Kangaroo Bond
It is the third-largest bond market subsegment after governmental and semi-governmental bonds.
What Is a Kangaroo Bond?
Kangaroo Bonds (K-Bonds or Matilda bonds) are issued by foreign companies solely in the Australian market under the Australian Dollar (AUD) and have to abide by the rules and regulations of Australian Securities and Investment Commissions securities.
Global banks, financial institutions, international corporations, and individuals can issue the above bonds. However, in recent times, there has been a decline in their numbers due to their lower ratings.
Thanks to the bonds, International issuers can now broaden their investor base and access an additional external capital market, eventually decreasing borrowing costs. Bond issuers that want access to Australian debt market lenders and investors offer kangaroo bonds.
Bonds issued by Australian non-resident firms are known as kangaroo bonds and are denominated in Australian dollars. Australia's unofficial emblem is the kangaroo. It can be seen on Australia's banknotes and the Australian coat of arms.
This market category dominates the Australian bond market. It is the third-largest bond market subsegment after governmental and semi-governmental bonds. Non-agencies still make up the bulk of issuers, despite a surge in non-financial business issuance.
Since they allow non-resident issuers to diversify their funding sources and have comparatively low issuance costs when compared to issuance in other currencies, k-bonds have proven to be appealing to non-resident issuers.
When collecting cash in AUD, these bonds are ideal for investment businesses and large corporations looking to diversify their portfolio and expand their exposure to local Australian currency.
International firms based in Australia find it suitable to issue these bonds during instances whereby interest rates in the country are low, as they tend to attract more investors.
K-bonds offer Australian investors the benefit of avoiding the currency risks associated with buying identical bonds in a foreign currency. The primary issuers of these bonds are SSA (sovereign, supranational, and agency).
How a Kangaroo Bond Works
In honor of the nation's national animal emblem, bond issuers who want access to investors and lenders in the Australian debt market are issued. An Australian dollar foreign bond known as a "K-bond" is issued by non-resident companies, financial institutions, and governments.
Like foreign bonds, the primary goal of these bonds is to provide issuers access to other stock markets so that they may raise capital. A foreign issuer issues a foreign bond in the country's domestic currency, issuing it on the domestic market.
Large businesses or investment firms wishing to diversify their holdings or increase their total currency exposures can use these bonds to raise money in Australian dollars.
When Australian interest rates are lower than domestic rates for foreign corporations, k-bonds are frequently issued. This lowers the foreign issuer's overall interest expense and borrowing costs.
When issuing K-bonds, a lot of issuers do not require Australian dollars. Instead, through financial instruments like cross-currency swaps, the bonds' proceeds are typically converted back into the currency that the borrower requires.
For example, ABC company has its corporate headquarters in New York. It focuses on goods made to protect the Great Barrier Reef. It raises $10 million in bonds to finance the construction of a plant to open a center in Sydney.
The company lists the bonds in the Australian markets because it expects strong demand from Australian investors. Those bonds are called Kangaroo bonds.
Foreign parties may issue k-bonds but must comply with Australian securities laws. Companies may issue k-bonds to diversify their currency risk or capitalize on international market interest. The bonds are denominated in Australian Dollars.
Benefits of a Kangaroo Bond
A business may decide to join a foreign market if it can obtain favorable interest rates or needs foreign money. When a business enters a foreign market, it can issue foreign bonds or bonds with a value in the target market's currency.
Despite having little need for Australian dollar finance, foreign firms occasionally issue bonds in that currency. Typically, using tools like cross-currency swaps, this issuance is transformed into a currency that the issuer needs.
Since matilda bonds are issued in local currencies, home investors can invest in them without being concerned about currency risk. Additionally, investors who want to diversify their portfolios outside their country might choose these bonds and increase their yield.
These bonds allow investors to invest in international firms without dealing with the consequences of currency exchange changes. Instead, the profits from the sale of the bonds are converted back into the currency that the issuer requires through cross-currency swaps.
Indirect counterparties for Australian businesses wishing to convert their cash include the issuers of k-bonds. Most companies selling matilda bonds raise Australian dollars before converting them to their local currency.
The key factor making this economical is the abundance of companies eager to exchange foreign cash earned from their activities back into Australian dollars in Australia, usually to fund domestic initiatives.
As a result, issuers of matilda bonds can obtain finance at a cheaper rate than the borrowing rate in their native country and easily convert Australian dollars into their local currency.
In addition, large credit rating agencies often provide a AAA rating to matilda bonds issued by SSAs. As a result, Matilda bonds are a crucial source of AAA-rated securities on the Australian bond market that the federal or state governments don't issue.
Importance of Non-Resident Issuance of Australian Dollars
Matilda bonds are the third-largest market for domestic bonds, behind semi-government and Australian Government Securities (AGS). They make up around a third of the non-government bonds available on the domestic market.
Most non-resident Australian dollar issuance formerly took place in offshore markets. However, since 2004, the issuance of K-bonds has taken the lead. As a result, little Australian dollar debt is being issued abroad by the biggest K-bond issuers.
The change has been especially noticeable among AAA-rated issuers who, before the financial crisis, mostly issued Australian dollar-denominated bonds abroad into the Uridashi market.
The majority of non-government issuance by Australian firms, particularly the large banks, has, in contrast, been undertaken abroad in about two-thirds of cases.
In the early to mid-2000s, there was a significant increase in issuing Australian dollar-denominated bonds by non-residents, notably K-bonds. This heightened the demand for these bonds.
The emergence of the Australian dollar swap market, which allowed overseas investors and issuers to hedge their foreign exchange risk, and the growing demand from foreign investors for better-yielding Australian dollar assets, all contributed to this.
Around the financial crisis, the issue of K-bonds and non-resident offshore issuance of bonds denominated in Australian dollars decreased. However, they later rebounded and have since been reasonably stable.
What makes it interesting?
Numerous issuers use the Australian bond market to diversify their funding sources. Non-residents' choice to issue in Australian dollars is influenced by several variables, including the relative cost of issuance and the liquidity of the bond and derivative markets.
The consistent positive "basis" that issuers get as a premium for their Australian dollars in exchange for foreign currencies, such as the US dollar, in the cross-currency swap market is a crucial feature of the Australian swap market.
The demand to exchange foreign currency for Australian dollars outweighs the supply of those looking to exchange Australian dollars for foreign currency. Hence the basis is usually positive.
However, some Australian corporations don't hedge back their offshore issuance since their overseas revenue and assets are better matched by foreign currency loan liabilities, especially the big mining companies with US dollar profits.
This mismatch is because Australian businesses, particularly Australian financial institutions, issue the bulk of their securities abroad in other currencies and convert them back to Australian dollars as currency risk insurance.
Australian issuers can access a broader range of investors and more developed capital markets through offshore issuance, which can better satisfy their funding needs. The demand for assets denominated in Australian dollars has been quite strong worldwide.
Non-resident issuers serve as significant, indirect counterparties for Australian issuers interested in hedging their foreign currency risks by employing intermediaries (such as international banks).
This is due to unusually high yields and relatively good credit ratings (many non-resident issuers of Australian dollar bonds are AAA rated).
Investors with mandates to exclusively invest in highly rated securities, like some reserve managers, find these assets quite appealing.
What are the different types of Non-Resident Issuers?
Supranational, sovereign, or quasi-sovereign agency (SSAs) entities make up the majority of non-resident Australian dollar issuers. They offer protection for various issuers with varying degrees of government support.
Financial institutions make up the majority of non-SSA issuers, while non-financial corporate issuer activity has grown because of US businesses like Apple and Coca-Cola.
If an organization believes it will receive favorable interest rates in a certain market or needs foreign cash, it may consider entering that market. The corporation can issue foreign bonds if it decides to enter the international market.
These are bonds where the target market's currency predominates. For domestic investors who might not be exposed to continuous currency risk due to the bonds' tendency to be denominated in the relevant local currency, a kangaroo bond provides a lucrative investment opportunity.
Additionally, investors wishing to diversify their portfolios outside their home countries may pick the provided bonds to generate additional income.
These bonds are well recognized for allowing investors to invest in international firms without dealing with the consequences of currency exchange volatility.
When issuing these bonds, most issuers may not necessarily need Australian dollars. Cross-currency swaps are a common financial instrument used to convert the sale proceeds of the specified bonds into the currency required by the issuer.
Issuance by SSAs
SSA provides coverage for various issuers with various levels of government assistance. As European supranational agencies moved their Australian dollar issuing away from offshore markets, substantial Kangaroo bond issuance by SSAs started in 2004.
Institutions like the World Bank and the European Investment Bank account for a sizable portion of the SSA Kangaroo issuance, and supranational entities have multinational ownership structures.
Quasi-sovereign agency issuers are independent organizations that frequently gain government assistance (directly or indirectly) and are typically created to help a specific sector of the economy, such as export financing and housing construction.
These organizations account for a sizable chunk of the Kangaroo issuance, especially European agencies like the German-based KfW and Rentenbank. Australia only sees a small amount of issuance from foreign sovereign issuers.
During the global financial crisis, k-bond issuance significantly decreased because of increased bond market volatility and issuing expenses.
The cost increase was due to both an increase in the cost of hedging foreign currency and an increase in the spreads on K-bonds compared to benchmark interest rates.
However, supranational with a AAA rating kept issuing K-bonds. Following the financial crisis, SSA issuance increased significantly, reaching a peak in 2010, and has since been largely constant.
Over the last five years, many SSAs have seen a drop in worldwide financing plans. A greater amount of their funding has come from US dollars, indicating more favorable US dollar funding circumstances recently due to changes in the cross-currency swap market.
Despite this, the proportion of SSAs' financing in Australian dollars has remained relatively constant during the past few years. This shows that investment in these bonds was highly accepted.
Even when issuance in other markets is more cost-effective, large issuers often strive to issue into the Kangaroo market frequently because they wish to keep access to various capital markets. Investors favor issuers that routinely issue bonds.
AAA-rated firms have dominated SSA issuance. This may reflect investor preferences since reserve managers and other institutional investors highly demand issues with a AAA rating.
While non-AAA-rated SSA issuance has increased since 2011, this activity has been focused on a small number of issuers, mostly in Canadian provinces. In addition, some SSAs stopped issuing Kangaroo bonds after they lost their AAA credit ratings.
Issuance by financial institutions
Financial firms have been the next-largest Kangaroo bond issuers by volume, with sizable issuance from European and US-based institutions. Indicatively cyclical issuance trends have been seen, with banks completely absent from the market during the financial crisis.
Major investment firms and businesses use kangaroo bonds to raise Australian dollars to diversify their assets and reduce their currency exposure.
When Australian interest rates are generally lower than domestic rates for international firms, kangaroo bonds will be issued. As a result, this aids in reducing the foreign issuer's overall cost of borrowing and interest expenditure.
The key factor making this economical is the abundance of companies eager to exchange foreign cash earned from their activities back into Australian dollars in Australia, usually to fund domestic initiatives.
Issuers of kangaroo bonds can obtain finance at a cheaper rate than the borrowing rate in their native country and easily convert Australian dollars into their local currency.
Bank issuance restarted in 2010 at steadily lower rates for European and US banks than at their pre-crisis high. However, issuance by Canadian banks, which tend to issue covered bonds with a AAA rating, has somewhat offset this drop.
Many Asian banks with higher credit ratings have substantial deposit bases that can cover their borrowing needs because they have issued bonds through their Australian subsidiaries or branches requiring Australian dollar funding.
Issuance by non-financial corporations
Non-financial corporate Kangaroo issuance began in 2012 after a protracted gap brought on by the global financial crisis. As a result, only a tiny amount of issuance from foreign sovereign issuers occurs in Australia.
A small number of bigger US and British corporations, and Korean organizations (typically with close ties to the government), issued securities to fund the first activity. There has been a substantial global demand for assets denominated in Australian dollars.
Since 2012, non-financial firms have made up a larger portion of non-SSA Kangaroo issuance than before the financial crisis, accounting for over 20% of recent non-SSA issuance.
Market players claim that rising investor interest in non-AAA-rated issuance and the worldwide "search for yield" trend brought on by low government bond rates have fuelled the growth in non-financial corporate issuance.
A limited handful of significant agreements by US firms were primarily responsible for the surge. Notably, Apple raised $2.25 billion in the largest-ever Kangaroo sale in August 2015 and another $1.45 billion in June 2016.
Compared to SSA issuance, corporate Kangaroo transactions have frequently featured multi-tranche arrangements with various tenors and have also tended to be bigger.
These transactions often involved a mix of bonds having a shorter term and bonds with a longer tenor.
Using this tactic, businesses may issue bonds with various maturities to appeal to various investors. As a result, shorter tenors of recent agreements have seen significant domestic participant demand, while foreign investors have dominated longer tenors.
or Want to Sign up with your social account?