The last few years of the 1990s saw a clutch of names that would become familiar to Kangaroo investors making their debuts, including Asian Development Bank (ADB), European Investment Bank (EIB), KfW Bankengruppe and World Bank. But it was not until 2004 that the sector could truly be said to be a reliable, regular component of Australian domestic market issuance (see chart 1). 

A steadily growing market took a significant hit in the wake of the global financial crisis. But annual SSA Kangaroo issuance volume passed A$15 billion for the first time in 2009 and only fell below that level once in the next decade and a half – in 2020, when COVID-19 and its associated fiscal response caused shockwaves throughout global markets. 

Australia’s fortune in coming through a decade and a half of economic and market crises relatively unscathed has also helped its capital market grow, including by attracting international capital. Apoorva Tandon, head of Asia syndicate at TD Securities in Singapore, explains: “Fiscal and monetary stability has been helpful to the Australian dollar market over an extended period. While it has at times been a headwind, the growth engine of China has been pretty helpful overall through the fiscal linkage to commodities.”

The current year seems set to produce all-time record SSA Kangaroo volume. The A$27.7 billion issued in the first half is comfortably a year-to-date record and trails only two full years; just A$3.1 billion of second-half issuance will see 2023 pass the all-time record annual volume, printed in 2010.

The consistency of SSA supply in the Kangaroo market is all the more impressive because no buyer base is effectively mandated to buy this product, while the activity of investor groups that do buy Kangaroos has ebbed and flowed based on relative value, outright yield and a raft of other factors.

“There is no ‘natural’ buyer base of SSA Kangaroos as there is in some other markets, like New Zealand or Canadian dollars, where the local banks buy for HQLA [high-quality liquid assets] purposes,” explains Yuriy Popovych, Singapore-based director, debt capital markets at TD. “What’s unique about the Kangaroo market is how internationalised it is: there are domestic buyers but also substantial participation from Asia and Europe.”

The dynamics of Japanese demand provide a good example of this. For an extended period in the late 2010s, SSA issuance  was heavily concentrated in long-dated format – typically 10-year tenor – with flow coming in the form of very frequent, typically small-sized tap transactions. 

Average deal size fell to less than A$100 million in 2016 while the total number of deals peaked at 215 – approaching one for every working day – a year later (see chart 2). The realignment of Kangaroo buyers away from an investor segment with a specific long-dated bias also reshaped the tenor profile of SSA issuance from 2019 onward (see chart 3).

The value proposition for this specific bid started to unwind as the relative advantage of Australian dollar yield fell over the latter part of the decade. Popovych explains: “This demand was driven by insurance policies sold in Japan and the proceeds reinvested. But since the Australian-US yield differential has collapsed – with the US dollar yielding more – it was inevitable that some of this insurance money would reallocate to US from Australian dollars.”

While he does not anticipate this specific stream of Japanese demand returning to the Kangaroo market in the foreseeable future, Popovych suggests the way the market has moved on demonstrates its fundamental resilience.

“It is a very diverse market by investor type,” he explains. “There are bank buyers and also central banks, asset managers and others. Without a natural buyer base, it is important for one or more investor groups to be aligned with SSAs – whether it be on relative value or another factor – but, equally, such alignment is usually in evidence.”

Investor diversity has also promoted issuer breadth in the Kangaroo market. According to KangaNews data, no fewer than 48 SSA issuers have priced Kangaroo bonds in the market’s history, all but eight of them having bonds outstanding as at 30 June 2023.

KfW Bankengruppe is by some distance the largest borrower by total issued, at A$63.7 billion, though six more SSAs have printed more than A$20 billion in total: EIB is the second-largest followed by International Finance Corporation, World Bank, Rentenbank, ADB and Inter-American Development Bank (see chart 4).

There have been consistent opportunities for other names over the years, however. For the past decade, SSAs outside the top seven have typically provided around one-third of total sector Kangaroo volume (see chart 5), while some issuers have been able to build outstandings quickly. Canadian Pension Plan Investment Board, for instance, priced its debut Kangaroo in August 2022 and increased its outstandings to A$4.7 billion within a year.

Issuance diversity is also shown by the destination of funds raised in the Kangaroo market. At A$191 billion, supranational issuers represent almost exactly half of all-time SSA Kangaroo issuance while the prominence of KfW and Rentenbank help make Germany by some distance the most active single jurisdiction (see chart 6). But issuers from a further 14 countries have tapped Kangaroo investors, primarily in Europe but also with a prominent Asian and North American flavour.

Most recently, the emergence of green, social and sustainability (GSS) bonds has given the SSA Kangaroo market another boost – especially with domestic Australian investors. These accounts are particularly coveted by SSA borrowers because they typically do not appear in the issuers’ deal books elsewhere in the world, thus providing the purest form of diversification.

As with the SSA Kangaroo market overall, it took some time from the pricing of the first GSS deals for the asset class to become a regular fixture of the market. In this case, World Bank printed the first Kangaroo green bond – a A$300 million transaction in 2014 – and, allowing for a pandemic-related slowdown in 2020, issuance started to reach its potential from 2019 (see chart 7).