America Is Beautiful for Aussie Borrowers Shunning Euro Issuance

  • U.S. currency bond sales by Australian issuers have jumped 21%
  • Cost of switching from U.S. to Aussie dollars more favorable

Australian bond issuers are lapping up dollar funding at the fastest pace in seven years as the relative attractiveness of the European market wanes.

Borrowers sold $23.1 billion of U.S. currency notes in 2016, up 21 percent from the same period last year and the most since 2009, according to data compiled by Bloomberg. Australian offerings in Europe’s common currency have fallen 53 percent over the same period to 5.79 billion euros ($6.6 billion), the least since 2011.

The cost of shifting funds from U.S. dollars into the Aussie currency is lower than it has been for most of the period since 2012 and is more favorable than euro swap contracts. American investors are also more at ease with Australia’s economic transition away from mining investment and comforted by regulations aimed at shielding banks from mortgage shocks, according to Citigroup Inc., the leading manager this year of U.S. currency bond deals from the South Pacific nation.

“We continue to just be amazingly robust,” said Ian Campbell, head of debt capital markets origination in Sydney at Citigroup. While concerns about China, commodities and housing had previously weighed on the outlook for U.S. investors, there is now a realization that Australia’s banks “rank pretty well” compared with international peers, he said in an interview last week.

Australia’s largest lenders -- Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd., Westpac Banking Corp. -- have tightened mortgage lending standards under regulatory pressure, refrained from increasing dividends and last year added a combined A$20 billion ($14.8 billion) in equity capital. Mortgage arrears haven’t blown out and business loan losses have so far been restricted to a few companies.

Australia’s economy has also appeared to be in good shape as it shifts away from its reliance on mining investment to other drivers of growth. Unemployment is at a 2 1/2-year low, business confidence has remained steady and the speed of corporate loan growth jumped to a seven-year high in April. Gross domestic product grew by 3.1 percent in the first quarter from a year earlier, the fastest pace in 3 1/2 years, data released last week showed.

Bank Dominance

The four major banks are the biggest Australian issuers in the U.S. market, accounting for some $17.3 billion of sales, about three quarters of the total from Down Under, according to data compiled by Bloomberg. The lenders have raised only 3.38 billion euros in the common currency market over the same period, the data show.

The tilt toward the U.S. has been helped by a more favorable cost of shifting funds through cross currency basis swaps. The 10-year Australian-U.S. basis swap has averaged just 14 basis points this year, down from 25 in 2015, while the equivalent Aussie-euro swap has averaged 62 in 2016, compared with 60 last year. The basis swaps are a key part of the cost when swapping funds into Aussie dollars.

“Two things are at play here,” Alexander Machliss, a director for debt capital markets at BNP Paribas SA in Sydney, said last week. “One is the cross-currency swap where current euro-dollar swap levels put euro funding at a disadvantage and results in U.S. dollar funding being cheaper. Secondly, there is the depth and liquidity of the U.S. market, which offers volume with minimal execution risk. At some point the banks will need to tap other markets where we would expect euros to provide both volume and diversification.”

The recent flurry of U.S. currency deals has included not only senior unsecured bonds, but also subordinated instruments that qualify as capital under prudential regulations. ANZ announced on Tuesday that it planned to sell dollar-denominated hybrid capital securities that would count as additional tier 1 capital. Australia’s banks have also tapped into demand for longer-dated debt by selling 10-year notes as well.

Those kinds of offerings “are attracting new investors,” according to Citigroup’s Campbell. “You’re offering more spread in a market that’s still a AA rated bank, you’re offering the life insurance companies some yield who are obviously keen to get some yield and all of a sudden we’ve had everybody step in that had stepped back out. It’s been a positive for the market to have that product diversity.”

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