Middle East borrowers are increasingly weighing Australian-dollar bonds as they seek to tap one of the world’s biggest sources of pension funds, according to HSBC Holdings Plc.
Three regional lenders including National Bank of Abu Dhabi PJSC sold A$1.05 billion ($984 million) of debt this year, known as Kangaroo bonds, compared with two sales in 2013 for A$475 million, according to data compiled by Bloomberg.
“We expect to see further transactions from Middle Eastern issuers,” Mustafa Aziz Ata, HSBC’s head of debt capital markets for the Middle East and North Africa, said in e-mailed comments this week. HSBC anticipates working on another three kangaroo-bond deals for clients in the region, he said, declining to identify the issuers.
Banks are turning to new markets for funding as they guard against an eventual tightening of credit in the U.S. Australia’s pool of pension funds is the world’s fourth-biggest, while European and Asian bank demand for Aussie-dollar assets is helping to bring down the cost of funding in the currency, according to HSBC.
The yield on Australian government bonds maturing March 2019 fell 23 basis points this year to 3.24 percent today, according to data compiled by Bloomberg. That compares with an average drop of 16 basis points to 4.63 percent for Middle East bonds, according to JPMorgan Chase & Co. indexes.
National Bank of Abu Dhabi, the United Arab Emirates’s biggest lender, raised A$400 million from five-year securities in March. Third-ranked First Gulf Bank PJSC followed two weeks later, selling A$250 million, and second-placed Emirates NBD PJSC issued A$400 million of securities this month. HSBC helped arrange all three deals, data on Bloomberg show.
“Over the years, Emirates NBD has issued in a range of currencies,” Shayne Nelson, the bank’s chief executive officer, said by e-mail this week. “As well as diversifying our investor base, there was a marginal cost saving when we swapped the proceeds” from this month’s sale into U.S. dollars, he said.
The Australian dollar is the second-best performer among 10 developed currencies tracked by Bloomberg Correlation-Weighted Indexes, rising 4.6 percent this year.
Emirates Bank International PJSC, which merged with National Bank of Dubai PJSC in 2007 to create Emirates NBD, sold the first kangaroo bonds from the Middle East in 2006.
International issuers, including the United Nations and the Royal Bank of Canada, raised A$27.2 billion from sales of the securities last year, according to data compiled by Bloomberg. Issuers selling bonds in different currencies typically swap them into U.S. dollars.
“The local currency markets are now maturing and liquidity is deepening,” Andrew Koczanowski, Australian head of debt syndication at HSBC, said by e-mail. “It might not be hugely cheaper, because obviously there are additional costs in swapping.”
Last year the Australian currency lost 14 percent against the U.S. dollar, according to data compiled by Bloomberg.
Bond sales in the six-nation Gulf Cooperation Council have declined 32 percent this year to $12 billion as borrowers favor loans, according to data compiled by Bloomberg. Sales, which climbed to $41.1 billion last year, will probably catch up over the rest of the year, finishing between $35 billion and $40 billion, Ata said in an interview May 5.
“Issuers increasingly don’t want to feel hostage to the large U.S. or the euro markets,” Koczanowski said. “Kangaroos offer an attractive funding alternative.”