Kangaroo Sales Slide 53% as Aussie Swap Lure Fades for Issuers

  • Issuance by foreign borrowers off to slowest start since 2009
  • Fundraising `very much more expensive for borrowers,' ANZ says

Kangaroo bond sales are running at half the pace of last year as the cost of borrowing in Australia and switching out of the local currency makes fundraising less attractive.

The cross currency basis swap, a measure of the discount foreign issuers receive for shifting funds out of Australian dollars, has declined amid a drop in offshore borrowing by banks and other companies from Down Under. International borrowers issued just A$5.35 billion ($4 billion) of bonds in Australia since Dec. 31, the slowest start to a year since 2009 when there was no issuance at all in the first quarter.

Global market turmoil has put a damper on Kangaroo deals, and leading sale manager Toronto-Dominion Bank says bond buyers appear to have less conviction in adding to their allocations for Aussie securities. Demand has also been undermined by a dearth of maturing Aussie dollar bonds this quarter, meaning less money that needs to be reinvested.

“The lower cross currency basis swap curve has meant Kangaroo issuance has become very much more expensive for borrowers,” said Martin Whetton, an interest-rate strategist at Australia & New Zealand Banking Group Ltd. in Sydney. “Any pickup in issuance will probably only happen from April as upcoming maturities and the start of the new Japanese financial year revive demand. We also need to see an increase in Australian banks funding offshore and driving up the basis swap.”

This year’s Kangaroo issuance compares with A$11.4 billion of sales at the same stage in 2015, according to data compiled by Bloomberg. It follows an 18 percent decline in volume for the whole of last year as annual borrowing dropped to A$32.3 billion from a record high.

Demand Driven

Japanese bond buyers seeking additional yield have long been one of the mainstays of the Kangaroo market, in particular for borrowers such as KFW and Inter-American Development Bank, sovereign-backed or supranational entities that issue frequently.

The pace of Kangaroo bond issuance is largely driven by the ebb and flow of investor demand, according to Tom Irving, Singapore-based head of the Asian debt syndicate at Toronto-Dominion Bank’s TD Securities unit.

“Issuers are very willing, but they’ll only be willing when there’s the appropriate level of demand to support it,” said Irving, whose company has been the top-ranked manager of Kangaroo deals for the past two years. “In terms of reallocating to Aussie at the moment there appears to be less conviction. It’s more a case of holding positions constant as opposed to new allocations.”

Maturing Bonds

With new money scarce, the volume of redemptions takes on an increasingly important role. The amount of Aussie-denominated bonds originally scheduled to mature in the first three months of 2016 was about A$27 billion, according to data compiled by Bloomberg that includes both government and company issuers from Australia and abroad. That compares with A$43 billion for the final quarter of 2015 and A$66 billion in the upcoming April-to-June period.

The Australian dollar bought 74.06 U.S. cents as of 11:30 a.m. on Monday in Sydney. While the currency has declined 28 percent over the past three years, it has stabilized more recently.

With Australian companies not needing to bring as much overseas funding home, the cost benefit for foreign issuers looking to shift money in the opposite direction is reduced. That’s created a less favorable cross currency basis which is combining with demand softness to deter some borrowers.

Basis Swap

The 10-year Australian dollar basis swap has averaged just 12 basis points so far in 2016, compared with 25 for the whole of 2015, while the average for the five-year tenor has slipped to 19 from 24.

There’s been a lack of flow from Australian companies repatriating funds around the 10-year part of the curve that’s favored by supranational and sovereign-backed issuers, ANZ’s Whetton said. That stems from the fact that Australian banks are doing more of their funding domestically and the offshore borrowing that they are doing has been at shorter maturities after funding costs climbed, he said.

Sales of international bonds by Australian issuers have declined to $14.9 billion in 2016, down 26 percent from the same period in 2015, data compiled by Bloomberg show.

At the same time, there’s also pressure from Japanese investors who have been using the Aussie cross-currency basis to boost the yields they receive on their own domestic government bonds through use of an asset-swap trade, Whetton said.

Market Volatility

The worldwide market turmoil that’s seen oil drop and wiped more than $3.5 trillion off global equities this year certainly hasn’t helped, according to TD’s Tom Irving.

“If the market conditions were benign I think you’d have more people looking objectively at the relatively low, but still by global standards high yields in Aussie and thinking it’s worthwhile,” he said. “But when you throw over the top a very volatile backdrop, then it does hold you back a bit.”

Before it's here, it's on the Bloomberg Terminal.