Kangaroo bonds stand tall in low-yield debt capital landscape

By Patturaja Murugaboopathy

(Reuters) – Global investors are fuelling a surge in Kangaroo bond issuance, turning to Australia in search of an alternative to record-low yields – especially after the shock of Britain’s vote to leave the European Union.

Kangaroo bond issuance of $7.2 billion in the second quarter of 2016 was 22 percent higher over the year and the largest volume in the last five quarters according to Thomson Reuters data.

Apple Inc and Coca-Cola Co were among the biggest corporate borrowers in this market, issuing A$1.425 billion and A$1 billion in Kangaroo bonds respectively.Kangaroo bonds are issued by non-Australian issuers in the Australian market and are denominated in Australian dollars. They offer higher coupon rates and yields than Australian government bonds.

The total value of outstanding Kangaroo bonds was A$160 billion as of Wednesday, according to Thomson Reuters data. That compares to A$430 billion of outstanding Australian government bonds and A$247 billion of state government bonds.

The surge in Kangaroo bond issuance comes at a time when bond yields in the United States, Japan, Germany, France and the UK have all hit record lows, which are expected to persist as investors bet on the prospect of more official stimulus following Brexit.

“Investors, particularly global investors, are continuing to search for yield. So we will see steady interest, particularly around the 10-year part of the curve for SSAs (supranational, sovereign and agency issuers of Kangaroo bonds),” said Andrew Ticehurst, Sydney-based Australia rates strategist for Nomura.

The biggest issuers of Kangaroo bonds are supranational institutions, such the International Bank for Reconstruction and Development and the Asian Development Bank. Despite costing the borrower more than U.S. dollar debt, Kangaroo bonds are popular because of the diversification they offer.

The issuance of Kangaroo bonds has also been helped by rising Australian dollar-basis swap spreads, which the issuer would receive in a currency swap transaction while hedging its Australian dollar borrowing. The 10-year Australian dollar basis swap spread stood at 24.5 basis points on Wednesday, the highest in nearly a year.

“The cost of issuance of Kangaroo bonds is a lot more attractive. It is cheaper for borrowers to issue them,” said Ken Crompton, a Sydney-based fixed-income analyst at Deutsche Bank.

Some analysts said demand for Kangaroo bonds has also contributed to the recent appreciation of the Australian dollar versus the U.S. dollar – a trend they expect to continue.

The Australian dollar has appreciated by more than 9 percent against the U.S. dollar over the past six months.

“The Australian dollar will continue to trade a little higher than the commodity prices and interest rate differentials might suggest is fair, because of this demand for Kangaroo bonds,” said Nomura’s Ticehurst.

(Reporting by Patturaja Murugaboopathy; Additional reporting by Gaurav Dogra; Editing by Eric Meijer)