Apple's Record Aussie Bond Contrasts With Fading Kangaroo Sales

  • Kangaroo debt issuance in 2015 down about 20% from last year
  • Collapse in swap spreads has helped weigh on investor appetite

Kangaroo bond sales have dropped in 2015, fading after a strong start to the year even as iPhone maker Apple Inc. concluded a marquee offering.

Foreign entities including sovereign-backed agencies and chipmaker Intel Corp. have sold A$31.4 billion ($23 billion) of Kangaroo debt this year, about 20 percent less than at the same stage in 2014, data compiled by Bloomberg show. Issuance for the whole of last year reached A$39.5 billion.

A widening of credit spreads has given pause to both buyers and sellers, amid market turbulence spurred by concerns about China and U.S. interest rates. Highly-rated government-backed and supranational issuers dominate the market for overseas issuers of bonds in Australia and demand for their notes has dropped as spreads between swaps and sovereign bond yields collapsed.

“Swap proxy products have started to look more expensive for investors as the sovereign has cheapened and therefore there’s been less desire to participate in deals,” said Tom Irving, Singapore-based head of the Asian debt syndicate at Toronto-Dominion Bank’s TD Securities unit, the top underwriter of Kangaroo deals this year. “It’s a demand driven market and when the demand is not as strong as it has been, then you will find the market will slow down.”

Narrowing Spreads

Australia’s 10-year swap spread narrowed to a record 5.4 basis points on Nov. 11, compared with an average of about 56 basis points over the past decade. It was at 14 as of 11:45 a.m. on Thursday in Sydney. The average yield premium over the swap rate on a Bloomberg AusBond index of supranational and sovereign-backed notes has almost doubled this year to 45.1 basis points.

Some of the more regular Kangaroo issuers in the supranational, sovereign-backed and agency segment of the market have offered only limited volumes in recent months. The last deals of A$500 million or more from these so-called SSAs came in July and August with transactions from the likes of the International Bank for Reconstruction & Development, Asian Development Bank and Export-Import Bank of Korea.

The decline in overall sales comes even as debut borrowers such as Apple and Intel brought large deals to the market. The maker of MacBook computers in August raised A$2.25 billion in Australia’s largest ever non-financial corporate bond deal, while semiconductor manufacturer Intel sold A$800 million of paper last month. The market has also seen deals from commercial banks including Lloyds Banking Group Plc, Toronto-Dominion Bank and Groupe BPCE.

2016 Outlook

With Australia heading into what is traditionally a quieter holiday period, attention has turned to how robust the market is likely to be in 2016.

“I don’t think we’re going to get the same sort of start as we got in 2015, but at the same time I think we’re going to get more than we’ve had over the last few months,” said TD’s Irving.

TD is on track to be the largest sale manager in the Kangaroo market for the second-straight year, ahead of Deutsche Bank AG and Nomura Holdings Inc., according to data compiled by Bloomberg.

While investors “are going to want to tread carefully,” there are also some positives to provide support for the market, according to Oliver Holt, the Singapore-based head of Australian dollar debt syndicate at Nomura.

Factors he cites include the possibility of a Reserve Bank of Australia interest-rate reduction, the level of upcoming bond redemptions, a stabilization of the currency and the relative costliness for investors of state government debt.

While Holt expects “reasonably good” demand for financial paper, SSA bonds are more of an unknown given the absence of large-scale supply in recent months. He’s nevertheless encouraged by indications from most investors that they see current valuations as being more fair-to-cheap rather than expensive.

“The technical factors are positive for the market and things look reasonably priced here, and people will begin to dabble,” said Holt. “The key for this market is issuers’ expectations need to line up with what’s really out there.”

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