In a 36-hour window during the first week of the year, World Bank, CPPIB Capital and KfW Bankengruppe printed a combined A$5 billion. At A$2 billion, World Bank’s market-opening deal is the largest-ever SSA Kangaroo transaction. Meanwhile, CPPIB and KfW priced A$1.5 billion apiece, setting new issuer records and equalling the previous SSA deal record.

Large transaction sizes continued for the rest of the month, rounded off with a A$1.5 billion Kangaroo debut from PSP Capital. Supply eased without stalling in February when, despite the Lunar New Year holiday falling at the end of the second week, SSAs priced a little north of A$3 billion by mid-month – bringing the year-to-date total to A$12.9 billion.

While predictions of a fast start abounded late last year, the scale of the success of the Kangaroo market in early 2024 still surprised many dealmakers. Optimism had been tempered by an expectation that less supportive technical factors than were evident for much of 2023 – when wide swap spreads buoyed demand – would likely entail a good start as opposed to a great one.

Instead, what transpired at the start of the year was close to a best-case scenario. Investors wanted to participate in primary flow while interest rates were at or close to it peak, while lower outright yield and spread to government bonds than in 2023 did not seem to affect takeup.

Source: KangaNews 31 January 2024

“Investors have been able to see through it,” comments Harald Eikeland, director, debt syndicate at RBC Capital Markets in Sydney. “The pricing-in of terminal rates has been additive and spreads over asset swap have been wide, too, which is helpful for balance sheet investors. The stars are not as aligned as they were 12 months ago, but when top-quality names come to market with a new-issue concession available, the market will be receptive. Investors clearly have lots of cash to put to work.”

Oliver Holt, Singapore-based head of origination and debt syndicate at Nomura, adds: “It has been a surprising reception. Australian dollar investors care about asset-swap levels, but spread to government bonds is usually the focus. We thought comparatively tighter levels would create an issue, but this has not been the case. Instead, the upward sloping yield curve and considerably higher spread to the risk-free curve versus US Treasuries or Gilts has drawn in a larger range of investors.”

In fact, intermediaries say the buy side was more engaged than usual at the start of the year. Craig Johnston, Sydney-based director and head of DCM syndicate at Deutsche Bank, says this extends to the number of investors willing to bid early in the year as well as their relative enthusiasm.

“Deals have been driven by offshore demand but there has been diverse take up,” Johnston comments. “There is generally a good depth of demand ready to start investing early in the year, but this year only a handful of accounts weren’t ready to look at trades in the first weeks.”

Interest was broad but deal sources draw particular attention to offshore bank treasury participation in early-year deals, noting that these investors were unusually large players in deals in addition to the typical central bank presence.

“Asia and the central bank community will always be important to the SSA market. Lately, though, we have seen good bank treasury participation out of Asia and Europe – accounts that buy SSAs as part of their HQLA [high-quality liquid asset] portfolios,” notes Tim Pinchen, vice president, syndicate at J.P. Morgan in Sydney.

Overall, deal distribution data provide some evidence to support the view that some investors could be – at the margin – reallocating away from US dollars into noncore markets, including Australian dollars.

Apoorva Tandon, Singapore-based head of Asia syndicate at TD Securities, says: “It is always hard to say, because when investors reallocate to noncore markets it typically happens with a lag. However, the books we have been involved in have featured a more interesting set of accounts than was the case in early 2023 – which could reflect a currency reallocation. It is difficult to confirm, but we are starting to see accounts that have been absent from Australian dollars for some time or have never bought Australian dollars participating in deals.”

The secondary market may provide conclusive evidence ahead of a primary impact, Tandon adds – and the pattern is also most likely to be evident in the government bond space first. Even so, he tells KangaNews: “We have SSA clients across currencies so the sector is a good reference point – and some investors that typically base themselves in US dollars are definitely allocating differently. They are buying the same credits but in different part of the curve or different currencies.”

Coupled with high SSA deal flow, the Australian market has also had an unseasonably early start to semi-government syndications. Deal statistics suggest greater offshore participation in this sector, too.

It was not just offshore investors that delivered enhanced demand for SSAs in early 2024. Australia’s asset manager sector also made its presence felt, Pinchen continues. “Given the amount of money going into superannuation, even a slight tilt in allocation toward fixed income can have a meaningful impact on SSA and semi-government deals as many of these funds track government bond indices, of which SSAs are a component,” he says.

Australian Prudential Regulation Authority (APRA) data support the narrative that fixed-income allocation has been increasing. Cameron Lofstedt, executive director, debt capital markets and syndicate at UBS in Sydney, notes that these data suggest that 21 per cent of superannuation assets under management are in fixed income, compared with 16 per cent about 12 months ago. “It is clear there has been an increase in allocation. This has helped all market segments including the Kangaroo SSA space,” he concludes.

The scale and diversity of demand made Kangaroos an appealing proposition for issuers, combining substantial deal volumes with a funding cost that stacks up globally. “Australian dollar funding has been competitive without being a bargain,” Johnston notes. “It has been more challenging for European-based issuers but pricing has been fair for the issuers that have come to the Australian dollar market.”

The fact that multiple global markets were showing the green light at the start of the year may actually mitigate the Kangaroo issuance outlook, simply because many issuers have been able to print an unusually large proportion of their annual requirements early. For instance, World Bank ticked off about 20 per cent of its 2023/24 funding programme in January – including two trips to Australian dollars as well as issuance in US and Canadian dollars, and sterling.

This still leaves a clutch of SSA names that are frequent Australian dollar visitors but are yet to issue significant volume in 2024 (see table 2).

Source: KangaNews 26 February 2024

Pinchen suspects some SSAs have taken advantage of attractive funding opportunities elsewhere but will look at the Kangaroo market in the next few months. “If anything, the Australian dollar market could have absorbed even more issuance in January but a lot of SSA issuers have been drawn to the opportunities available in larger markets,” he says.

The rates outlook likely adds weight to SSAs’ focus on core markets first. “The rhetoric from the RBA [Reserve Bank of Australia] is very measured – it seems likely it will hold rates until later in the year. In a scenario in which Australian rates are elevated compared with the rest of the world, our yields should theoretically be more attractive for offshore investors,” Pinchen adds.

Technical factors, however, may not be as supportive throughout the current year as they were in 2023. It was relatively cheap to buy Australian dollar credit and rates product last year, Tandon notes – and this led to an abundance of liquidity. “For the bulk of 2023, Australian dollars across credit and SSAs benefited from being a relatively cheap currency when relative value adjusted to rates,” he explains. “US dollar focused investors could get better carry in Australian dollars because they could buy the currency in the FX forwards market then buy a spread product like an SSA and run the carry.”

While the tailwind has eased, Tandon adds: “Swap and government bond spreads are not as wide as they were last year but they are higher than G-10 peers. Global investors that are set up to buy or consider Australian dollars – and which are comfortable with the liquidity – will be looking at the SSA sector carefully and will consider it merely for the fact that it offers some of the widest government bond margins.”

Robust early-year demand – and a plausible rationale for these conditions to hold – combined with an explosive start to the year might be expected to foretell another record issuance year. At the beginning of January, however, Tandon called 2023 “an outlier” and his base case was that 2024 would deliver a historically good outcome but fall short of the record.

But after no indication of a slowdown he says his view has changed. “In January, it felt like the market would ease but, if anything, we have seen a step-up in investor participation and no signs of slowing down across sectors. We have all been surprised by the resilience and depth of the market on the upside,” he says.

Andrea Dore, global head of funding at World Bank in Washington, tells KangaNews printing A$2 billion with relatively less balance sheet reliance is an amazing result. But this increased demand may not be permanent, she adds: if the increased asset manager share is driven by reallocation from equity to fixed income, Dore believes it may be short-lived.

Official institution growth is generally more sustainable, though this will depend on many factors including yield levels and the value of the Australian dollar. “In our five-year Kangaroo, we saw the share of official institutions increase significantly and some official institutions that have not been present for years participating,” Dore says. “They are taking a view that the Australian dollar is now at a good entry point.”

Overall, though, Pinchen says it is important to acknowledge that there has yet to be a clear reversal of demand conditions. “Last year we had an early-year rush, a busy May, then a pickup toward the end of the year,” he reflects. “There is a lot being priced in by investors for this year, and if it plays out how the market thinks, it could be another very strong year.”

Whether or not 2024 delivers record volume, Pinchen says it is positive to see the Kangaroo SSA market perform so well in the last three years – especially given the prominence of volatility and event risk in global markets. This reflects a deeper set of foundations for the SSA sector in Australia.

This is not lost on issuers. “The Australian market is dear to my heart and to see how it has evolved is excellent,” Dore comments. “In the past, I would not have imagined being able to execute a A$2 billion trade – let alone to execute a swap of that magnitude flawlessly and in such a short period of time. Many years ago, we were on top of the world when we first issued a A$1 billion bond. To achieve double that size was unimaginable, but we did it!”

When the stars align, though, Dore says Australian dollars is always a good option. “In the last few years, we have had a very good run in the Australian market and have consistently been able to do nicely sized transactions. We love to issue as much Australian dollars as possible. World Bank has a significant funding programme, and diversification is important. If the ability to issue Australian dollars is there, the size of our programme allows us to do so – and we really value it.”