Kangaroo bonds, diversification and globalisation

Kangaroo bonds are bonds issued in Australia by non-Australian issuers in Australian Dollars under local laws and regulations.  They provide foreign issuers with access to another capital market, outside of their own, as a way of diversifying their investor base and potentially reducing their borrowing costs.

The biggest issuers of kangaroo bonds are currently supranational, sovereign and agency (“SSA”) issuers, which issue bonds in the local market structured in the same way as fixed rate Australian commonwealth government bonds.  Other issuers of kangaroo bonds include foreign banks and financial services companies and foreign corporates; however in recent times these issuers have become less active in the kangaroo market due to their lower credit ratings than SSA issuers.

Many of the key SSA issuers are based in Europe or Asia with capital support and guarantees provided by multiple governments and public sector entities (hence the term “supranational”) which can further reduce the chances of default.  Kangaroo bonds issued by SSAs are typically rated AAA by the major credit ratings agencies and therefore have become an important source of AAA-rated securities in the Australia bond market outside of the commonwealth and state governments.  Kangaroo bonds issued by SSAs are also eligible collateral with the Reserve Bank of Australia, meaning that local banks can use the bonds as security for loans from the RBA.

Since they were first issued in Australia more than 20 years ago, kangaroo bonds have grown to become an important segment of the Australian bond market and qualify for inclusion in domestic bond indices, even though the issuers are non-Australian.  For example, SSA issues currently account for about 13% of the Bloomberg AusBond Composite Index, which is the primary bond index used by Australian fixed income fund managers.  Kangaroo bonds are also purchased by foreign investors, such as sovereign wealth funds, given the higher yields on offer in Australian Dollars.

Kangaroo bonds issued by SSA’s typically carry a higher yield to maturity than comparable bonds issued by the commonwealth or state governments, and provide risk-averse investors with an important source of diversification away from Australian government issuers.  For foreign issuers, the cost of borrowing in Australia, and hedging the currency exposure back into their home currency, is often cheaper than borrowing in their home currency.

Major kangaroo bond issuers include the European Investment Bank, KfW Bankengruppe, International Bank for Reconstruction and Development and the Asian Development Bank.  These issuers typically use the funds to provide export finance or loans for infrastructure and development spending in emerging economies.  Several offshore banks have also issued AAA-rated covered bonds into the kangaroo bond market.

With downgrades to the credit ratings of many European nations since the global financial crisis, there has been some deterioration in the credit outlook for European SSA issuers, although most have retained their high credit ratings to date, and the higher yields on offer relative to AAA-rated Australian government bonds currently reflect the weaker credit outlook for those issuers.

 

 

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