U.S. Attracts CBA as Australia Swaps Cheapest Since 2012

Commonwealth Bank of Australia raised $3.5 billion in the world’s biggest bond market after the cost of switching funds from dollars dropped to a two-year low.

CBA sold the three-year and five-year bonds after a two-month period in which dollar debt issuance by Australia’s four largest banks and their units fell 59 percent from a year earlier. The five-year basis swap, the cost of shifting greenbacks into Aussie, slid to 21.3 basis points Feb. 26, the lowest since January 2012. The cost of such exchanges was also affected as sales of Kangaroo bonds, Aussie debt issued by foreigners, had the busiest start to a year since 2011.

“As the costs come down for the banks, offshore issuance by them may pick up,” said Ken Crompton, a fixed-income relative value analyst at Deutsche Bank AG in Sydney. “Kangaroo bond sales are a key factor, so when you get a lot of issuance there that will help push the basis down.”

Australian lenders are selling fewer bonds and depending more on deposits for funding as credit growth stagnates and a mining investment boom wanes. Average bank bond credit spreads in the U.S. have narrowed 43 basis points to 112 basis points over the past year, while an equivalent Australian measure has compressed by 21, Bank of America Merrill Lynch indexes show.

Kangaroo Sellers

Foreign-based borrowers including Germany’s KFW, Goldman Sachs Group Inc. and ABN Amro Bank NV issued A$7.55 billion ($6.8 billion) of notes in Australia in the first two months of this year, compared with A$7.18 billion last year. The figure for the first two months of 2011 was A$12 billion.

Santiago-based lender Banco Santander Chile yesterday started marketing its first-ever Kangaroo bond, joining Council of Europe Development Bank, Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden NV and Landwirtschaftliche Rentenbank in coming to the market this month.

“The increase in Kangaroo issuance is a bit of a two-edged sword for those issuers because as they do more, it brings the basis narrower, which reduces its attractiveness,” said Deutsche Bank’s Crompton.

Commonwealth Bank sold $1.25 billion of five-year fixed-rate notes to yield 73 basis points more than Treasuries and $1.25 billion of three-year fixed-rate notes at a 50-basis-point spread, according to data compiled by Bloomberg. It also priced $1 billion of three-year floating-rate notes at 36 basis points above the London interbank offered rate, or Libor, the data show. The transaction was managed by CBA itself along with Deutsche Bank, Goldman Sachs and JPMorgan Chase & Co.

“Spreads have performed well and the current market offers an attractive issuance opportunity” both in terms of U.S. dollar costs and swapped costs back to the Australian currency, CBA Deputy Group Treasurer Simon Maidment said following the deal.

The five-year Aussie basis swap was at 22.3 basis points as of 10:30 a.m. today in Sydney, having dropped from a high of 30 in February 2013. The three-year rate has declined to 16.5 after reaching 25 last year. The currency bought 89.78 U.S. cents, down 12 percent over the past year.

Offshore Sales

CBA, Westpac Banking Corp., Australia & New Zealand Banking Group Ltd. and National Australia Bank Ltd. sold the equivalent of $14 billion of bonds offshore in January and February, the slowest start to a year since 2011, according to data compiled by Bloomberg. The amount denominated in U.S. dollars fell to $4.83 billion from $11.7 billion last year.

Australian market bond sales by the big four banks of A$3.58 billion were the least for the first two months since 2010, the data show. Their securitized funding is also down, with CBA the only one to issue residential mortgage-backed securities in 2014.

Slow Credit

“Credit growth in Australia is still not high and a lot of it is being funded via deposits, so that’s helping to cap banks’ wholesale funding needs,” said Chris Viol, a Sydney-based credit analyst at UBS AG. “Corporate Australia did a great job after the global crisis by terming out debt, reducing gearing and cleaning up balance sheets, so there aren’t huge refinancing needs, while appetite for increasing capital expenditure remains low.”

Private-sector credit grew by 0.4 percent in January and the monthly pace of expansion has not exceeded 0.6 percent since before the global financial crisis in 2008, even as the Reserve Bank of Australia has joined global counterparts in implementing unprecedented monetary policy easing.

Bank funding costs have also been reduced by the narrowing of credit spreads to the lowest level in six years. The yield premium over the swap rate on bank paper in the U.S. was 112 basis points on March 4, the lowest level since November 2007, according to a Bank of America Merrill Lynch index. The equivalent Australian gap was at 97 basis points, having dropped to an almost six-year low of 94 basis points on Feb. 7.

“The banks’ financing task at the moment is much smaller than it has been, so credit investors aren’t that concerned about being deluged with Aussie bank paper and that’s positive for their credit spreads,” said John Sorrell, the Sydney-based head of credit at Tyndall Investment Management Ltd. “Aussie bank spreads are still quite reasonable given they’re quite strong credits.”