Features and investment trends for fixed-income products in the Australian market: a KangaNews report for DFAT

This report presents new research and deep insight into the specific motivations and likely course of development of institutional investor engagement with sustainable finance in Australia. It delivers research and conclusions about the bond and securitisation markets, including the drivers of recent growth and the outlook, investment rationale and strategy, primary and secondary liquidity, the influence of private credit, and product features and preferences.

The report explores the Australian fixed-income investor base’s capacity to absorb a privately issued emerging market focused debt security that addresses climate change. There exists flexibility to consider a fairly wide range of tenors, fixed- and floating-rate coupons, and structural features. There is also a range of distribution channels. However, specific types of credit exposure would exclude large subsets of the local investor base from participating.

You can read and download the full report by clicking here.

The presence of four novel features would be challenging for Australian bond, securitisation and private debt investors when layered into a single product, regardless of increased credit margin:

  • Unrated credit risk.
  • SME credit risk, potentially in aggregated format – ie fundamental exposure to the underlying risk of loans to SME borrowers.
  • Offshore credit risk.
  • Credit risk in emerging markets.

Investors would offer some positive consideration of underlying credit risk mitigation methods such as first-loss notes, full or partial sovereign guarantees, or lower-rated and higher-yielding tranched securitisation structures, though none appears to be a silver bullet.
 
Encouragingly, the overall scale of the market and of some individual investors within it means only a handful of accounts would be needed to support a small, off-index transaction. A subset of the investor base does have sufficient mandate and analytical capacity to consider allocating, especially if some form of risk mitigation is offered and, more so, if the emerging-market risk question can be answered.

BACKGROUND

In 2024, KangaNews was engaged by Australia’s Department of Foreign Affairs and Trade to write a research report on Australian fixed-income market features and investment trends. The report supports the US and Australia, which have committed to jointly develop an Indo-Pacific Net-Zero Transition bond series to mobilise private finance that assists SMEs in the Indo-Pacific region to navigate the transition to a low emission economy.

THE REPORT

These findings were based on research inputs including:

  • Transaction data from the KangaNews deal database, including deal pricing and volume information, transaction structural information and distribution details.
  • Intelligence directly sourced from market participants including fixed-income issuers, investors, intermediaries, law firms and trading platforms.
  • A survey of Australian fixed-income investors designed and conducted specifically for this report, and one-on-one interviews with more than 30 Australian fixed-income investors.

KangaNews has been a specialist provider of information and data to the Australian fixed-income market for more than 18 years.