The recent surge of foreign bond issuance in Australia demonstrates the growing faith global issuers have in the Australian dollar market
Foreign bonds are used to provide issuers with access to an offshore market in order to raise capital. Specifically, a kangaroo bond is a type of foreign bond issued in the Australian market by international corporations and is denominated in Australian dollars. The bonds are subject to Australian laws and regulations.
While Australian domestic issuance has been limited in 2016, kangaroo deal flow has gained traction – investors looking to diversify their holdings and improve their overall currency exposures can use kangaroo bonds to raise funds in Australian dollars.
Recent issuance includes an A$1bn deal by the Coca Cola company, which investors say offered fair value. Coca Cola’s debut issuance was followed by another benchmark kangaroo deal from US tech giant Apple, who on 4 June returned to the Australian dollar market. Apple priced A$1.42bn in a second kangaroo transaction, following its successful debut bond offer which raised A$2.25bn in August 2015.
The deals highlight the Australian market’s ability to deliver worthwhile issuance options to global names. Past examples of large Australian dollar kangaroo bond deals (including bank issues) are shown below:
|Issuer ||Pricing date ||Total volume (A$m) ||Tenor at issue (years) |
|Asian Development Bank ||January 2015 ||1,050 ||5 & 10 |
|KfW Bankengruppe ||July 2015 ||1,900 ||5 & 10 |
|Apple ||August 2015 ||2,250 ||4 & 7 |
| Intel Corporation ||November 2015 ||800 ||4 & 7 |
| World Bank ||January 2016 ||1,350 ||5 |
| The Coca Cola Company ||June 2016 ||1,000 ||4 & 8 |
| Apple || June 2016 ||1,425 ||4, 7 & 10 |
Both the Apple and Coca Cola bonds priced this month. Apple offered coupons of 2.65%, 3.35% and 3.6% for its four, seven and ten year bonds respectively, whilst Coca Cola priced coupons of 2.6% and 3.2% for its four and eight year bonds. Unusually, investors saw Coca Cola’s bonds issued below the rate of Apple’s, considering Apple has a higher credit rating:
| ||Apple ||Coca Cola |
|4 year ||Swap +82bps ||Swap +67bps |
|7 year ||Swap +125bps ||n/a |
|8 year ||n/a ||Swap +105bps |
|10 year ||Swap +135bps ||n/a |
Source: Yield Report
While the pricing perplexed some investors, the consensus suggests there was no single reason for the discrepancy, although Coca Cola has been issuing bonds to the market longer than Apple. Their market is globally more liquid, more diversified and it is a consumer staple company, rather than one in the more volatile IT sector. Coca Cola’s current spread to Australian Commonwealth government bonds (ACGBs) sits at an indicative 1.42% for their Nov 19 bond, whereas Apple’s Aug 22 bond is at 1.07% as of May 16:
Source: Yield Report
Rod Everitt, Sydney based head of Australian dollar syndicate at Deutsche Bank, emphasises attractively priced global issuance options and why portfolio diversification has moved up the agenda as international corporations bring more bonds to the kangaroo market.
“In the last few years issuers have learned that they need to have access to all markets, because if one shuts they need to be able to enter another,” Everitt says. “[…] what is driving corporates to access our market is the fact that Australia can provide them with these opportunities – and on a par with what they can achieve in other markets.”
The fact that global borrowers of Coca Cola and Apple’s stature are prepared to invest time and effort required to engage with the Australian dollar market, is a great indication of what kangaroo bonds can offer investors in the long term – portfolio diversity, benchmark size issuance, and consistent income to name a few.
Source: KangaNews, Yield Report, FIIG Securities