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2
A changing
landscape
Ongoing volatility, subdued demand and unfavourable issuance spreads in the
Kangaroo market appear likely to limit deal flow – and exert a widening pressure
on the basis swap – in 2012. But even if the European borrowers that traditionally
provide the bulk of Kangaroo volume remain unfavoured by AUD investors,
there may be opportunities for new issuer sectors to emerge.
B y
T a r a
T
he Kangaroo market opened with a bang in
2011, with A$7.45 billion (US$7.9 billion) and
A$4.55 billion pricing in January and February
respectively. By the mid-point of the year,
primary levels were tracking towards all-time
highs with A$22.4 billion already issued.
However, an upsurge in volatility across
Europe in the latter half of the year placed a stranglehold on the
market and capped full-year volume at just A$28.7 billion. The
figure was down on the previous year’s record of A$36.4 billion
(see chart on facing page).
The extent to which Kangaroo issuance is a leading or a
lagging indicator of basis swap movements can vary. Kangaroo
deal flow tends to intensify when a wider basis – generally spurred
by Australian bank issuance in offshore markets – gives a pricing
advantage. But there are also occasions on which Kangaroo
demand drives issuance and, consequently, the basis.
The journey of the five-year USD/AUD basis swap
throughout 2011 certainly closely matched the Kangaroo
S p e n c e r
issuance picture. The basis opened the year at a level of slightly
above +25 basis points, and maintained a relatively steady level
before reaching an annual peak of +27.25 in March.
In the wake of European and US sovereign risk-driven
market uncertainty reaching a new high in August, the fiveyear basis swap hit its lowest point for the year at +5.3 basis
points in mid-September. The final quarter of 2011 witnessed a
dramatic lurching of levels before closing at a level of +24 basis
points. By that point, however, Australian market demand for
European paper in particular had declined so far that headline
spreads for Kangaroo borrowers could not be compensated
sufficiently, even by a relatively appealing basis.
Paul White, ANZ’s Sydney-based global head of
syndicate, believes basis swap volatility is not of itself a
major concern for the Kangaroo market – and that the basis
should be one factor working to support Kangaroo issuance.
“All markets have been very volatile over the past six
months, so movements are not peculiar to the AUD/USD
basis swap. We believe there will be a slight widening of the
“Despite the fact that sentiment feels a lot better in global
markets so far this year, and we expect spreads in Australia
to perform, we are still living with significant headline risk
and it will take some time for investors to regain confidence
in the Kangaroo market.”
A l e x Ca r i d i a R B C C a p i t a l M ark e t s
3 8 | k a n g a n e w s
F e b r u a r y
2 0 1 2
bills-Libor basis, based on continued offshore issuance from
banks and corporates,” he predicts.
annual kangaroo issuance by sector
Falling issuanc e
Agency
Supranational
Financial institution
40,000
35,000
volum e (A$ M)
A
ustralian-origin deal flow going offshore is not
expected to be matched by incoming flow levels as
the Kangaroo buyer base continues to be especially
wary of European names. The post-crisis Kangaroo market
has been dominated by supranational, sovereign and agency
(SSA) borrowers as confidence has never fully returned for
US and European financial institution (FI) names. In the SSA
sector, the quantity and programme sizes of European entities
made them the biggest offshore names in the Australian dollar
arena: European SSAs accounted for over half of all Kangaroo
issuance in 2011 (see chart on this page).
It is precisely these European SSA names that have borne
the brunt of investor expression of Eurozone fears – with
Australian dollar curves the worst hit. Data from Westpac
Institutional Bank (Westpac) shows European Investment
Bank (EIB)’s five-year Kangaroo bond trading nearly 100 basis
points back of its equivalent US dollar bonds in early 2012,
while KfW Bankengruppe (KfW)’s five-year notes were around
50 basis points wider in Australian dollars.
Intermediaries agree that for as long as European SSAs
have to pay these kinds of premia to complete Australian dollar
transactions, Kangaroo issuance in 2012 will in all likelihood
be below historical norms. Just as last year was a year of two
halves, this year may be the same in reverse.
“Despite the fact that sentiment feels a lot better in global
markets so far this year, and – as liquidity and stability return
to the markets – we expect spreads in Australia to perform,
we are still living with significant headline risk and it will take
some time for investors to regain confidence in the Kangaroo
market,” comments Alex Caridia, director and head of SSA
origination at RBC Capital Markets (RBCCM) in London.
In what shape demand for European SSA Kangaroos can
return remains to be seen. KangaNews understands there are a
number of Australian and Asian accounts that are completely
opposed to investing in any European Kangaroos for the time
being. But issuers themselves maintain a commitment to the
market (see box on p40).
Some SSA names are willing to make efforts to meet
the Australian dollar market on price, but their willingness
to resume Kangaroo issuance will likely only ramp up when
AUD margins converge further with global alternatives. There
Covered bond
30,000
25,000
20,000
15,000
10,000
5,000
0
2007
2008
2009
2010
2011
Source: kanganews january 31 2012
Kangaroo Issuance in 2011 by origin (a$M)
No n - E u rozo ne
ot her
6 ,1 5 0
eu rozo ne ot her
1 ,0 0 0
E u rozo ne ssa
14, 575
No n - E u rozo ne ssa
6 ,975
Source: KangaNews January 31 2012
are positive signs here, with a January report from Westpac
suggesting: “After their significant period of underperformance,
AUD SSAs are finally beginning to trade back towards levels
consistent with historic valuations – ‘cheaper’ than USD but
more expensive versus EUR equivalents when converted into a
spread to bank bill swap rate.”
Perhaps a bigger issue is the fact that there is still a lack of
demand in size even at the Kangaroo market’s wider spread
levels. “Since the beginning of 2012 we have seen wide newissue premia offshore, but when SSA borrowers come to this
market they are not necessarily prepared to pay that premium
because they are not getting the volume behind it. I think
“Since the beginning of 2012 we have seen wide
new-issue premia offshore. But when SSA borrowers come
to this market they are not necessarily prepared
to pay that premium because they are not getting the
volume behind it.”
Ma r k G o d d a r d W e s t p ac I n s t i t u t i o n a l B a n k
3 9
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2
SSAs’ strategic issuance
claims to be tested
Although issuance prospects in the Kangaroo market appear
challenging for the foreseeable future, supranational, sovereign
and agency (SSA) borrowers say they remain committed to
issuing in the sector. However, such issuance this year is likely
to be more opportunistic than it has been in the past.
One issuer which has
seen continued success
throughout recent volatile
periods is KfW Bankengruppe
(KfW). The German agency
issued a record A$7.5 billion
(US$7.9 billion) of Kangaroos
in 2011, including five of the
nine deals priced between
August and December. It
also succeeded in re-opening
the market in 2012, pricing
a A$250 million increase to
its 2021 bond on January
12. KfW followed with the
opening of a new 2022
line in early February.
Klaus-Peter Eitel, vice
president, capital markets
at KfW in Frankfurt, told
KangaNews at the time of
pricing the top up that the
margin was in line with KfW’s
2021 euro benchmarks on
an asset swap basis, but
proved more expensive
than USD funding options.
“Given the Kangaroo market
is a strategic market for us
we were happy to pay that
much although we are able
to fund cheaper, especially
in US dollars. With €80
billion [US$104.7 billion] of
funding volume in 2012 we
need to keep diversifying
our investor base and
looking at the average cost
of funds,” Eitel explains.
Until recently, European
Investment Bank (EIB)
was the largest Kangaroo
borrower. However, the
supranational has suffered
from widened spreads
since the onset of European
sovereign woes. It was
therefore much less active
in 2011 than in previous
years, pricing just shy of A$3
billion – the bulk of which
was in the first quarter.
Until spreads improve,
EIB is unlikely to return to
the market, comments
its Luxembourg-based
senior capital markets
officer, Richard van Blerk.
“EIB’s AUD secondary curve
continues to consistently
price EIB a notch or two
lower in credit terms than
elsewhere. Therefore EIB
has not been as active in
the Kangaroo market as in
previous years. Since June
2011 EIB’s secondary levels
in AUD appear to be at an
extreme variance when
compared with levels in
other markets. A necessary
first step towards any new
Kangaroo issuance from EIB
“Surprisingly, November 2011 – when
EIB Kangaroo spreads capitulated to
record wides – was by some distance
our strongest month on record
in terms of secondary flows.”
Richard van Blerk
European Investment Bank
that will be a real challenge for this market,” comments Mark
Goddard, executive director and head of debt securities and
syndicate at Westpac in Sydney.
ANZ’s White also suggests traditional Kangaroo borrowers
may have to become more opportunistic in response to
volatility and narrower demand (see box on p42). “The issue
is whether a European issuer would price a deal in Australia at
current levels when it could potentially issue in other markets
more attractively. We will continue to see volatility and issuers
4 0 | k a n g a n e w s
F e b r u a r y
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would be for the AUD levels
to converge to global trading
levels,” he comments.
Other borrowers admit
that the Australian market
has penalised them more
than others. “In the context
of a generally negative
perception on Europe, our
secondary market spreads
have widened substantially,”
Eitel reveals. “We have seen
this in other markets as
well, but not to the same
extent. While we think this
move is unjustified we need
to accept the new reality.”
However, Eitel is confident
that the point at which
investors start to see value
is close. “We have seen
evidence that, at current
spreads, accounts see
good value to buy our name
again,” Eitel comments. “And
given the basis has improved
for us we can respond to
this demand accordingly.
The Australian market
therefore is certainly not
punishing us, sometimes it’s
just reacting more fiercely
than other markets. But
the correction often follows
with the same impetus.”
While US-based
supranationals have not
been penalised as much as
their European counterparts,
their AUD spreads are
still wider than they see
in markets elsewhere.
Consequently, there was only
one issue from that sector
in the second half of 2011,
when International Finance
Corporation priced a A$1.5
billion deal in late July.
will have to be fairly nimble about coming to market as
windows of opportunity will probably be smaller than what we
have been used to in the past few years,” he says.
International bid
O
ther bankers are convinced SSA Kangaroo
opportunities are already starting to emerge – with
Australian dollar spreads the factor attracting
international investors in particular. “Australian dollar spreads
Dore adds that Kangaroo
issuance cannot occur,
however, until margins
become more in line
with other markets.
Regulator tension
Alongside pricing issues and
a general lack of domestic
demand for Kangaroo
product, van Blerk highlights
ongoing disappointment with
the Australian Prudential
Regulation Authority
(APRA)’s exclusion of SSA
paper from its definition of
liquid assets. Following the
announcement that SSA
paper would not classify as
level two assets for liquidity
coverage ratio purposes
in late February 2011, EIB
only completed two further
Kangaroo transactions
for the rest of the year.
When the announcement
was made EIB put forward a
strong case for its liquidity,
which van Blerk claims
has only increased since –
despite challenged market
conditions. “EIB Kangaroo
secondary market flows
were stronger in 2011 than in
2010 as the average monthly
KfW reports similar success.
“In 2011 dealers turned over
our total outstanding more
than once – even slightly
more than in USD. In the
context of a more stringent
regulatory environment we
expect dealers to reassess
their ability to provide
secondary liquidity to
investors going forward.
We believe the liquidity of
our bonds is fairly healthy,
and this is also reflected by
investor feedback. We would
appreciate it if the final
APRA decision took that into
account,” comments Eitel.
Investor behaviour has
also acted to restrict some
of the liquidity available,
particularly for the SSAs.
Ana Ascalon Kotamraju,
senior treasury specialist at
Asian Development Bank in
Manila, says the bank hopes
to continue to develop its
Kangaroo curve from the
A$6.5 billion outstanding
across seven maturities.
But she notes: “While the
volume of our issuance
and outstandings has
increased in recent years and
placement is broad-based,
our issues tend to be tightly
held. Thus there does not
tend to be a high degree of
turnover in our bonds.”
are not currently outside the realm of where global comps are,
and they offer relative value for investors,” reveals Tom Irving,
vice president and head of Asia syndicate at TD Securities
(TD) in Singapore. “The main challenge is making investors
comfortable that they want to be in the sector.”
A baseline of international demand combined with
attractive Australian dollar spreads and a favourable basis
swap mean issuance from European names is unlikely to be
prevented altogether.
TOTAL KANGAROO ISSUANCE BY SECTOR
80,000
volum e (A$ M)
turnover went to A$2.2
billion from A$1.75 billion,”
he reveals. “Surprisingly,
November 2011 – when
EIB Kangaroo spreads
capitulated to record wides
– was by some distance our
strongest month on record in
terms of secondary flows.”
72,146
70,310
64,886
60,000
40,000
20,000
7,495
4,717
0
Financial Supranational Agency
institution
Covered
bond
Corporate
600
Sovereign
Source: kanganews january 31 2012
TOTAL KANGAROO BONDS OUTSTANDING BY SECTOR
60,000
v o l u m e ( A $M )
Andrea Dore, Washingtonbased lead financial
officer, capital markets
at World Bank, says the
supranational’s spreads
are improving around the
world. “The USD market
opened very strongly this
year and we are seeing
good spread performance
in our sector. We hope
that trend will carry over
to other markets including
Kangaroos,” she comments.
45,000
55,150
41,296
29,955
30,000
15,000
5,995
0
Supranational Agency
Financial
institution
Covered
bond
600
365
Sovereign
Corporate
Source: kanganews january 31 2012
Intermediaries are realistic about how long the road back
to market functionality will be, however. “Last year we saw the
effect that European concerns had on Kangaroo spreads. Until
we see some stability and performance in secondary markets
and swap valuations start to reflect comparable trading levels
in other markets, we will probably not see a large amount of
Kangaroo supply,” acknowledges RBCCM’s Caridia.
And Irving adds that even if demand does return it is
unlikely to be generic across the SSA sector. “The most
significant change in behaviour we are seeing from investors is
that they are less focused on ratings and more focused on the
support structures underlying the names,” he notes.
The pleasing factor to note is that demand for Kangaroo
paper is not completely dependent on the flaky domestic bid,
with appetite continually emerging from Asia, Europe and
the US. Most market participants are confident that, even in
the absence of a returned bid from domestic accounts, the
international investor base will be the crux that will ensure SSA
Kangaroo issuance in 2012.
International investors, particularly central banks, continue to
hold a positive view on Australia’s fundamentals in terms of its
currency, relative yields and overall economy. While pressure on
4 1
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2
Domestic Kangaroo
demand profile squeezed
The supranational, sovereign and agency (SSA) Kangaroo market
has in the past garnered significant support from domestic investors.
It is this demand that suffered the most in the second half of
2011 – and how strongly it can return is still a matter for doubt.
One problem potentially
limiting issuance is the true
demand existing for Kangaroo
product, which began sharply
decreasing in the second half
of 2011.
Intermediaries note that even
in slightly calmer conditions
at the start of the new year, a
number of key investors are
not ready to return. In fact,
KangaNews understands
that a number of real-money
investors have backed away
from European SSA names
entirely, largely because
their clients do not want to
be associated with the region
until a sustained resolution of
the problems is reached.
accounts through Australia
and Asia that will sit on the
sidelines until they see more
stable signs,” says Chad
Karpes, director, capital
markets at Bank of America
Merrill Lynch (BofAML).
Western Asset Management
(WAMCO) – until recently a
regular SSA Kangaroo deal
participant – is one example
of the trend. According to
Anthony Kirkham, the firm’s
head of investments and
Australia operations, WAMCO
is more inclined to invest in
Washington-based credits,
and is fairly sidelined in terms
of the European SSA names.
“We already hold a reasonable
amount of that paper. Our
participation is more about
seeing something positive
“While the contagion and
uncertainty persist, I think
there will be a number of
emerge from the politicians
and finding a clear solution,
rather than finding an
attractive pricing level at this
stage,” Kirkham reveals.
David Hanna, senior portfolio
manager at Macquarie Funds
Management, agrees that
European SSA names remain
a difficult sell. “There is a point
at which the margin will make
such securities attractive
relative to the risk. But prior
to any kind of resolution of the
issues in Europe it would be
difficult to look at these names
confidently,” he argues.
Hanna adds that his firm is
becoming more selective with
typical offshore credits. “With
any Kangaroo issuance we
would look to compare the
levels they are issuing at in
“Our participation in European SSA
deals is more about seeing something
positive emerge from the politicians
and finding a clear solution to
the problems, rather than finding
an attractive pricing level.”
Anthony Kirkham Western Asset Management
Australian rates remains downward, further quantitative easing
in the North Atlantic region – and no sign of rates rebounds
– mean these buyers are expected to seek Australian dollar
product via triple-A rated securities. Those fundamentals make
SSA Kangaroo issuance highly attractive. “Government bonds
are trading more expensively on an asset swap basis. Kangaroo
spreads are very attractive as a triple-A product, and that will
attract international and local demand,” ANZ’s White comments.
However, Caridia notes that while the offshore investor
base may return he does not expect it to grow at the same
pace it has in recent years. “Most large central banks now
4 2 | k a n g a n e w s
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2 0 1 2
Australia against the levels
at which their securities
could be purchased in
other currencies. Financial
institutions (FIs) and SSAs
have largely dominated the
issuance market in recent
years. These sectors continue
to dominate headlines so we
would focus on developments
within their domicile as
well as the relative value
to determine our level of
interest,” he explains.
One factor which may
gradually change realmoney demand dynamics is
straightforward inertia. Many
investors have seen a buildup of cash since the latter
part of 2011 as primary deal
flow slowed, and perceived
value could start to tempt
money back into the market.
Australian dollar redemptions
are also high in 2012, and
include around A$20 billion
of government-guaranteed
bank paper as well as A$8
billion of SSA Kangaroos.
That cash will have to
be put somewhere, and
intermediaries believe much
of it is likely to go back into
triple-A product. Hence
investors may be prepared to
look at SSAs – although they
are now also being offered
the competing attractions of
covered bonds.
Intermediaries claim an
opportunistic buyer base has
already emerged, as some
investors view spreads as
having peaked.
have investments in Australian dollar assets. Given that a
large number of international investors have already added
Australian dollars to their currency lists over the past few
years, we may not see as many new investors over 2012.
Nevertheless, the overall volume of international demand is
likely to remain high,” he comments.
And Goddard urges the broader picture to be considered.
“The easiest place for offshore investors to enter the Australian
dollar is through the top-tier names they buy in other
currencies. For many investors these are SSA names. However,
I do not expect any growth of demand in the offshore space
Balance sheets sidelined
Perhaps a more worrying
situation for domestic
SSA Kangaroo demand is
the ongoing relative lack
of interest from balance
sheet buyers. While banks
were the main driver of the
Kangaroo market throughout
the early months of 2011,
the Australian Prudential
Regulation Authority (APRA)’s
announcement in late
February 2011 that SSA
paper would not qualify as
level two assets for liquidity
purposes effectively wiped
out that interest.
Unless APRA makes a new
declaration – which seems
unlikely given the regulator’s
reiteration of its view in
November 2011 – banks will
continue to look to invest
in alternative asset classes
that offer consistently wider
spreads than SSAs while
garnering the same treatment
in the liquid assets regime.
Intermediaries note that,
unlike domestic fund
managers, balance sheets
may not necessarily be
tempted by a particular price.
Any appetite that does surface
is likely to be highly namespecific and concentrated
in the intermediate part
of the curve, according to
Paul White, global head of
syndicate at ANZ. But he
adds: “I think there is still
a shortage of good-quality
assets for liquidity. The
Kangaroo market – whether
SSAs or covered bonds – is
still an attractive asset when
looking at the composition of a
liquidity book.”
Consequently, not all signs
for participation are gloomy:
the forthcoming committed
liquidity facility from the
Reserve Bank of Australia
could enable bank buyers
to actively participate in the
market once again, even if the
halcyon days of early 2011 are
unlikely to be repeated.
“Particular balance sheets
will explore the avenue of the
committed liquidity facility,
but the question is whether
they will support the market
to the same degree that they
did in the early parts of last
year. I do not think they will. I
believe we are moving back to
a market we saw several years
ago, where the balance sheet
interest was complementary
rather than critical,” one
banker predicts.
The baseline to any
expectation of liquidity
book support remains SSAs
retaining repo eligibility.
If a large segment of the
SSA borrower universe lost
triple-A ratings they would
no longer hold repo-eligible
status and balance sheets
would therefore no longer
be attracted to investing in
those credits at all. In this
context, January downgrades
by Standard & Poor’s that
affected nearly A$2.5 billion of
Kangaroos have an ominous
tone for the market (see
KangaTrends on p2).
to be sufficient to completely offset the fall in domestic bank
demand that we saw in the latter part of 2011, so 2012 SSA
issuance is likely to be lower,” he estimates.
One challenge that may present itself with regard to
international investor participation is renewed volatility
in the Australian dollar – and the currency’s lack of clear,
fundamental-driven direction (see chart on p45). “The currency
has been reasonably difficult over the last year, switching
above and below parity regularly,” says TD’s Irving. “If the
currency shows some clear direction the offshore bid should be
encouraged. However, if we enter a period of extreme volatility
with a risk-off tone, I believe the offshore bid will become
more uncertain.”
Sector opportunities
T
wo outcomes for the Australian bond market in 2012
appear to be beyond doubt. One is that domestic bank
borrowers will continue to need to source a substantial
volume of funds in international markets. Another is that
supply from European SSAs will not match the volume seen in
recent years.
Irving expects a more evenly-distributed range of SSAs
to come to market over the next 12 months. “The SSAs will
not be as active as they probably have been over the last few
years, but they will still issue in Australian dollars. I think
the Washington-based supras will be very sought after as a
diversification play. However, the fact that there is quite a
significant price differential means there are clear opportunities
for the European borrowers as well,” he notes.
The gap left by reduced European SSA issuance seems
unlikely to be filled by bank borrowers. Investors seem no
less likely to be wary of European financial institution (FI)
borrowers – which had already all but vanished from the
market in 2011 – than they are of equivalent SSA names.
European bank borrowers are also backed to avoid massive
funding pressures caused by large-scale upcoming redemptions,
following the offer of a Long-Term Refinancing Operation
(LTRO) from the European Central Bank on December 21
2011. The LTRO offers banks three-year loans at a discount
– which is expected to help banks cover their own borrowing
needs while keeping a lid on yields. One knock-on effect
is likely to be a reduced need for European banks to meet
markets like the Kangaroo on their unfavourable pricing terms.
The LTRO may not completely put a stop to normal
issuance. “It is crucial for FIs to keep issuing in core markets
to maintain investor appetite. It is less of an issue for a market
like ours, unless the Australian market provides them with
something attractive from a spread point of view,” explains
Rod Everitt, Sydney-based head of Australian dollar syndicate
at Deutsche Bank.
He adds that demand for Kangaroo covered bonds is
likely to increase in the wake of Commonwealth Bank of
Australia (CBA)’s A$3.5 billion domestic issue on January 17,
which was predominantly bought by real-money accounts.
“CBA’s domestic covered bond debut proved there is cash
for the product. However, it is unlikely to be of the same
scale on an ongoing basis. The domestic covered bonds will
provide a pricing point for other issuers to be priced off and
enable liquidity for Kangaroo covered bonds to increase,”
comments Everitt.
Overall, a wider basis swap caused by international issuance
out of Australia being set up against reduced European
Kangaroo flow is likely to create opportunities in the main for
US and Asian FI credits. The potential direction of the market
was illustrated in January 2012 when Industrial Bank of Korea
4 3
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2
Kangaroo issuance would only
be welcomed.
One local intermediary
which is focused on bringing
global corporates to the
Australian market is Goldman
Sachs. According to the bank’s
Sydney-based managing
director, financing group,
Robert Foale, at least three
international corporate borrowers will complete Australian
roadshows during the first quarter of 2012.
After meeting with local investors, Foale visited Europe
in late 2011 to talk to issuers which would fit Australian fund
managers’ desires. “Instead of focusing on bringing more FIs
and SSAs to the market, we are leveraging off our corporate
relationships. We were quite surprised at how little coverage
there had been about the Australian market among these
leading sector names. Nevertheless, we had a really positive
response,” he comments.
Some fund managers say they would be open to looking
at corporate Kangaroos. David Hanna, Sydney-based senior
portfolio manager at Macquarie Funds Management, tells
KangaNews: “We would welcome any offshore corporates
looking to issue in the Australian market as long as we
understand the reason they want to fund in Australian dollars.”
“Australian dollar spreads are not
currently outside the realm of where
global comps are, and they offer relative
value for investors. The main challenge
is making investors comfortable that
they want to be in the sector.”
Tom Irving TD Securities
(IBK) priced the first true Kangaroo deal by an Asian bank
issuer since 2007 (see KangaTrends on p6).
At the end of January, the A$350 million IBK issue meant
the Asian bank sector was technically the largest Kangaroo
issuing source in 2012 – albeit on the back of just two total
trades. Intermediaries say they expect to see more deal flow
from Asian FIs, especially Korean names. But the universe is
limited – the majority of Asian banks either do not meet the
Australian market’s credit profile expectations or are sufficiently
deposit-rich not to require offshore wholesale funding at
Kangaroo spreads, even with a favourable basis swap.
Corporate gl i m m e r s
M
eanwhile, although the last corporate Kangaroo
deal was issued by Vodafone in 2006 – and that
was itself the first such transaction for three years –
a number of intermediaries are confident the market can be
revitalised in 2012.
“The market needs to diversify further away from SSAs and
FIs, and that is clear from a demand perspective given what
has happened in the last year,” comments White at ANZ. “I
expect more financials and corporates to look at this market for
diversification purposes. I think issuance will be gradual, but it
could definitely happen this year.”
Global corporates have been entering new markets –
particularly in Asia – of late, demonstrating the fact that
borrowers are increasingly open to issuing outside their home
markets. The favourable position of the basis swap could
kick-start Australia’s addition to the list of options, with levels
being particularly attractive for those names which complete a
significant amount of funding in euros.
Although the domestic institutional investor base may not
be desperately seeking SSA paper, its appetite for corporate
bonds – particularly for well-known, investment-grade names
– remains loudly stated, and an increase of global corporate
Corporate challenges
T
urning interest into deal flow will be challenging,
though, and recent efforts have not come to
fruition. For instance, BP roadshowed and sounded
a Kangaroo deal late last year, but KangaNews understands
a mutually-acceptable pricing level could not be found.
The borrower instead went to the US market to achieve a
volume of US$1.5 billion at an issuer-favourable price. Like
many other borrowers, BP does not have a critical need for
Australian dollar funding.
Caridia at RBCCM also points out that given the typically
smaller borrowing programmes of most corporates, there is
likely to be only a handful of international names that would
look to access the Kangaroo market. In some cases, he notes,
this would be with a view to finance domestic operations and
would therefore not be considered Kangaroo issuance.
Local fund managers highlight the same supply-related
issues. “We are always interested in offshore corporates but
I’m not sure how
much issuance we will
“If the corporate Kangaroo market does
see this year given that
most borrowers have
not open now it will be a major problem.
limited funding needs,”
We have to offer an attractive alternative
points out Anthony
here, and it is up to the participants to
Kirkham, head of
ensure we create the opportunities to issue.” investments and
R o b e r t F o a l e G o l dma n Sac h s
Australia operations
4 4 | k a n g a n e w s
F e b r u a r y
2 0 1 2
at Western Asset Management
“I expect more financials and
in Melbourne.
corporates to look at this market
Two main factors have prevented
for diversification purposes. I think
global corporate issuance in Australian
issuance will be gradual, but it
dollars in recent years: the lack of
volume available at a substantial tenor
could definitely happen this year.”
and the uncompetitive pricing levels.
Paul White ANZ
However, Foale believes those dynamics
have now been addressed and, as long as
margins are in line with what borrowers could achieve in their
demand for Australian dollars in Asia, noting the attractive yield
home markets, issuance possibilities are encouraging.
dynamic. Consequently, a group of corporates and FIs will
“The market has matured: it’s still not at the level
issue into the Australian domestic market – but it is likely to be
everyone would want but I am optimistic it will develop,”
a select group.”
Foale says. “We need greater tenor and that will come once
Karpes also points to the US dollar deal BofAML jointly
the Australian government starts issuing longer-dated bonds.”
led for SABMiller on January 10 as evidence of a lagging
Foale adds that pricing is only becoming more competitive
Australian domestic market. That transaction was the largest
in line with the rest of the world. He highlights that the nexus
US corporate bond in almost a year, with a volume of US$7
between bank pricing and the corporate curve was broken
billion priced across four tranches – including US$2.5 billion
for the first time last year, when Woolworths printed its first
of 10-year bonds and US$1.5 billion of 30-year paper. Those
domestic bond in five years – a A$500 million five-year – at a
tranches priced at 185 basis points and 200 basis points over
level inside the bank curve.
US Treasuries, respectively. The issue had a final order book
One further problem Foale highlights is the time
of US$27 billion. The support, liquidity and price tension
constraint for overseas borrowers to conduct Australian
achieved in that deal demonstrate a market scale that remains
roadshows – with the prospect of a modestly-sized
a goal rather than a reality in Australia.
transaction failing to provide much incentive. But with the
But Foale notes the almost urgent need for Australian
market’s increasing depth, issuers are growing aware that it is
dollar issuance. “I think if the corporate Kangaroo market does
possible to achieve a sizeable deal in a tenor that fits with their not open now it will be a major problem. We have to offer
maturity profile.
an attractive alternative here, and it is up to the participants to
Although other intermediaries are hopeful regarding
ensure we create the opportunities to issue,” he concludes. •
corporates’ prospects, they also remain cautious about the
likelihood of serious corporate Kangaroo volume. And their
australian dollar versus US Dollar
opinions further suggest the emergence of a blown-out
1.12
basis swap. “I definitely think more corporates will issue in
1.10
Australia but it will take time for investors to come to terms
1.08
with pricing: international corporates have access to most
1.06
markets and pricing is very tight, so I don’t think there will be
a huge pick up in corporate activity in 2012. However, if there
1.04
is too much volatility and no European issuance, we will end
1.02
up with a gap in the market,” Irving predicts.
1.00
And although the position of the basis swap renders it
0.98
undeniably attractive for a number of offshore corporates, it is
0.96
unlikely to produce a sudden swell of supply. As Chad Karpes,
0.94
director capital markets at Bank of America Merrill Lynch
Jan
Sep
Nov
Mar
May
Jul
2012
2011
2011
2011
2011
2011
(BofAML) in Sydney, points out: “The US and European
Source: kanganews february 2 2012
markets have been robust this year. We have also seen strong
“It is crucial for financial institutions to keep issuing in
core markets to maintain investor appetite. It is less of an
issue for a market like ours, unless the Australian market
provides them with something attractive from a spread
point of view.”
Rod Everitt Deutsche Bank
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