaustion in the government bond market.
He told an Australian Business Economists lunch in Sydney on Wednesday that recent tenders for Commonwealth government bonds, had been well covered with a good range of bids.
He also said demand for short dated Treasury Notes, which the AOFM only began reissuing in March after a six-year lull, had been "quite strong".
According to the AOFM website debt securities issued at end-February 2009, had a total face value of $62.1 billion, "comprising Treasury Bonds totalling approximately $56.1 billion and Treasury Indexed Bonds totalling approximately $6.0 billion".
The office is running two bond issues a week most weeks on Wednesdays and Fridays for $500 million to $700 million.
All it would take to raise the funding over the next 8 years (or the government’s share) would be to add $400 million to those issues a month (an extra $60 million a week), which would easily cover the 51% share Canberra says it will have to finance, and allow some extra funding.
This funding will go up over the next two years of course, as the size of the federal budget deficit has to be financed.
Bloomberg has reported that the ‘covered’ rate for recent issues has been quite strong (that’s the amount of lodged bids in dollars compared to the size of the bond issue being made).
With the government’s AAA rating, it will have no difficulty getting pension funds and other big investors to take as much as it can issue because there’s a dearth of corporate issues, there’s no competition from the securitisation markets and the share market is not doing well.
The only thing working against it is the sharp fall in official rates, which has brought closer the day when the RBA starts lifting rates. That will be a factor, despite that day being some time off.
The structure, duration and size of the issues for the new Aussie Infrastructure Bonds will be of considerable interest.
There is going to be a determinedly large retail marketing effort.
That will raise hopes of some sort of tax advantage, but that is hard to see given that the last Aussie bonds were stopped because the tax deductions were having a big impact on government tax revenues in the last recession.
With the bonds, they will be Australian Government securities, but called something catchy like Aussie Infrastructure Bonds.
The trick is how to make these attractive and how to make them non-rortable if there are any attached tax benefits.
Working out the details of these bonds and then making them attractive to all investors will be a big task.
It would seem Misters Rudd, Swan, Tanner and Conroy want something catchy to market to the punters, something with a political, as well as a financial selling point.
If they were just ordinary bonds with a few tweaks, then that would settle questions about security, and access to cash flows.
Government support, covenants controlling borrowings and cash flows and other questions, will all have to be worked out.
But in the end they will be little different that the way Australia Post funds itself at the moment in the money markets.
But the big end of the market is fretting over the amount involved.
Merrill Lynch said: "$43bn FTTH funding will be very difficult to secure: Even if the government is able to negotiate through t
