SSAs pounce on Kangaroos
Favourable Australian dollar swap dynamics and elevated investor appetite for high-grade paper propelled the supranational, sovereign and agency Kangaroo market in early 2023, with January one of the biggest issuance months for several years. The surge in issuance came despite a relatively weak bid from Japanese investors, which have until recently been a main supporter of Kangaroo issuance.
Dan O'Leary Deputy Editor KANGANEWS
World Bank opened the 2023 supranational, sovereign and agency (SSA) market with a A$1.5 billion (US$944 million) five-year Sustainable Development Bond on 4 January, quickly followed by a further A$1.3 billion issued by CPPIB Capital the following day. There was some speculation that the early Chinese Lunar New Year – on 22 January – might skew early-year issuance into the earliest window, but flow resumed after the holiday break and into February.
Total SSA Kangaroo issuance passed A$10 billion on 13 February – the earliest point in the year at which this milestone has been reached (see charts 1 and 2).
Craig Johnston, Sydney-based director and head of DCM syndicate at Deutsche Bank, says the positive tone on primary deals has been supported by market confidence that terminal rates are inching closer. Further rates clarity should drive ongoing primary issuance.
“The spread to sovereign for tier-one [SSA] issuers is very wide – not as wide as at various points in the second half of last year, perhaps, but historically very attractive,” Johnston tells KangaNews. “This is providing a tailwind for new issuance. A strong primary market in turn gives the investor base confidence.”
Andrea Dore, Washington-based head of funding at World Bank, tells KangaNews market conditions were favourable for the issuer at the start of the year. The supranational requires its issuance to align with demand and deliver a swapped-back cost that stacks up with US dollar pricing. This was achieved with room to spare in the case of the January Kangaroo, Dore says.
An active start to the year for Australian banks in foreign-currency markets (see box) has also helped keep the cross-currency swap at conducive levels for Kangaroo issuers despite the record volume of inbound issuance. ANZ Banking Group and Westpac Banking Corporation have both issued their first euro benchmarks since 2018, for instance.
Yuriy Popovych, director, debt capital markets at TD Securities in Singapore, says: “SSA pricing has been supportive versus US dollars – it looks attractive for borrowers. It is not a slam dunk for euro borrowers as the euro curve continues to trade tight. But if we remain near these levels and demand remains strong, I expect supply to come. It will become less a question of pricing and more one of demand.”
Underlying the market dynamics is a positive story on Australian dollar value that has sparked international investor support. The significance of offshore buyers in the SSA Kangaroo market explains why the Australian dollar product experienced an early-year issuance boom while its New Zealand dollar equivalent – which typically relies on local buyers – set off at a steadier pace (see box).
Dore explains that yield on Australian dollar fixed income has gradually restored a relative value advantage the currency largely lost in the course of the previous rates cycle. “The differential to US dollars shrunk significantly when rates fell, which meant Australian dollar investment became less attractive for international investors and we saw less offshore interest,” Dore says. “As yields have now increased, we see international investor interest growing.”
Market sources say many global investors choose whether to allocate to primary market SSA Kangaroo deals based on specific spread to Australian Commonwealth government bond (ACGB) targets, while primary SSA deals are typically marketed on the basis of a margin to domestic semi-quarterly swaps. Swap spreads have widened and SSAs’ relative pricing to ACGBs has also moved significantly, making Kangaroo deals more attractive to offshore investors.
For instance, Asian Development Bank (ADB)’s A$450 million 10-year note priced at 108.1 basis points over the November 2032 ACGB – a fact not lost on offshore investors, according to the issuer.
Popovych notes offshore demand has strengthened thanks to a pickup in rates and attractive spreads to government bonds. “A combination of technical factors remains that is making Australian dollars an attractive proposition for offshore accounts,” he explains. “Australian dollar swap spreads were at one stage the widest among G10 currencies – that is pretty attractive.”
Kauri market set for steady supply
Maturities in the first half of 2023 should fuel supranational, sovereign and agency (SSA) Kauri primary issuance, local market users say. The demise of Kāinga Ora – Homes and Communities as a standalone issuer could also increase appetite for international names.
With three transactions priced by mid-February, the early part of 2023 has been solid if unspectacular for SSA Kauri supply (see chart 3). Kauri issuance is typically less seasonal than the Australian dollar equivalent, however. For instance, the all-time record issuance year – 2021 – saw just NZ$825 million (US$521.9 million) of the eventual total of NZ$7.8 billion priced in the first month and a half.
A chunky redemption schedule over the next few months should see a steady flow of primary deals, according to Danny Keene, director, debt capital markets at Commonwealth Bank of Australia in Auckland. “There should be plenty of cash to put to work over the next few months based on those maturities,” he adds.
According to KangaNews data, NZ$7.9 billion of SSA Kauris is due to mature in 2023 (see chart 4), which is easily a record for the sector. There is also a NZ$16 billion sovereign maturity – the largest single point on the New Zealand government bond curve.
Keene notes New Zealand Debt Management’s absorption of Kāinga Ora’s funding task could provide a further tailwind to other high-grade issuers. “Investors will be looking for high-grade assets and Kauris can fill some of the gap,” he explains. “We also have a large New Zealand government bond maturity in April alongside a LGFA [New Zealand Local Government Funding Agency] redemption. There will be plenty of cash looking for a home in the first half of 2023.”
Mat Carter, head of debt capital markets and syndicate at Westpac in Auckland, says January’s primary issuance achieved good volume outcomes despite the uncertain interest rate environment. “The yields are constructive compared with global curves, but some offshore accounts remain cautious,” he explains.
Inter-American Development Bank (IADB) opened the Kauri market for 2023 with a seven-year transaction – the same tenor as that issued by International Finance Corporation in the last deal of 2022 and by Nordic Investment Bank in its return to Kauri issuance in February. Market participants say the steepness of the New Zealand dollar-US dollar basis curve currently favours issuers seeking longer maturities.
Glen Sorensen, director, syndicate at ANZ in Wellington, says: “For investors, New Zealand dollar swaps, and by extension Kauri bonds, currently offer a healthy pick-up in yield to the likes of Australian and US dollars.”
Sorensen adds that IADB’s transaction marked a positive start for SSA Kauri issuance, with the issuer recording one of the best volume outcomes for seven-year paper “for some time”.
Keene says seven-year is typically a more bespoke trade, dominated by balance sheets that can buy in this part of the curve. “Certainly, the five-year part of the curve caters to a broader set of investors domestically and globally,” he notes. “Pricing back seven-year tenor to US dollars is attractive to some issuers, though – so getting these good volume seven-year trades done is great.”
Carter suggests domestic balance sheets want exposure to SSA paper and are the predominant drivers of recent transactions. “SSAs also still want diversification away from more traditional currencies,” he says. “Subject to the tenor, the Kauri market can provide attractive relative value for those issuers compared with their primary funding curves.”
The positive start to SSA Kangaroo issuance has happened despite the relative weakness of the Japanese bid. Japanese investors have for decades been major buyers of global high-grade debt thanks to supressed domestic interest rates that forced them offshore in their hunt for yield. Australian dollar issuers have been beneficiaries, with SSA names among the most favoured.
The Bank of Japan (BoJ) shocked markets in late December 2022 and early January 2023 by tweaking its interest rate policy on 10-year Japanese government bonds (JGBs) and revising inflation targets upward. The yen strengthened as FX traders factored in a potential end to Japan’s decades-long loose monetary policy settings.
Although the BoJ move remains more a shot across the bow than a major policy revision by February 2023, the market consensus is that Japanese fixed-income investors are contemplating something not seen in domestic bonds for some time: the prospect of significant positive yield on JGBs.
Leads on ADB’s 10-year Kangaroo foray decline to specify the level of Japanese distribution but note significantly more diverse geographic participation than usual for the 10-year Kangaroo market, with less reliance on Japan. Asia-based investors accounted for most of the 10-year deal, while central banks and bank treasuries were the dominant buyers by type.
Oliver Holt, Singapore-based head of origination and debt syndicate, Asia ex-Japan at Nomura, says the market has come to expect 10-year Kangaroos to be placed with Japanese investors and that, in this context, greater diversification is a positive outcome for the sector.
“This is the first time in a very long time that we have seen a five- and 10-year deal with a steep credit curve,” he explains. “In the past, we have done five years at a price driven by the number of asset-swap-based buyers, and 10-year deals driven by yield targets toward Japanese buyers. Here, the non-Japanese accounts were attracted by the 23 basis points of credit curve, which helped – alongside the obvious 100 basis points over ACGBs for a triple-A product in a more stable rates backdrop.”
Holt says the lack of 10-year paper in primary and secondary markets also aided ADB’s success. “This was the first deal after cash had accumulated over a long time – the deal was timed perfectly and differentiated from prior transactions by theme and tenor,” he tells KangaNews.
Nikolaus Romuld, head of high-grade origination and syndicate at Commonwealth Bank of Australia in Sydney, suggests rising yield on JGBs and Australian dollar hedging costs could change Japanese appetite for offshore debt in 2023.
“Certainly the dynamics have changed,” he says. “There are two pools of investors, one of which takes on the currency view while the other is about yield on a hedged currency basis. Australian dollar-yen has bounced back somewhat since the BoJ’s moves, which is a consideration for the first pool. The other pool is finding Australian dollar fixed income a little more expensive. How this dynamic shakes out for the rest of 2023 will be interesting.”
Anthony Ruschpler, senior treasury specialist at ADB in Manila, says 10-year Kangaroo issuance can be challenging but the issuer noted good demand at the start of 2023. “Spreads in this part of the curve were attractive, not just for the Japanese investors but buyers globally,” he tells KangaNews.
“We started with A$150 million minimum, and so we were delighted with the final outcome – the orderbook was very granular,” Ruschpler continues. “We are equally pleased with the outcome on the five-year. This is our first syndicated education bond in any public market so we are very happy with the interest it received.”
A retreat of Japanese demand could have a long-term impact on the tenor profile of the Kangaroo market. “The deepest pool of demand is at five-year tenor, where we find central banks, domestic accounts and global investor interest in Australian dollars intersecting,” Johnston notes. “Beyond five years, we tend to exceed central bank mandate limits and some of the domestic accounts are more reluctant to go longer.”
More generally, Popovych adds, investors remain cautious despite the strong start – particularly when it comes to adding duration. But there are positive signs even here.
“We are starting to see investors globally being more comfortable further out on the curve, including Australian dollars,” Popovych says. “The 10-year part of the curve historically traded tight, which was prohibitive for some global fund managers. But the five- and 10-year curve looks fair now. This is definitely a space I am keeping an eye on. We will have to wait and see if this develops into a broad source of demand across the investor base.”
WOMEN IN CAPITAL MARKETS Yearbook 2022
KangaNews's annual yearbook amplifying female voices in the Australian capital market.
SSA Yearbook 2022
The annual guide to the world's most significant supranational, sovereign and agency sector issuers.
KANGANEWS SUSTAINABLE FINANCE H2 2022
KangaNews is proud to share cutting-edge information from the global and Australasian sustainable debt market.