History - 2008-2011

Managing risk and volatility

QTC also underwent change internally, with the resignation of its Chairman, Sir Leo Hielscher AC, following nearly seven decades of public service. With the appointment of QTC’s Chief Executive, Stephen Rochester, to the position of Chairman, QTC welcomed its new Chief Executive, Philip Noble, on 1 December, 2010.

With QTC’s client-centric focus continuing to evolve, its joint venture with the Local Government Association of Queensland, LG Infrastructure Services (LGIS), rose to the challenges brought about by major cyclone and flood activity in the State of Queensland. Supporting local councils through the rebuilding process, QTC worked to assist the State’s disaster recovery process, by facilitating the National Disaster Relief and Recovery Arrangements process on behalf of local authorities.

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The transfer of the State's long-term financial assets

On 1 July 2008, the Queensland Government transferred to QTC approximately $21 billion of the State’s long-term financial assets, held to meet future superannuation and other long-term obligations of the State. This transfer removed the volatility in the Queensland State Budget as a result of the fluctuation in returns from the investment of these assets.

In return for this transfer, QTC entered into a financial arrangement to provide a fixed rate note to the General Government sector, at a rate initially set at 7.5 per cent per annum, which is the actuarially assessed long-term average rate of return for a managed diversified portfolio of investments.

While QTC was expected to incur accounting profits or losses in the future due to the volatility in investment returns in the market, the return on the assets was expected to match the long-term average of 7.5 per cent per annum. As the transfer had no effect on cashflow, there was no impact, positive or negative, on QTC’s capacity to meet its financial obligations. The liability for superannuation was not transferred to QTC, but remained with the Queensland Government. As there was also no impact from a whole-of-Government perspective, the transfer did not affect the State’s or QTC’s credit rating or outlook.

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Managing through the GFC

The 2007 to 2011 period saw turmoil within the global financial markets following the fall-out from the credit and liquidity crises. The global financial markets landscape was fundamentally transformed in 2007-08, primarily as a result of the United States’ sub-prime mortgage crisis, which began in August 2007. This volatility created an environment of greater market risk.

In the wider financial market, large-scale downgrades of mortgage-backed securities, and acute illiquidity in debt securitisation and commercial paper markets led to a sharp increase in the cost of funds for all borrowers. The desire for liquidity, along with increasing counterparty risk concerns, also created unprecedented pressure within global inter-bank money markets. This created an environment of greater market risk, uncertainty and volatility in funding markets, along with a higher cost of funds (relative to Commonwealth Government issues) for QTC.

Despite this new environment of greater market risk and volatility, the wider financial market continued to buy increasingly large amounts of QTC’s commercial paper. QTC was positively impacted by the changed market conditions in that it experienced the benefit of investors seeking high credit quality assets. However, there were also some less positive influences and, as a result, QTC was constantly adapting its issuance strategies to best suit the changing market circumstances.

During this period of uncertainty, QTC pursued a number of funding strategies to achieve the best possible outcomes for its clients and the State. This included issuing debt on demand from our investors, rather than through our normal tender process, to better manage our cost of funds, extending our borrowing horizon for terms longer than previously contemplated and raising funds in advance of requirements to deliver interest cost certainty for clients involved in the delivery of significant infrastructure projects.

Adjusting to the transformation within the financial markets, which effectively saw the markets move from a ‘traded’ to a ‘brokered’ model, was also made easier given the strong, long-term relationships that QTC maintained with the members of its financial distribution group, and through them, its investors.

Applying its strong financial management expertise, QTC continues today to meet its borrowing requirements, ensuring the financial sustainability of its clients and the State. Our ability to fund the State’s borrowing program directly reflects our employees’ experience in and commitment to maintaining a strong relationship with our investors directly and through our market intermediaries, our intimate knowledge of the markets in which we operate, and our market reputation as a professional and transparent global issuer.

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Operating in a challenging environment

In late 2007 and early 2008, as QTC observed what appeared to be the effective end of traded fixed interest markets and saw the signs of an undefined but pending crisis, QTC adjusted its funding strategies and built up liquidity to secure funding for the State. This buffer allowed QTC to handle the unanticipated shocks of the second half of the 2008-09 financial year.

The most significant of these shocks came in February 2009, when rating agency Standard & Poor’s downgraded QTC’s long-term credit rating from AAA to AA+. In May, Moody’s also downgraded QTC’s long-term credit rating from AAA to Aa1.

On 16 June 2009, following an extended period of severe market turmoil resulting from the global financial crisis, strong competition for term funding from commercial institutions that had already secured a guarantee from the Australia Government, and feedback from its major investors and members of its distribution group, QTC took the significant decision to accept the Australian Government’s offer of a guarantee for its existing AUD benchmark bond lines, with maturities between 12 months and 15 years. QTC formally took up the guarantee in September 2009.

In January 2010, in recognition of the time-limited nature of the Australian Government guarantee offer, QTC implemented a strategy to begin rebuilding its yield curve of bonds with the exclusive guarantee of the State Government of Queensland, and issued $4 billion AUD benchmark bonds maturing in 2014. At the time, this transaction was reported to be the largest ever AUD domestic syndicated benchmark bond line launch by a semi-government authority.

In February 2010, as conditions generally improved in global financial markets, the Australian Government announced that it would no longer offer to guarantee new state government borrowings after 31 December 2010. Following this announcement, QTC focused its funding strategy on transitioning from issuing AUD benchmark bonds covered by both the Australian Government Guarantee and the State’s own Government Guarantee, to issuing bonds exclusively guaranteed by the State Government of Queensland (consistent with the proven funding arrangements that existed prior to the onset of the global financial crisis).

QTC’s ongoing strategy to respond to strong investor demand and build its yield curve of State Government guaranteed benchmark bond lines provided investors with a viable alternative of well-established, liquid benchmark bonds that complemented QTC’s existing Australian Government-guaranteed benchmark maturities.

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Historic book-build launch

In mid June 2009, QTC launched a new 2019 AUD denominated benchmark bond. The launch followed the release of the State budget, the announcement of QTC’s 2009-10 borrowing program, and confirmation that Queensland would be taking up the Commonwealth Government guarantee on most existing (and selectively on future) AUD denominated long-term debt. Together, these announcements provided sufficient certainty for investors to take a positive view on investing in QTC long-term debt.

The launch, which raised $3.25 billion with substantial over subscriptions, was conducted via a successful book-build process and was reported at the time as the largest AUD domestic syndicated benchmark bond launch in Australian history. Received positively by the market, the bonds attracted strong domestic and international support.

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Establishing the Major Projects Team

In 2008, QTC established a new Major Projects Team to support its client-focused team with large-scale projects. The development of this team provided QTC with a concentrated focus on providing its clients with financial risk management advice and services, with dedicated resources to assist in the assessment, procurement and delivery of major infrastructure projects across the State.

This team provided the foundation for QTC’s joint initiative with Queensland Treasury, the Infrastructure Projects Assessment Team (IPAT). Established in July 2011, IPAT combined QTC and Queensland Treasury resources to better ensure public sector infrastructure projects were properly analysed, procured and delivered.

In turn, the Queensland Government’s Projects Queensland unit, formed in 2012, was built around core personnel of the former IPAT, to bring together a team of financial specialists from Queensland Treasury and Trade and QTC. A number of QTC employees were seconded to Projects Queensland, to deliver positive infrastructure outcomes by driving cooperative funding models to maximise private investment, while promoting and protecting the State’s interests.

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Support for local government

On 1 July 2007, the Queensland State Government announced that it would reduce the number of existing local governments from 156 to 72, to create larger councils to manage the changing requirements of these organisations. QTC played an integral role in the lead-up to this significant reform of Queensland’s local governments, working closely with its clients to provide financial and risk management advice to assist them with their financial sustainability prior to, and during, the reform process. QTC also completed the financial sustainability reviews of 109 of Queensland’s local governments, and compiled information to assist clients during the amalgamation process.

QTC’s Chairman, Sir Leo Hielscher AC, was selected as one of the five members of the Local Government Reform Commission, established to determine boundaries, names and electoral arrangements for the new local governments. Two senior employees were seconded to the Commission to assist with financial modelling and analysis of the various reform options and recommendations. QTC representatives also travelled widely throughout the year, visiting local governments both during the reform planning process and post-amalgamation.

In the lead-up to the amalgamations on 15 March 2008, QTC considered the implications of the reform on its internal financial management systems and its clients’ information requirements. Our assessment revealed a number of system changes and procedural arrangements were needed to merge the debt and investment accounts of our amalgamating clients. Following the amalgamation, QTC also continued to develop its 10-year Financial Forecasting Model, used by almost all local governments in Queensland to assist with their strategic planning and help manage their financial positions.

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Aligning our structure for the future

The 2009-10 financial year saw the progression of one of the largest organisation-wide initiatives undertaken by QTC to date: the design and transition to a new customer-centric operating model and structure.

This restructure provided QTC a better alignment of its capabilities to meet its clients’ needs. By matching its service structure more closely to its clients’ needs profiles, QTC achieved a closer level of collaboration with its clients, in turn resulting in better strategic financial and risk management for its clients and the State. Clients benefited from improved access to the QTC services they needed, as well as QTC’s refocused delivery of targeted, customer-specific advisory services.

While QTC’s mandate and strategic direction remained unchanged, the organisational realignment around four client-focused, multi-disciplinary teams fundamentally changed the way QTC worked with its clients and within the organisation, bringing together teams comprising a range of disciplines and encouraging greater interaction and collaboration within and across teams.

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Leadership to meet the challenges ahead

On 11 February 2010, Sir Leo Hielscher AC announced he would not be seeking re-appointment at the end of his eighth consecutive term as Chairman on 30 June 2010. Upon his retirement, Sir Leo noted his role as Chairman of QTC had been a clear highlight of his 60-plus years of serving the Queensland Government, and while his retirement came with a degree of personal sadness, it was with great pride that he was able to look back on the remarkable economic advancements and world-class infrastructure the State of Queensland had achieved with the integral support of QTC.

In recognition of Sir Leo’s distinguished career, the QTC Board awarded Sir Leo the specifically-created, honorary title of QTC’s Foundation Chairman, effective 1 July 2010. As part of this role, and at the request of the Board, Sir Leo agreed to provide ongoing high-level advisory services to the QTC Board, as required.

Upon Sir Leo’s retirement, QTC’s Chief Executive, Stephen Rochester, was announced to succeed Sir Leo as the new Chairman of the QTC Capital Markets Board, effective 1 September 2010. This followed Stephen’s retirement from the office of Chief Executive on 27 August 2010. Alex Beavers, QTC’s Deputy Chairman, assumed the role of acting Chairman from 1 July 2010 to 31 August 2010.

In March 2010, the QTC Board commenced its process to recruit a new Chief Executive for QTC. On 1 December 2010, QTC welcomed Philip Noble, who brought over two decades of investment banking experience to the organisation, as its second Chief Executive.

Today, QTC is well-placed through its experienced team of leaders to continue its delivery of quality results for both its clients and the State. With a strong foundation in its Board and under the guidance of its leadership team, QTC continues to achieve significant results across its operations, adapting to find innovative solutions in the new environments ahead.

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Assisting the State’s privatisation program

The Queensland Government’s privatisation program undertaken in 2010 and 2011 saw the privatisation of several public assets. This program was unprecedented in size, scale and complexity for an Australian state government.

QTC played a key role in supporting the privatisation of Queensland Rail’s coal and freight transport business (Australia’s largest IPO in a decade), Queensland Motorways Ltd (40 year lease), the Port of Brisbane (99 year lease), the Abbot Point Coal Terminal (99 year lease) and management of Queensland’s forestry plantations (99 year licence).

The program delivered $15 billion to the State, funding the natural disaster recovery program and repaying State debt. As the State’s corporate treasury provider, QTC’s assistance included the secondment of senior staff to lead the Government’s sales teams, the provision of tailored capital structure and debt management advice, the development of financial risk management, interest rate risk management and cash management solutions; the management of the State’s debt repayment requirements in the most cost effective manner and the management of cash inflows to maximise returns for the State. Two of QTC’s most senior staff members provided project leads to the asset divestment program for the successful sale of Forestry Plantation Queensland ($612 million, June 2010), QR National ($4.6 billion, November 2010) and the Abbot Point Coal Terminal ($1.83 billion, May 2011).

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Australian Domestic Sovereign/Agency Deal of the Year

In December 2010, QTC was awarded KangaNews’s Australian Domestic Sovereign/Agency Deal of the Year award for its AUD 4 billion 2014 Bond Line. This bond line was offered in a syndicated deal as a switch out of the December 2014 Australian Government guaranteed bond line.

The deal, which was also the largest issue by any state since the Australian Government guarantee was made available in 2009, grew to become the largest single day nominal bond transaction in Australian market history, with its final size of AUD 4 billion. Proceeds from this award-winning 2014 bond were primarily used to re-finance the State of Queensland’s core electricity businesses—Ergon Energy and ENERGEX.

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Supporting Queensland’s rebuilding efforts

In November and December 2010, significant flooding events occurred across much of the State of Queensland. In early January 2011, substantial rainfall also caused damaging flooding to the north-west of the State’s capital city, Brisbane, which ultimately culminated in considerable flooding across parts of the south-eastern corner of Queensland. January 2011 also brought a category five tropical cyclone, Cyclone Yasi, to the coast off Cairns in the north of the State.

The efforts of 12 Queensland councils to rebuild communities impacted by Tropical Cyclone Yasi and the devastating floods of late 2010 and early 2011 were boosted with assistance from Local Government Infrastructure Services (LGIS), a joint venture between QTC and the Local Government Association of Queensland.

Between them, the 12 councils sustained around $800 million in damage to facilities and infrastructure. LGIS was engaged directly by the councils to provide in-field assistance to complete damage assessments and prepare funding applications in line with Queensland Reconstruction Authority (QRA) requirements, to support the councils in their applications for reimbursement under the Australian Government’s National Disaster Relief and Recovery Arrangements. These joint Australian and state governments’ arrangements were instrumental in Queensland’s solid recovery from the natural disasters, and through the arrangements’ provision of 75 per cent of the cost of reconstruction, significant progress was made to repair the damage to public infrastructure.

The Lockyer Valley Regional Council also engaged QTC to analyse the financial implications of the Australian-first Strengthening Grantham development. This involved the relocation of more than 100 families from the devastated Lockyer Valley community of Grantham to a new town in a safer location, while enabling them to retain their sense of community.

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