Underneath the headline numbers, however, is a market that has at times divided into two tiers. On one hand, the largest SSA names have enjoyed something of a virtuous circle of issuance volume, liquidity and thus demand. For example, International Finance Corporation and KfW Bankengruppe between them issued almost A$12 billion (US$8 billion) in 2023 – nearly one-third of total market volume.

Meanwhile, smaller and more infrequent borrowers tend to rely more on offshore participation in their Australian dollar deals and historically have often struggled to coalesce demand around substantial benchmark prints. Illiquidity, and therefore a pricing premium, typically ensues.

For instance, Sven Lautenschläger, international funding officer at L-Bank in Karlsruhe, reveals that the agency’s 10-year trade in February was “a struggle” – to the extent that it only sold 50 per cent of the A$100 million print volume at issue, with the remainder traded down by leads. “We had permission to issue more, but we could not get enough interest,” Lautenschläger reveals. “The leads had to take a sizeable amount of the bonds into their books.”

Source: KangaNews 11 April 2024

However, over recent years opportunities have presented themselves for smaller SSA issuers to access the Kangaroo market – including at benchmark volume. L-Bank itself printed its largest-ever Kangaroo deal – a A$500 million transaction – in January 2022, and a clutch of other issuers from the sector have achieved the same outcome more recently (see table).

Source: KangaNews 11 April 2024

Issuers tend to point to two factors that they say support successful benchmark Kangaroo trades: the ability to offer some form of green, social and sustainability (GSS) format, and willingness to engage with a diverse investor base that in many cases is primarily outside Australia.

Oesterreichische Kontrollbank (OKB) issued its inaugural Kangaroo sustainability bond in early March. At A$400 million, the deal is also the issuer’s largest-ever Kangaroo – surpassing a record it set with its inaugural transaction more than 13 years previously.

Monika Seitelberger, director, treasury at OKB in Vienna, says the deal was driven by a large lead order from an international account. Crucially, she says the GSS label was a firm requirement. Seitelberger adds that OKB used its US dollar curve as a reference point and “only paid up slightly” to issue in Australian dollars.

Similarly, Council of Europe Development Bank (CEB) priced a A$600 million social-inclusion Kangaroo bond on 22 March. Again, this was its largest-ever Kangaroo and beat an issuer record that had stood for well over a decade.

Arturo Seco Presencio, deputy head of funding and head of treasury at CEB in Paris, says the trade was supported by the strong performance of the Australian dollar SSA market since the beginning of the year as well as marked investor interest in social bonds, particularly from issuers with a strong standing in the space.

Anne Flori, Paris-based senior funding officer at CEB, tells KangaNews the trade also forms a strong component of the issuer’s currency diversification strategy and is an extension of the footprint of its social-inclusion bonds: it was the issuer’s first benchmark-sized print in Kangaroo format.

African Development Bank’s A$500 million green bond, priced on 27 February, is not the issuer’s largest Kangaroo: it printed A$600 million in June 2021. But these two deals are the issuer’s first of A$500 million or more since 2012 and both came in GSS format. The 2021 transaction was a social bond.

AfDB continues to view the Australian dollar market as important despite not issuing between the 2021 deal and the latest transaction. Keith Werner, the supranational’s Abidjan-based head of funding, says the deal group decided labelled issuance would likely give the market return the best chance of success.

“We decided an ESG label – specifically, a green label – was something that could attract extra interest. In the end this was true. The deal was very well supported and we had strong interest from green-focused investors,” he notes.

However, while ESG labelling helps bring in the widest possible group of investors, market users acknowledge that the key to successful benchmark deals for smaller issuers often remains a strong international bid.

While offshore investors can be crucial for smaller SSAs in the Kangaroo market, it is also true that offshore support has more often than not been a critical component of deal success for the entire Kangaroo SSA sector this year. The challenge for smaller issuers is more acute, however, as it relates to critical mass.

Investors want to see large, tradeable lines in the market. But this can produce a natural favouritism for issuers that have the established support necessary to deliver such lines from debut – and a relative-value disadvantage for others that can make the Australian dollar market less cost-effective.

Lautenschläger says L-Bank wants to issue in larger volume but feels hamstrung. “There is a structural problem,” he tells KangaNews. “We are told to be more active and increase our lines, but there are two sides: one offers, and one buys. But if investors will only buy when a bond gets to A$500 million, how am I meant to get there when they won’t buy? Who is going to buy the initial A$500 million?”

There is also a pricing challenge for less-traded curves. One market source tells KangaNews: “The traders marking bonds from less frequent issuers tend to be more defensive, given there are no flows. This becomes a vicious cycle on Yieldbroker screens: a bond will not be trading but will have a mark on Yieldbroker, and this will typically drift wider and wider precisely because there is no trading.”

For instance, according Lautenschläger, if L-Bank had chosen to issue a five-year bond in February, the stale marks on the issuer’s outstanding bonds at similar tenor might have meant issuing 20 basis points wider than the issuer achieved on the 10-year bond it elected to print. Hitting a part of the curve unaffected by unreliable reference pricing helped L-Bank achieve an acceptable pricing outcome but drove it away from the market sweet spot where it might have attracted more volume.

“If we had done a five-year, investors would have looked at Yieldbroker and asked for a pickup over the quote,” Lautenschläger comments. “We would not have been able to get a five-year deal to work at levels similar or a touch wider than our euro curve. Yieldbroker was indicating 70 basis points or more over swap for five years, whereas we priced a 10-year for 59 basis points over swap.”

The issue is not that L-Bank is not prepared to pay extra to issue in Australian dollars – in fact, Lautenschläger says there has only been one occasion in L-Bank’s 20-year history where the cost of funding in the Kangaroo market has been cheaper than euros. Rather, if it were to sell bonds at the level Yieldbroker suggests, it would be so much more expensive that it would be significantly off kilter with euro and US dollar issuance and could in effect reprice the development agency’s global curve.

Despite the challenges, recent outcomes suggest it is possible for smaller SSA issuers to break through the volume barrier. Borrowers say they hope to use recent positive results to attract more domestic accounts.

Werner comments: “The ultimate goal is to be active and consistent in the Australian dollar market. This is what we are setting ourselves up for; we did not have to do Australian dollars this year but we wanted to reset our curve.”

OKB followed its Kangaroo with a trip to Australia to meet investors. Seitelberger says the agency received positive feedback from local accounts despite its deal mostly having been allocated offshore. She hopes domestic investors will participate in an OKB tap in the future.

“We got very encouraging feedback from the investors we visited, especially after having issued in the market with a sizeable transaction just a week prior to the KangaNews conference,” Seitelberger says. “From this perspective, we had a very current transaction as a basis for our discussions and future plans.”