THIS REPORT IS SPONSORED BY AUSTRACLEAR | Kangaroo bonds are bonds issued in the Australian market by offshore firms and denominated in Australian dollars. Bonds deposited into the Australian market are held within Australia’s bond settlement facility, Austraclear, which is a wholly owned subsidiary of the Australian Securities Exchange.
Facilitating kangaroo bond issuers
Austraclear currently holds around $200 billion in kangaroo bonds. These types of bonds are attractive to offshore issuers, as they provide access to a capital market outside their own, which potentially reduces their borrowing costs and diversifies their investor base. Hedging the currency exposure back to their local currency can often be more efficient than borrowing in their own country or in other markets.
Blair Harrison is Austraclear’s senior manager for settlements and collateral. “To issue a bond into Austraclear, you generally need to be an Australiandomiciled entity,” he says. “If you’re not, for example, if you are a kangaroo bond issuer, then you need to use an agent, and there are a number of different service providers in that market, including ASX’s own service, Austraclear Services (ACSL).”
ACSL acts as an agent for many offshore issuers enabling them to facilitate their issuance of securities in Aussie dollars as well as managing their Aussie dollar cash flows for settlement and coupon payments to investors. But Austraclear can also work with large, overseas custodians when clients have a strategic relationship with these providers, or when they wish to diversify their risk by working with multiple parties.
Foreign borrowers maintain appetite
The biggest issuers of kangaroo bonds into Australia are predominantly supranationals, including the Asian Development Bank and the European Investment Bank. Issues also come from Japan, Canada and US corporates, such Australia’s bond settlement facility, Austraclear, is as Apple.
Harrison says that supranationals continue to borrow in the realm of $200 billion in the Australian market. “We see that Canada, for example, is increasing, mostly from semi-governmental issuers such as the Canadian states and provinces,” he says. “Whereas the Japanese issues appear to be decreasing, which may be an indication that Japanese issuers are focused domestically, possibly because of the low interest rate environment in Japan.”
On the Japanese investor side, however, Harrison says there are still Japanese investors investing in Australian dollars. “We can see the case where supranationals will issue bonds in Australia that end up with those Japanese investors,” he says. “In this situation it’s a case of simple supply and demand.”
Harrison explains that if there’s an appetite for a Japanese investor to hold an Australian dollar bond, it is likely to be because they have a positive view of the Australian interest rate environment compared with others.
He adds Canada’s interest could be due to a variety of reasons. “Our economies are quite similar for one,” he says. “Also, we are both large countries and have similar political systems, and there are investments in Australia from Canada and vice versa.”
Harrison says when it comes to kangaroo bonds, although the issuer utilises Austraclear and predominately accesses the Australian market, some of the issuance ends up being held by investors offshore. “This is sometimes the case,” he says, “demonstrating that issuers that issue bonds into Austraclear can reach investors both onshore and offshore.”
The number of foreign issuers is rising and one reason for this could be related to the efficiency of raising capital through Austraclear in Australia and in Australian dollars, rather than in other markets in other currencies, Harrison says.
“This could be an indication that bond issuers believe the Australian dollar is an efficient currency to borrow due to the current interest rate environment. But it might also mean that issuers can swap the bonds back into their own currency at an effective rate,” Harrison says. “And that would seem to be supported by the types of bonds we’re seeing.”
Harrison says for both kangaroo bonds and government debt, the length of the bond issuance, or the tenor, is becoming longer so issuers are borrowing at fixed rates for a longer period of time. “That is, instead of borrowing Australian dollars for three to five years, they are borrowing for 10 to 20 years at that rate,” he says.
He adds this situation suggests that offshore entities are taking a view on the affordability of borrowing money in Australia. “In particular, they are taking a view on our current interest rate environment compared to other markets, long-term,” he says. “The fact they are also borrowing more is another reflection of this favourable view of Australia’s interest rate environment.”
It’s also no surprise that most of these bonds are issued as fixed rate notes rather than floating rate notes, Harrison says. “This gives the investor and the issuer certainty over the interest that will be paid or earned and also secures in the borrowing for a longer period at a fixed low rate,” he says.
Investigating the tech
Austraclear services over 800 participants and holds close to $2 trillion worth of securities, which includes around $550 billion on issuance by the Australian government. Austraclear settles on average more than $67 billion transactions per day via a link to the Reserve Bank Information and Transfer System (RITS) – Australia’s high-value settlement system used by banks and other approved institutions to settle their payment obligations.
An emerging trend in the settlements space involves Australian issuers and, in particular, the major banks issuing bonds in other markets, especially in US dollars.
“The volume of US dollar issuance from the major banks in recent years has outweighed the volume of Australian dollar issuances,” Harrison says. “There are a number of reasons for this, but this trend is a reason why Austraclear is considering diversifying to facilitate payments and bond issuance in other currencies. While assisting clients in raising offshore currencies in Australia, we can also provide our local customers with safe and secure infrastructure, governed by a stable and robust legal environment, to hold those securities onshore in Australia.”
Austraclear services a variety of different customer types, including institutions that hold bonds directly and also custodians who hold bonds in Austraclear for their clients. “The question is how we can better service custodians, intermediaries and end-investors in the future, particularly as we consider the move onto platforms that use distributed ledger-based technology,” Harrison says.
The Australian industry can benefit from the use of distributed ledger technology for equities settlement and Harrison says those efficiencies could also apply to securities such as bonds and other fixed-interest securities. “
The whole world is interested in ASX’s progress developing distributed ledger technology to replace our equity settlement system, and we are excited about the potential benefits for our customers and the market, too.