International Kangaroo Bond Issuers Find Australian Debt Market Increasingly Expensive

Post by Sharat on July 2, 2009 · Under Australian Economy, Business News, Capital Markets, banking, investments · 2 Comments

International issuers from Asia, Europe and the US are finding the costs of issuing Australian dollar denominated debt known as “kangaroo bonds” are rising as a result of having to compete against Triple A rated sovereign guaranteed debt being issued by domestic Australian banks.

Two supranational issuers, International Finance Corporation (IFC) and The European Investment Bank (EIB) who between them issued US$17 billion in kangaroo bonds in the four years to Augusts 2008, now pay 120 basis points in additional interest, when tapping the Australian bond market.

The additional interest means for every US$1 billion that is borrowed, those issuers are required to pay US$12 million a year in extra interest.

Supranational organizations are those institutions formed by two or more governments and usually have a mandate to finance or aid economic development.

Prior to the global credit crisis, supranationals were able to issue Kangaroo bonds below mid swap rates. Such interest rates no longer seem attractive to investors who have option of investing in sovereign guaranteed debt with interest rates of 120 basis points above benchmark swap rates.

According to Bloomberg, Australian banks, since the start of the year, have issued $US52.8 billion in sovereign guaranteed debt. Taking advantage of the Federal Government guarantee which was introduced on November 28th to ensure Australian banks were still able to obtain funding in the aftermath of credit markets freezing over in the wake of the Lehman Brothers collapse.

The amount of Kangaroo bonds issued in the first half of 2009 amounts to $5.5 billion, falling almost fifty per cent or from $10.1 billion during the same period in the previous year. International issuers have raised $126 billion in Kangaroo bonds since 2000.

Supranational organizations tend to have the highest credit ratings, allowing them to obtain financing at lower interest rates than normal corporate issuers. In 2001 The Asian Development Bank (ADB) issued US$1.3 billion in Kangaroo bonds, paying 6.25 per cent on debt with a maturity of 10 years. That was 39 basis points lower than the benchmarks swap rate at the time according to CBA who helped manage the deal.

Five years ago the EIB paid 30 basis points less than the swap rate for a US$2.5 billion deal. Two years later the same issuer had to pay 29 basis points more than similar Australian government paper for a $1 billion deal. The spread rose to 93.25 basis points when the issuer sold US$1 billion in five year paper on May 12th 2009.

Westpac’s debt chief Simon Ling said that Supreanationals “were being crowded out by triple A issuance from the banks” in the first half of the year, but since then the spreads on bank guaranteed paper have come in, making these other deals look attractive”.

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Tags: Australian Economy, banking, Business News, Capital Markets, Deals, Investing

Comments

2 Responses to “International Kangaroo Bond Issuers Find Australian Debt Market Increasingly Expensive”

School of screaming debt on July 19th, 2009 8:08 pm

wtf does any of this have to do with kangaroo bonds?
Sharat on July 20th, 2009 1:05 pm

erm, the piece and the title are fairly self explanatory.

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