Global corporate and financial institutions are set to play a more prominent role in the Australian dollar, or Kangaroo, marketasdomesticappetite fornon supranational, sovereign and agency (SSA) credits builds among cash-rich investors.
Overseas corporates have sold more Kangaroo bonds in 2012 to date than the whole of 2011, nearly reaching the record 2010 levels. To date, eight corporates have sold approximately AUD4.28 billion (US$4.45 billion) of Kangaroo bonds, compared to AUD3.13 billion across five deals in the whole of 2011, according to data provider Dealogic. There were five Kangaroo deals completed in 2010, worth AUD4.51 billion.
By comparison SSAs have issued AUD22.3 billion this year, versus the AUD21.15 billion sold in 2011.
While SSAs continue to play a dominant role in the market, Australian dealers say corporates are finding their feet. And while the trend of increased non-SSA issuance has only begun to emerge - comprising just 15.6% of the total kangaroo market compared to 10.8% a year ago and 14% in 2010 – their numbers are poised to strengthen.
“To pick a trend in 2013, we’ll continue to see the corporate market grow,” said Simon Ling, head of debt capital market (DCM) origination at Commonwealth Bank of Australia. “Unless we see a world meltdown we’ll continue to see growth in corporate issuances. SSAs will still be an important part of the Kangaroo market but investor demand for global corporates will remain strong – and that goes across the board. The total amount of corporate issuance in the debt market is 8% for of total Aussie credit for the year while the long-running average is 5%.”
Dealers attribute this demand to cash-rich investors seeking more diversified exposure, as well as corporate scarcity that has led to favourable pricing conditions.
Australia’s onshore debt market has traditionally been dominated by financial institutions and ‘AAA’-rated SSA borrowers, but recently the affects of quantitative easing and a depressed equities market have left fund managers hungry for different credits, and a stronger macroeconomic landscape has them looking at corporates.
Additionally, most domestic corporates have had minimal funding requirement, or have been able to easily access bank financing. This has left a gap in the market for overseas companies to sell Kangaroos.
While the trend has been brewing for months, Ling says issuers now have renewed confidence that investors have an appetite for corporate credits, the depth of which was uncertain before this year.
“If you look at this time last year Australians were saying they wanted to see more corporates issuing in Australian dollars, but issuers were less certain that demand was really there. They lacked confidence that there was really a depth in the market, but there’s been a big change,” he said.
He points to mining company BHP Billiton’s AUD1 billion, five-year Kangaroo bond sold on October 9. That bond, its first Australian-dollar deal in 11 years, has a coupon of 3.75% and yield 90 basis points (bp) over swaps. The orderbook was reportedly two times oversubscribed, and there was chatter that the company would expand its deal to AUD2 billion.
“We look at that as a watershed moment that proves that the market has real depth because it generated a lot more confidence in issuers,” said Ling. “These credits are also trading in the secondary market, which has done a lot to encourage issuers.”
Kangaroo issuers including J.P. Morgan and Goldman Sachs have issued subsequent bonds following BHP.This robust demand has also helped top-rated corporates shake their issuer premium. According to one Australia head of debt syndication at a global bank says that in the past year brand-name Kangaroo issuers have typically paid a 10bp-15bp premium to their US dollar and euro equivalents, “obviously a disincentive to Issuers and mitigating increased supply in the Australian Kangaroo market.” But this premium has narrowed substantially.
“From the demand side there is a growing retail bid for Australian dollars … leading to increased demand for the high yielding, ‘AAA’- rated Australian dollar debt,” he said. “Australian dollars are also seen as a good proxy to the China story and the global resource story, and given its proximity to Asia, it’s a proxy to the emerging markets. This ongoing Aussie dollar appetite from retail, Central banks and Sovereign Wealth Funds is helping to drive the buy side. That’s helped the premium disappear in the past three to five months.”