Within the financial sector, local issuers – including domestic branches of offshore banks – remain the leading source of new bond supply in the Australian dollar market. However, the volume supplied by offshore names and their share of total annual supply has risen consistently over the past three years (see chart 1).

There are signs that domestic bank supply may not maintain its pace in H2. The big-four banks are well funded ahead of expected volatility and are also enjoying a raft of attractively priced global issuance options. Even issuers that do not typically access foreign-currency markets – including local branches – have options, most notably residential mortgage-backed securities issuance. Bank securitisation also ticked up notably in H1.

In other words, supply growth in the medium term may have to come from global names. Thanks to a wave of Kangaroo activity in July, global bank issuance in 2024 has stayed ahead of the year-on-year run rate (see chart 2). The July wave was diverse in origin, with deals coming from two US insurers, a Canadian bank and two European banks (see table).

Except for Landesbank Baden-Wrttemberg (LBBW), all these issuers have an established a presence in the Kangaroo market. Perhaps most significantly for overall issuance prospects, even as domestic bank issuance was quiet in July, deal sources say there was no overwhelming near-term factor that attracted global issuers. Instead, the primary goals were ongoing development of Australian dollar investor bases and generally favourable economics.

For instance, TD Bank is one of the most prolific issuers of Australian dollar covered bonds. It has accessed the Australian dollar market at least once a year since it debuted in 2014 with a A$1 billion five-year floating-rate note.

Colin Elion, associate vice president funding, treasury and balance sheet management at TD Bank in Toronto, says Australian dollar senior-unsecured pricing was slightly back of US dollars in its July deal but “we were comfortable with the pricing level because of the importance of maintaining strong and consistent engagement with the local investor base as well as the strategic value of extending our Australian dollar senior curve”.

Source: KangaNews 5 August 2024

Investor diversification was front of mind for New York Life when it made its Australian dollar return, Andrew Cohen, the issuer’s New Jersey-based head of guaranteed products business, suggests. He adds that the cost of the Australian dollar transaction was competitive compared with the issuer’s funding alternatives and, in turn, the issuer paid a “minimal” new-issue concession.

“The dual-tranche structure allowed New York Life to achieve a strong deal size as well as to access the largest breadth and depth of investors,” Cohen continues. “Growing the investor base has been particularly important as we have increased our issuance globally – to close to US$8 billion equivalent across our eight funding markets in the year to date.”

Transactions have also uncovered supportive demand conditions – suggesting the mid-year slowdown in new issuance is primarily a product of supply factors. Leads describe granular orderbooks for fixed and floating tranches, including solid support from domestic Australian investors and Asian accounts.

Apoorva Tandon, Singapore-based managing director and head of Asia debt origination and syndicate at TD Securities, says: “Conditions for primary issuance were increasingly supportive [through July], such that volume and pricing became increasingly compelling. The market backdrop resulted in greater execution certainty in the Australian dollar market, giving many issuers higher confidence to return.”

Market dynamics enabled some global borrowers to execute larger deals than they have before. This was the case for the US insurers, as Metropolitan Life Global Funding and New York Life priced their largest Kangaroo bonds since launching their programmes in 2012 and 2021, respectively.

TD Bank’s orderbook – which peaked at A$2.3 billion – was the largest it has received for an Australian dollar senior deal to date. Elion also highlights an increased skew to onshore Australian participation compared with the bank’s past Kangaroo transactions, across fixed and floating tranches, which in part reflects relatively limited senior bail-in issuance from Canadian banks. Notably, there were north of 100 unique investors across the two tranches – further highlighting the granularity of the global investor base for Australian dollar product.

The experience of solid demand in recent months led one issuer to trial a new product offering. Banco Santander printed A$650 million of tier-two notes after achieving its largest ever senior deal – an A$800 million triple-tranche Kangaroo bond – in January 2024. Santander’s tier-two trade garnered the issuer its strongest Australian asset manager participation yet by volume and number of accounts, according to Suzy Ramos, Sydney-based executive director, debt syndicate at ANZ.

Considering these outcomes, some market participants suggest the Australian dollar market is on the verge of achieving a new level of significance for global banks’ funding strategies. Rahni Soliman, global head of capital markets originations at National Australia Bank in Melbourne, highlights the increased market capacity that has been uncovered by larger and more widely distributed transactions.

Asia’s role in driving Australian dollar deal volume has been a recurring theme across this year and last. Historically, demand from Asia has been quite cyclical, often starting the year strong August did not appear to have eliminated. When the Australian dollar primary market reopened in the week beginning 12 August, one of the first issuers to test appetite was BNP Paribas. It was rewarded with an orderbook of more than A$2.5 billion for an eventual A$1 billion print in tier-two format. Clearly, the door has not closed to international banks.

Speaking in July, Soliman explained that the Australian yield curve is steep on a relative and historic basis so the market’s ability to hit yield hurdles for investors in Asia has improved.

He explains: “Asian investors typically consider their overall funding costs versus the yield on offer for a new bond offering – and there is generally a bit of a lag in the transmission. With the steeper yield curve, they can fund their books relatively short then buy three-or five-year securities at a much higher spread, which makes the Australian market attractive.”

But there are also noncyclical explanations for increased demand out of Asia. The evaporation of Reg S US dollar supply from Chinese-domiciled companies brought a number of regional investors into the Australian market seeking an alternative investment-grade credit option.

Lorna Greene, managing director, debt capital markets APAC at LBBW in Singapore, says many Asia-based investors do not participate in euro-denominated transactions as it is not a currency they naturally hold.

Furthermore, she says, they struggle to access US dollar-denominated transactions offered in the primary market by non-APAC borrowers that launch transactions in the European or US time zone. It can also be difficult for Asian investors to get sizeable allocations in many US dollar transactions as the domestic US investor base is often favoured by issuers for diversification reasons, says Greene.

“Australian dollar issuance gives many Asian investors access to global credits they otherwise wouldn’t have access to,” Greene continues. “It means they can also access better primary allocations, rather than having to scour the market for more sizeable positions in secondary. In short, the Australian dollar market offers Asian investors more options within their region, with better access and broader issuer diversification.”

The key question appears to be whether the Australian dollar market can deliver a virtuous circle for new-issuance growth, whereby new demand attracts issuers and increased supply in turn makes the market more investable.

As capacity in the Australian dollar market has grown, so has its relevance to international financial institutions. Greene suggests the Australian dollar market is now third in size among international currency markets, behind the US dollar and euro but clear of other traditional ‘semi-strategic’ options available to global funders.

“As issuance options continue to grow, I don’t expect the increased liquidity in Australian dollar demand out of Asia to fall away, even if the US Reg S market picks up again. The increased depth and liquidity in the market, coupled with the current strength of the Australian economy and robust legislative framework, continues to attract global issuers and investors,” Greene concludes.

Deal activity is catching the attention of new names, including from regions that have not been active in the market for some time. LBBW’s A$750 million deal in July marks the first Kangaroo bond from a German financial institution since 2006.

Prior to this year, LBBW was only active in Australian dollars via its EMTN programme. The issuer tells KangaNews launching its A$5 billion Kangaroo programme this year is a function of the bank’s growth and desire to diversify its funding sources. But its first deal from the programme surprised on the up side.

“Issuers across the globe have been placing more importance on the Australian dollar market and consider it to be here to stay,” Greene continues. “It is for this reason that LBBW went to the extent of establishing a Kangaroo programme for ongoing future issuance, rather than returning with an opportunistic EMTN transaction.”

Initially, the issuer expected to print A$300-500 million, reveals Martin Rohland, LBBW’s Stuttgart-based director, funding and debt investor relations. He explains: “It was important to us to have a good first foray into the market. We did not want to oversize the trade or tighten pricing too much, so we could provide a good outcome for investors that had done the work and retain quality accounts in the book. Printing A$750 million in this manner was an overwhelming success.”

Jil Janssen, funding and investor relations at LBBW in Stuttgart, highlights the fact that only 8 per cent of the deal book went to Europe, with the majority placed with accounts in Asia Pacific, as the issuer hoped for. Of the 70 individual investors in the deal, 30 were new names to the issuer.

Price discovery was somewhat a challenge for LBBW as it does not have any senior-preferred bonds outside its domestic market. The deal group used Australian major banks and names like Banque Fédérative du Crédit Mutuel and Svenska Handelsbanken. Greene says LBBW’s debut Kangaroo outperformed its French counterpart.

While the Australian market backdrop has been conducive in general, LBBW believes the outcome was also the product of investor work in the Asia Pacific region. Peter Kammerer, head of debt investor relations at LBBW in Stuttgart, says LBBW continuously markets to Asia, visiting several countries in the region multiple times a year, and that these efforts paid off in the Kangaroo debut. LBBW also had a lot of contact and dialogue with Australian accounts prior to the deal, he adds.

The question for the Australian dollar market may be whether one-off successes can be used to persuade further banks from various jurisdictions to issue. Canadian banks have built a strong franchise in the Australian capital market while others – including Singaporean names – are regular presences through their local branches (see box). But while offshore-domiciled banks from 13 different countries have tested the Kangaroo market since the start of 2022, only three – Canada, France and the UK – could claim anything like consistent supply (see chart 3).

Greene says LBBW’s deal has gained a lot of attention from other financial institutions in Europe, though. “We have received a lot of reverse interest coming to us off the back of this very successful deal and, hopefully, we will see more coming,” she says.

Overall, Greene is confident the strong outcomes financials have enjoyed over the course of this year in general will continue to encourage more borrowers to consider the market. However, she adds that it might be early 2025 before there is more debut issuance out of Europe.

Meanwhile, Soliman tells KangaNews he would be surprised not to see more offshore supply, including by repeat issuers that are returning after an absence or in new formats. “The latter is something we are expecting in the near-to-medium term, as well as prospective new issuers in this market,” he reveals.

Soliman adds that, as global borrowers are expanding the types of asset classes they issue in Australian dollars across the capital stack, he expects more Kangaroo tier-two deals in 2024 – especially in light of the successful prints by HSBC, Santander and BNP Paribas, which have raised the bar on what high-profile global banks might hope to achieve in Australian dollars.