A Kangaroo Bond refers to a bond issued by non-Australian issuers in Australian dollars (AUD) in Australia, in compliance with the local laws and regulations. The bonds provide global issuers with access to an additional and external capital market and a source of diversification of their investor base, eventually decreasing their borrowing costs.
The sovereign, supranational, and agency (SSA) issuers are the main issuers of kangaroo bonds. They issue such bonds in the market arranged in the same manner as the fixed-rate commonwealth government bonds. International banks, financial services companies, and foreign companies can also release kangaroo bonds. However, recently, such issuers are becoming less involved because of their lower ratings than SSA issuers.
A Kangaroo Bond refers to a bond that non-Australian issuers issue in Australian dollars in Australia in compliance with the local laws and regulations.
Bond issuers seeking to gain access to lenders and investors in the Australian debt market will issue a kangaroo bond.
The SSAs issue kangaroo bonds that normally offer a higher return to maturity than similar bonds that the commonwealth or state governments issue.
Workings of a Kangaroo Bond
Bond issuers seeking an opportunity to approach the lenders and investors in the Australian debt market will issue a kangaroo bond named in honor of the country’s national animal symbol. A foreign issuer issues a foreign bond on the domestic market in the domestic economy’s currency. Foreign bonds, such as a kangaroo bond, are primarily used to provide issuers access to a stock market other than their own to collect capital.
Investment firms and large companies seeking to diversify their assets and improve their overall exposures to currency can use kangaroo bonds to collect funds in AUD. Kangaroo bonds are usually issued in Australia when interest rates in the country are low compared to the domestic interest rates of foreign corporations, resulting in the reduction of the net interest and borrowing costs of the foreign issuer.
Many issuers do not require Australian dollars when issuing kangaroo bonds. Proceeds from the bonds’ issuance are usually translated back to the currency needed by the borrower through financial instruments such as cross-currency swaps.
Exchanges are used to offset the foreign exchange liability linked with the duty of the issuer to pay coupons to refund the principal in Australian dollars. For example, via a cross-currency swap, an issuer of the kangaroo bond will lend Australian dollars at the Bank Bill Swap Rate (BBSW) and the basis and pay the Federal Funds Rate along with any U.S. dollar margin.
Significance of a Kangaroo Bond
Many of the main SSA issuers are headquartered in Europe or Asia with financial support and assurances maintained by several governments and public sector agencies (hence the word “supranational”), further reducing the risk of default.
Kangaroo bonds issued by SSAs are usually rated AAA by large credit rating firms. Hence, the kangaroo bonds serve as an essential source of AAA-rated securities on the Australian bond market outside the state and commonwealth governments. The bonds issued by SSAs are also eligible as collateral for the Reserve Bank of Australia (RBA), ensuring that local banks may use the bonds as protection for RBA loans.
In Australia, kangaroo bonds were first issued over twenty years ago. Although the issuers are non-Australians, the bonds are eligible to be included in bond indices in Australia. Currently, the SSA issues account for around 13% of the main bond index that the fixed-income fund managers use in Australia, the Bloomberg AusBond Composite Index.
The SSAs issue kangaroo bonds that normally offer a higher return to maturity than similar bonds that the commonwealth or state governments issue. The SSAs-issued kangaroo bonds provide risk-averse borrowers with a significant diversification source apart from the government issuers. The borrowing rates in Australia and hedging currency risk back into their home currency are often cheaper for non-Australian issuers than borrowing in their home currency.