Euroweek Australia report: kangaroo bonds

Euroweek, August 2013

Standfirst: SSAs and American banks gave the kangaroo bond market a flying start to 2013. It didn’t last, as global volatility combined with a falling currency to keep issuers away. But recent deals suggest demand is still strong for the right names in Australia – and for surprisingly long-term funding. By Chris Wright

The kangaroo bond market is experiencing a disjointed year: a rocketing start, a lull during global volatility, a decline as the Australian currency fell, and most recently a revival at the long end of the curve. Where it goes next will depend on a number of factors both local and global.

2013 started out looking like a record year. SSA issuers in the first two weeks of January included Landwirthschafliche Rentenbank and KfW, the European Investment Bank, the Nordic Investment Bank, and the International Bank for Reconstruction and Development. Between them, they raised $3 billion in those weeks – $4 billion by the end of the month – and did so cheaply: EIB’s A$400 million issue of 10-year funding priced at 77 basis points over swaps, compared with 112 a year previously. With risk premium falling globally, investor demand strong, and the Australian dollar apparently invincible, with plenty of fairly low-priced capacity in the cross-currency swap market, the market was experiencing an ideal issuing environment.

“From a spread product point of view, it was a perfect storm for the Australian market,” says Rod Everitt, head of global risk syndicate at Deutsche Bank. “At the start of the year the SSA borrowers wanted to take advantage of the basis swap at elevated levels. The Australian market provided them with attractive levels compared to their offshore curves, and gave them an opportunity to kick off their year.” At the same time, he says, domestic and regional investors had had cash build-ups, “as they always do at the end of the year”, and there was a risk-on tone globally.

And beneath the good market conditions was a broader shift in the way foreign issuers and investors were viewing the currency. “For SSA borrowers the A$ has become more of a planned currency in the last two years than in the past, when it was more of an arbitrage currency,” says Mark Goddard, executive director and head of debt securities at Westpac. “If you look at the IFC as an example, the A$ was their second largest funding currency in 2012.”

And it wasn’t just the SSAs. The period from late 2012 to early 2013 saw keen appetite for foreign banks and corporates in Australian dollars. JP Morgan, Bank of America Merrill Lynch, Citi and Wells Fargo were joined by a host of Korean issuers and, late in 2012, BP. That’s alongside global names with strong Australian presences that issue in the domestic market like Toyota, and the strange case of BHP Billiton: locally incorporated, it is nevertheless a local name, and its A$1 billion bond last October was a landmark whether it’s considered a kangaroo or a local name.

Two deals in particular stood out in the financial space. One was Wells Fargo, which raised A$900 million in a two-tranche kangaroo deal in January, its first issue since 2007. “Back in the pre-crisis days, Wells Fargo was an extremely popular name down in Australia for many years,” says Tom Irving, head of Asia syndicate at TD Securities in Singapore, which handles many kangaroo deals. Wells Fargo offered something “that was a bit different from the major Australian banks,” Irving says. “The coupon was priced at plus 100, which at the time was considered a very fair level, and accounts jumped on that.” The deal was made up of a A$400 million 4.25% January 2018 note, and a A$500 million January 2018 floater, both at 100 basis points over mid-swaps and the three month BBSW respectively.

The other, which really did stand out, was a A$300 million deal for National Bank of Abu Dhabi in February, only the second ever kangaroo issue from the Middle East and the first since 2006. This might have looked a tough sell, but it flew out the door, attracting an order book of A$1.3 billion from over 130 accounts.

The good times didn’t last. A combination of global volatility and the decline of the Australian currency stopped the market for new issuance in its tracks for all but the big SSAs who were already working through long-planned programmes. “The Aussie has been one of those currencies under the cosh, and it has meant new issues have been hampered,” says Irving at TD Securities. “But it’s typical for issuance to be quieter in the [northern hemisphere] summer. Generally we see a pickup in September through November; whether it happens will be based on what is happening globally with rates.”

Still, there is a sense that the currency has steadied now, and bankers argue that at least for SSAs the movement is not going to make much difference to their funding plans in Australia.

“I don’t expect the currency to have an impact on how SSAs view supply into this market,” says Apoorva Tandon at ANZ. “It could have an impact on demand. But the Australian dollar plays a material role for some borrowers like KfW, although it isn’t a huge component in terms of volume.” He says the currency represents about 10% of KfW’s overall funding needs, for example.

And there is, perhaps, a positive view on the currency decline. “The currency level tends to be more of an interest to investors than to borrowers,” says Goddard. “For kangaroo issuers swapping out to US dollars in the AUD market is impacted by the level of the basis swap – which is largely determined by flow of issuance. From the currency side, many would argue the sell-off means investors are looking at the Aussie market again because it’s cheaper on a relative basis and still offers decent yield.”

In any event, issuer bearishness hasn’t lasted.

In recent weeks, issuers have found demand for 10-year kangaroos. In early August the International Finance Corporation raised A$200 million in 4.25% 2023 paper through Deutsche Bank and TD Securities, at 36bps over swaps (IFC had previously raised A$300 million of 3.5% five-year paper at 18bps over swaps, and A$100 million of five-year floating paper at 18bp over the BBSW, in a dual tranche deal in May). And Nederlandse Waterschapsbank (NWB) tapped a 10-year bond for A$30 million of 4.75% April 2023 paper at 83bp over swap during the same week, also through Deutsche Bank. The IFC deal in particular sold heavily into Asia, particularly Japanese accounts, which often drive the long end of the curve.

Beside the SSAs, banks have continued to be active. At the end of July Goldman Sachs sold its first kangaroo bond of the year, selling a A$450 million five-year fixed rate bond and A$300 million five-year floating rate tranche. The deal attracted over A$900 million of orders across the two tranches, with pricing – 5% at 170 bp over swaps on the fixed tranche, 170bp over BBSW on the floating – roughly in line with Goldman’s cost of funding in dollars. Additionally, RBC raised a three-year deal in July, and Singapore’s OCBC priced a A$350 million senior FRN in mid-August. “I think you could continue to see more deals: the market is receptive,” says Duncan Beattie, managing director, debt capital markets at JP Morgan, joint bookrunner on the OCBC deal. “There is room for US financials or high quality Europeans, plus the Sydney branches of the Asian and Japanese banks.”

All through the year, issues have been helped by a growing international bid for Australian dollar paper.

“On many deals we do we can see a large component of the bonds sold offshore,” says Adam Gaydon, director, syndicate at ANZ. “We acted as joint lead manager on a deal for BAML in May, an $850 million five and a quarter year kangaroo, and more than 50% was placed with offshore investors, particularly in Asia, which made up 42%. Europe and the Middle East made up 15%, with the balance (43%) placed domestically.” On the NBAD deal, upon which ANZ was also a bookrunner (alongside BAML and NBAD itself), 46% went offshore: 41% Asia, 5% Europe.

This has other benefits. “Both the BAML and NBAD deals were very granular and had over 130 accounts participate,” Gaydon says. “The books were not skewed by one or two key investors. A lot of that granularity comes from private bank orders in Asia and the Swiss and Benelux region.”

It’s a widespread view. Everitt at Deutsche says that “particularly with the SSA deals, we’ve seen a lot of Japanese and Asian money coming into our market. Two years ago it was very much the domestic accounts driving the trades; now, domestic investors are still participating, but the flow is more consistently out of Asia.” And Steve Lambert, executive general manager, global capital markets at National Australia Bank, says that “Japanese banks have definitely stepped up as European banks are not playing the same role as before. But it’s not just the Japanese: you see Chinese banks, particularly on the loan side; there are banks from India, Singapore and Taiwan who are active. Asia, on the bond and loan side, is always a key part of the bid on any transaction. That will continue.” And in particular it will continue in support of raisings by local branches of big Asian banks that have balance sheets in Australia that need to be funded, he says.

There are nuances to that position, particularly around the Japanese, who normally drive demand in longer-dated trades. “Japan has a number of issues to deal with and has become less active when it comes to the longer dates,” says Tandon at ANZ. “The view here is there will be less supply in the longer end because of that reduced demand.”

But Tandon was speaking before the 10-year IFC and NWB deals; perhaps the Japanese will remain more central to kangaroo paper than has been feared. And even if they do not, it appears that Asian and European demand will provide a willing market for kangaroo borrowers who can brave the currency’s recent wobbles.