Bloomberg News

Kangaroo Bond Sales Slump as Basis Swap Falls: Australia Credit

September 20, 2011

Sept. 20 (Bloomberg) -- Bond sales by foreign borrowers in Australia are set for the slowest month in more than a year after global market turmoil helped push the discount for swapping the proceeds into U.S. dollars to the least since 2009.

Kreditanstalt fuer Wiederaufbau, Germany’s state-owned development bank, and Landwirtschaftliche Rentenbank are the only sellers of so-called kangaroo bonds this month, issuing a combined A$550 million ($563 million) of securities, according to data compiled by Bloomberg. That’s on course for the lowest monthly total since May 2010, and compares with an average A$3.5 billion for the first eight months of the year, the data show.

Borrowers are retreating to their home markets, or avoiding selling debt, as speculation Greece will default causes volatility in global bond, currency and equity markets, driving yield premiums on corporate securities worldwide to the highest level since July 2009. Canada’s so-called maple bond market has been closed since June, while sales by foreign issuers in the U.S. in September are less than half of 2011’s monthly average, Bloomberg data show.

“Credit markets globally are very quiet and investor demand seems reasonably subdued at the moment,” said Sally Auld, a Sydney-based interest-rate strategist at JPMorgan Chase & Co. “At least half the borrowers in the kangaroo market are European of some ilk, and that’s clearly an issue.”

Basis Swap

The five-year Australian dollar basis swap, which measures the cost of switching interest based on the London interbank offered rate for payments linked to Australia’s bank bill swap rate, was at 8 basis points in Sydney today, after falling to 5.3 on Sept. 14, the lowest close since January 2009. The higher the level, the greater the discount for overseas borrowers selling bonds in Australia.

The basis swap typically rises when Australian issuers seek to sell debt offshore and bring the proceeds home, and falls when kangaroo borrowers make the opposite transaction. It also tends to fall in times of risk aversion as investors seek haven assets such as the U.S. dollar.

“The general theme in basis has been demand for dollars,” said JPMorgan’s Auld. “There haven’t really been any offsetting flows. For kangaroo issuers it doesn’t exactly make it super attractive for them to issue.”

The rate rose to 48 basis points in November 2009, the highest since at least 1997 when Bloomberg records began, after Australian banks increased their U.S. dollar bond sales. Since then, an increase in household savings leading to record term deposits has helped the banks cut their funding requirements from bond markets.

‘Offshore Funding’

Westpac Banking Corp.’s sale of 100 billion yen ($1.3 billion) of notes on Aug. 4 was the last benchmark offering by one of Australia’s top four banks, which are the nation’s largest borrowers in offshore bond markets, data compiled by Bloomberg show.

“Reduced need for offshore funding by Australian banks means we think that the basis is likely to continue trending lower as European sovereign concerns remain,” Deutsche Bank AG analyst Ken Crompton said in a Sept. 16 note to clients.

Borrowers are getting more attractive rates in swap markets to switch the proceeds of Australian dollar bond sales into euros than the U.S. currency, with the five-year rate at 48.8 basis points today. It peaked at 82 in March 2009 and fell as low as -9.5 in October 2008.

The transaction is made in two steps, from Australian dollars into U.S. dollars, and then into euros. The discount on the second leg helps offset the less attractive rate on the first stage, according to Ben Stewart, a vice president and director of syndicate at TD Securities Inc. in Singapore.

“The European borrowers I think will look at the basis swap in euro-dollar terms as quite attractive for them,” Stewart said.

Debt Crisis

The sovereign-debt crisis that began in Greece has spread to larger European nations including Spain and Italy, where government bond yields rose for a fourth-straight week in the five days ended Sept. 16.

The International Monetary Fund and European Union are reviewing whether Greece can meet the conditions of its rescue loans and is eligible for the next payment due in October and for a second rescue package. They suspended their assessment earlier this month after discovering a hole in the budget.

Australia’s 10-year bond yield is on course to drop for a ninth straight month as the turmoil in Europe stokes investor demand for the safest assets. The yield was little changed at 4.15 percent today, or 222 basis points more than similar- maturity Treasuries.

Interest Rates

Traders signaled they expect Reserve Bank of Australia Governor Glenn Stevens will slash the 4.75 percent benchmark rate by 146 basis points over the next 12 months, compared with estimates for 16 basis points in cuts at the start of August, according to a Credit Suisse Group AG index based on swaps.

Investors are estimating Australian consumer prices will rise at an annual 2.54 percent pace over the coming five years, down from this year’s high of 3.14 percent on May 6, according to the gap between indexed government debt and bonds that aren’t linked to inflation.

The Australian dollar bought $1.0208 as of 12:11 p.m. in Sydney. The so-called Aussie, the world’s fifth-most traded currency, touched $1.1081 on July 27, the strongest since it began trading freely in 1983.

A new series of the Markit iTraxx Australia index of corporate credit-default swaps started trading today and was at 199 basis points as of 10:07 a.m. in Sydney, according to Credit Agricole. The previous version of the index closed at 184.8 basis points yesterday, according to data from CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Kangaroo Sales

The three biggest sellers of kangaroo bonds this year, KfW, European Investment Bank and Rentenbank, account for 45 percent of offerings, Bloomberg data show. Another 10 European borrowers have also accessed the market in 2011, the data show.

KfW, based in Frankfurt and the biggest kangaroo bond issuer this year, added A$300 million to an existing line of 6 percent August 2020 notes on Sept. 2, pricing the securities to yield 103.25 basis points more than similar-maturity government debt, according to a statement. The bonds were trading at a 107.5 basis-point spread at 12:14 p.m. today, Australia & New Zealand Banking Group Ltd. prices show.

RBC Capital Markets is leading kangaroo bond underwriter rankings this year with a 16.6 percent market share, followed by ANZ Bank and TD Securities, according to Bloomberg data.

Bond Spreads

Spreads on bonds sold by government-backed borrowers in Australia widened 16 basis points to 72 basis points this quarter, according to Bank of America Merrill Lynch’s Australian Quasi and Foreign Government Index, which tracks the debt of more than 20 kangaroo issuers including KfW and European Investment Bank. The average yield premium touched 78 basis points on Aug. 19, the most since June 2009.

Relative yields on company debt worldwide widened 83 to 246 since June 30, and hit 247 on Sept. 13, the highest since July 2009, Merrill Lynch’s Global Broad Market Corporate Index shows.

Sales of debt in Australia by corporate and state-backed borrowers total A$2.4 billion this month, 72 percent lower than the same period last year, Bloomberg data show.

“We’ve got a whole lot of fear and uncertainty in global markets at the moment, which is pushing up spreads and limiting issuance,” said Damien McColough, the head of fixed-income research at Westpac in Sydney. “There’s going to be some latent demand from investors once things settle down.”

--With assistance from Candice Zachariahs in Sydney. Editors: Ed Johnson, Garfield Reynolds

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To contact the reporter on this story: Sarah McDonald in Sydney at smcdonald23@bloomberg.net.

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net.


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