Hypo VBG hoping to demonstrate Kangaroo value to smaller issuers

The Kangaroo market has traditionally been a diversification play for global borrowers with substantial funding tasks, but Austria’s Hypo Vorarlberg Bank (Hypo VBG) (A/A3) believes the Australian dollar option can be a perfect fit for its profile as a relatively small but innovative issuer.

Hypo VBG roadshowed in Asia and Australia in the week beginning 21 May with the aim of adding Australian dollars to its suite of currencies issued. With an annual wholesale funding requirement of just €750 million (US$878 million) – which can be increased to €1 billion at the bank’s discretion – Hypo VBG hopes to become a consistent issuer of relatively small volume transactions in Australia.

“The scale of the Australian dollar market is appropriate for the size of our funding requirement,” Florian Gorbach, head of treasury at Hypo VBG in Bregenz, tells KangaNews. “Completing a euro benchmark of minimum volume of €500 million is almost a ‘one-and-done’ affair for us, whereas we would prefer to have more diversity in our funding book.”

Of its total funding requirement, Hypo VBG aims to issue approximately €500 million between the public covered-bond market in Europe and Australian senior-unsecured benchmarks. A further €110 million approximately will come from vanilla, structured and tier-two private placements including from its EMTN and Kangaroo programmes, with a further €90 million to be issued in the same formats to retail investors. The final €50 million is likely to comprise private placements of additional tier-one notes.

Completing a euro benchmark of minimum volume of €500 million is almost a ‘one-and-done’ affair for us, whereas we would prefer to have more diversity in our funding book.

FLORIAN GORBACH HYPO VORARLBERG BANK

Deutsche Bank and TD Securities are the arrangers of Hypo VBG’s Kangaroo programme, and Deutsche Bank arranged its Kangaroo investor update.

Hypo VBG certainly differs, at least in scale, from the traditional ‘national champion’ bank issuers that tend to be the first credits from any jurisdiction to find their way to the Australian market. Its €13.2 billion asset book places it just outside the Austrian top 10 banks by size.

However, the issuer is quick to point to its high credit quality. Hypo VBG is 76 per cent owned by the AA+ rated Austrian state of Vorarlberg with the rest of its equity owned indirectly by a state and a commercial bank from the German state of Baden-Württemberg. It is well capitalised, at 14.7 per cent common-equity tier-one and 18 per cent total capital, and it describes its focus as “longstanding, straightforward and deeply rooted” in its regional population and businesses.

Funding innovation

The majority – 87 per cent, as of mid-April this year – of Hypo VBG’s funding book is denominated in euros (see chart), but Gorbach points out that currency diversification is already in the mix. Most of the rest of the funding book was sourced in the Swiss franc market, which Gorbach says offers comparable scale to Australia although Hypo VBG has a natural advantage in the form of some Swiss franc-denominated assets. The bank has also issued some yen and Czech koruna paper.

With relatively small volume aspirations, Hypo VBG is willing to engage with investors on transaction format. Alexander Boor, the bank’s Bregenz-based head of funding and investor relations, says its Kangaroo focus encompasses senior and tier-two options while it is also willing to discuss structured options such as callable, senior preferred or senior nonpreferred tranches.

Source: Hypo Vorarlberg Bank 11 April 2018

This willingness to listen to investor demand – and indeed its engagement with the Kangaroo market as a whole – is characteristic of Hypo VBG’s overall approach to its funding task. Gorbach explains: “We are happy to be relatively innovative in capital markets, using the fact that we are not dependent on scale as an advantage. For instance, the fact that we have been active in yen already marks us out as relatively unusual among Austrian banks.”

The Asian connection may be relevant to any Kangaroo debut, too. Hypo VBG’s roadshow visited Tokyo, Singapore and Hong Kong as well as Australia, while Gorbach reveals that the issuer found Japanese investors, in particular those from the life-insurance sector, were more interested in talking about potential Australian dollar issuance than yen.

As for timing of a debut transaction, Hypo VBG is prepared to meet the market on price within the context of its overall cost of funds. Specifically, Gorbach says that while the issuer would be delighted to find a cost-of-funds pickup from the basis swap it would also be willing to consider paying a small premium to access Australian dollar diversification.

Boor says: “We want to build long-term partnerships with investors and to show our commitment to any market we are active in, which is one reason why we wrote a Kangaroo programme. But of course we do have to be somewhat opportunistic when it comes to issuing outside our ‘natural’ currencies of euros and Swiss francs.”