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Kangaroo Bond Sales Slump as Swap Flags Bounce: Australia Credit

Kangaroo Bond Sales Slump as Swap Flags Bounce
Australia’s dollar, the world’s fifth-most traded currency, fell to $1.0238. Photographer: Sergio Dionisio/Bloomberg

Sales of bonds by top-rated foreign borrowers in Australia are slumping to the lowest level in more than a year as the fiscal crisis in Europe saps investor appetite for the region’s debt.

Offerings of so-called kangaroo bonds tumbled to A$450 million ($460 million) in October, the least since May 2010, according to data compiled by Bloomberg. Kreditanstalt fuer Wiederaufbau, Germany’s state-owned development bank, was the only issuer of the debt in more than two months.

European borrowers, which account for more than half of kangaroo bond sales in 2011, are facing higher relative yields after the region’s sovereign crisis escalated this week. An increase in the discount for exchanging Australian dollar bond sale proceeds to U.S. dollars, the third-most attractive concession on the swaps globally, may draw issuers back to the market, say Deutsche Bank AG and Commonwealth Bank of Australia.

The move in the basis swap “starts to open the door” for borrowers, said Adam Donaldson, head of debt research at Commonwealth Bank in Sydney. “At a strategic level there is a high degree of interest and it won’t take a lot of widening of the basis swap to attract some of that interest.”

The five-year Australian dollar basis swap, which measures the cost of switching interest based on the London interbank offered rate for payments linked to Australia’s bank bill swap rate, closed at a five-month high of 20.3 basis points on Oct. 28 before easing to 18.3, Bloomberg data show. The higher the level, the greater the discount for issuers of kangaroo bonds swapping the proceeds into U.S. dollars.

Slumping Sales

KfW, based in Frankfurt, led A$22.5 billion of kangaroo bond offerings in the first six months of the year, the busiest half on record, Bloomberg data show. Sales have plunged to A$6.1 billion since June 30 as Europe’s debt crisis saps investor appetite for risk, the data show.

The extra yield investors demand to hold the debt of state-backed issuers such as KfW and the European Investment Bank instead of government bonds rose to 78 basis points on Aug. 19, the most since June 2009, and was last at 73, according to Bank of America Merrill Lynch’s Australian Quasi and Foreign Government Index. The index includes debt of sovereign, supranational and agency issuers such as Asian Development Bank, Council of Europe and International Finance Corp.

The spread on EIB’s A$2.6 billion of 6 percent notes due in August 2020 was 143 at 1:34 p.m. in Sydney today, after falling as low as 98 on June 15, according to Australia & New Zealand Banking Group Ltd. prices. The yield premium has widened 12 basis points since Oct. 31, the prices show.

Europe Turmoil

Greece will remain a focal point for policy makers and investors today as Prime Minister George Papandreou faces a confidence vote in parliament. Papandreou canceled a planned referendum on the country’s bailout after it split his party, roiled financial markets and drew unprecedented warnings from euro leaders that it may cost Greece its membership in the 17-nation currency club.

Europe’s crisis has weakened the Australian dollar, which traded at $1.0390 as of 1:37 p.m. in Sydney, down from $1.0416 late yesterday in New York. The local currency reached $1.1081 on July 27, the highest level since it was freely floated in 1983.

European governments face “a major challenge in putting their public finances on a sounder footing,” the Reserve Bank of Australia said today as it cut forecasts for economic growth and inflation for the next two years.

Growth Forecast

The RBA sees growth of 4 percent in the 12 months to June 30, 2012, down from its Aug. 5 estimate of 4.5 percent. Consumer prices will rise 2 percent over the period, from a previous prediction of 2.5 percent, the central bank said in its quarterly monetary policy statement.

The RBA cut its key rate this month after underlying inflation slowed to the weakest in 14 years in the third quarter. The yield on Australia’s benchmark 10-year government bond rose 7 basis points to 4.3 percent today.

The gap between yields on Australian five-year inflation-linked debt and benchmark notes of similar maturity was 2.38 percentage points. The spread indicates investor expectations for consumer-price gains over the lifetime of the debt.

The Markit iTraxx Australia index of credit-default swaps that gauges perceptions of corporate bond risk dropped 20 basis points to 175 as of 11:32 a.m., according to Australia & New Zealand Banking Group Ltd.

Basis Swap

The basis swap rises when Australian companies sell debt in the U.S. and drops when foreign borrowers issue kangaroo bonds. It surged to a record 48 basis points in November 2009 as Australian lenders boosted offshore debt sales to replace short-term funding after the collapse of Lehman Brothers Holdings Inc. The gauge has averaged 18.3 basis points in the past year.

Only the Mexican peso basis swap and the New Zealand dollar basis swap are higher, at 136 and 33, Bloomberg data show.

The higher basis swap has made kangaroo bonds “a more competitive funding option than they have been for most of the time since August,” Ken Crompton, an analyst at Deutsche Bank, wrote in a Nov. 2 note. “On the funding cost side of the equation, conditions are reaching a favorable point for the SSA issuers. The key question, therefore, is the demand side.”

Global sales of bonds arranged by banks for companies, agencies and sovereigns since June 30 totaled $1.16 trillion, down from $1.85 trillion in the same period of the first half, Bloomberg data show.

Covered Bonds

Supranational and sovereign-backed bonds issued in Australia have returned 5.1 percent since June 30, compared with 6.1 percent on Australian government debt and 3.3 percent on the nation’s corporate notes, S&P/ASX bond indexes show.

Part of the move in the basis swap has been due to speculation that Australia’s banks will soon start selling covered bonds, and will need to transfer the proceeds back to their home currency, Commonwealth Bank’s Donaldson said.

Australia’s upper house Senate passed legislation on Oct. 13 that amended the nation’s Banking Act to allow domestic lenders to sell the securities for the first time.

National Australia Bank Ltd. and Commonwealth Bank are planning meetings with investors in Europe and the U.S. ahead of their inaugural sales, people familiar with the talks said last month. ANZ Bank’s proposed covered bonds will be rated Aaa, Moody’s Investors Service said in a statement yesterday.

Commonwealth Bank hosted a conference last week for global bond investors, where five supranational borrowers including the World Bank gave presentations, according to an Oct. 25 statement. Representatives from 13 central banks attended, the statement said.

“The cross currency basis creates the platform for ongoing issuance in Australian dollars,” said Dean O’Hara, Sydney-based head of fixed income syndicate at UBS AG. “The challenge at the moment continues to be the ongoing concerns about market stability.”

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