NBN Co bond issue benefits from public ownership

TLDR version: NBN Co’s successful issue of six and ten-year bonds for a total of EUR1.2bn benefitted from good management and some luck, as the deal barely avoided being caught up in growing banking instability. But the deal also benefitted from NBN Co’s quasi-sovereign status – something that highlights the tension between private and public investment in the industry.

Green bond issue is good business

This week the NBN Co issued six-year bonds worth $1.2bn and ten-year bonds worth $0.95bn in the European green bond market. The funds are earmarked for energy efficient and socially beneficial investments, particularly the replacement of copper with fibre and upgrading the regional network. This was not the first green bond issue by NBN Co – it issued $800m locally in April 2022 – but it the first for any Australian company in Europe. The European issue was two and a half times oversubscribed, reflecting high levels of interest in green investment.The issue brings some welcome financial certainty to NBN Co.

The success of the issue also undoubtedly reflects NBN Co’s quasi-sovereign status as a fully government owned company. It is worth emphasising how unique this is. Telco incumbents were privatised globally starting in the 1980s, and now seek more capital as private borrowers without the implicit guarantee they enjoyed before privatisation. (For those who remember, this was one of the arguments raised against privatisation in the 1990s). NBN Co is the only major telco in public hands in the developed world.

Why does this matter?

Lack of sovereign status didn’t bother privatised companies or their private competitors as long as the cost of capital remained low. Borrowing has been cheap and easy until recently.

But post-pandemic inflation has triggered higher interest rates, straining the banking system and putting pressure on overleveraged companies. And it is looking more likely that both inflation and interest rates will remain relatively high for some time.

In this scenario, NBN Co has a distinct advantage over its private sector competitors, who are beginning to press in with fibre, satellite and fixed wireless alternatives in different geographies. As we have been pointing out for a while, privately owned telcos worldwide have struggled to meet ROIC targets as telco prices have deflated, particularly in Europe and also in ANZ. Higher interest rates only increase the pressure, and will probably accelerate the spinoff of infrastructure assets to improve balance sheets. In contrast, NBN Co is able to issue oversubscribed bonds despite an annual loss and a significant debt/equity ratio.

This is a good thing for Australia’s ability to attract capital for fixed telco investment. It is less good for competition and for the private operators who build and maintain our mobile networks. The risk here is that the “de-privatisation” of the Australian telco industry that began with the NBN Co’s creation in 2009 could take on a life of its own as private telcos find it harder to raise capital and further shrink as a share of the total industry. The result would be more pressure for government to fund networks, particularly in regional Australia, which could exacerbate the trend.

Instead, the policy response should be to identify structural factors are contributing to the decline of telco returns, with a view to addressing them and attracting fresh capital to the industry. This was precisely the task undertaken in the 1990s with the liberalisation of the telco market and the privatisation of Telstra. The industry’s structural environment is now so different that a reconsideration of the policy framework is now well overdue.

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