The Rise of The Kangaroo – AUD Bonds

 

To date, we have had more AUD kangaroo bond issues than the entire of 2013 – 127 issues compared to 118 for 2013.

Singapore has had only 71 so far (last count 73) and let’s see how they compare. It makes Singapore look like a has-been.

kangaroo bond market

A simple definition of kangaroo bonds are bonds issued by non domestic borrowers denominated in AUD. These non domestic bonds are part of the larger world of eurobonds, which is the generic term for bonds issued in a currency other than the domestic currency of the borrower.

In the old days, no one really bothered with AUD bonds because their curve was inverted anyway and it made sense to just do a fixed deposit at 6.5% than buy a 10 year bond at less.

Check out the 2007 interest rate curve vs current.
AUD INTEREST RATE 2007 VS 2014

I traded AUD eurobonds back in 2004 and had a good time with them because they were a thoroughly civilised marketplace simply because it is a high grade, transparent and liquid market. There is no need for junk issuers because the bond yields are already high enough for good quality names, there is no need to buy junk for yield enhancements.

Indeed I was surprised to read that Qantas is the first junk rated issuer in the AUD domestic market and there is a new Qantas 7 year issue to be priced by tomorrow. http://www.businessspectator.com.au/news/2014/6/3/debt-capital-markets/qantas-raise-least-100m-second-junk-bond-issue

Alas, it is a domestic paper, which means that we have to do extra homework on the tax implications.

My personal interest in AUD eurobonds started in 2009 when the RBA started cutting rates, the curve tanked and bankers were still pushing short dated papers on a very steep yield curve.  Knowing that Australia would be directly in the QE line of fire, I then decided to lock in the high yields by buying AA papers that gave over 5.5% for anything above 5 years.

The reason for eurobonds then was simple – there is no coupon with holding tax concern (for me, at least) and it only requires small minimum investments of A$10-50k to get started.
(Australia’s regulators probably see bonds as safe investment alternatives to stocks unlike the case of Singapore).

Taken from the tax guide.
Foreign investors are exempt from Australian interest withholding tax for bonds issued in a manner which qualifies for interest withholding tax exemption, including the passing of a relevant “public offer test”.
Otherwise, a 10% interest withholding tax applies.
Non-resident bondholders who do not hold their bonds on the revenue account should be exempt from Australian capital gains tax on the disposal of their bonds. Those who hold their bonds on revenue account may be taxed in Australia on profits on disposal, although residents of a country that holds a treaty with Australia may be entitled to income tax relief. Resident bondholders may be taxed on profits on disposal of their bonds.

These days,  the world appears to have taken to AUD denominated bonds because of  global portfolio reallocations that started over a year ago as I mentioned sometime last year. https://tradehaven.net/market/thinking-about-reallocations-aud-and-cad/

Examining this year’s batch of issuers, we have a bunch of A to AAA issuers with the odd BBB+ and just 1 teeny junk rated issue. It is just that we have to look towards 10 years for the 5% now, unless you are willing to live with a single A or BBB name (usually Middle eastern banks, which are probably better than 2/3 of SGD new issues).

http://www.bloomberg.com/news/2014-05-13/hsbc-touts-kangaroo-bonds-as-banks-look-down-under-arab-credit.html

The Singapore market has seen its share of AAA issuers too, once upon a time. In the old days, the market used to issue loads of high quality papers to large scale global customers but sadly, that market died out.

1. Unprofitable because there were no fees
2. The large customer could only take 30% of the issue size and it was hard to sell the rest
3. Easier and more profitable to buy USD and G3 papers (more liquid) and swap into SGD for them (to make money on the swap and the bond !)

I have decided to initiate coverage on AUD bonds because they are the next big thing and Australia is commanding more attention in the global investment sphere being the 4th most traded currency in the world and it is the only AAA country left where you can get 4-5% returns for investment grade credits.

This is something Singaporean investors need desperately instead of sticking their necks out there, buying junk at the same yield.

Table of Kangaroo bonds 2014 (prices unverified)
aud bonds

And there are those AUD eurobonds issued by Australian corporates (usually banks) that are listed offshore.

Here are a few of them that were done this year and they are all SENIOR papers !

AUD SENIOR BANK BONDS(prices unverified)

All nicely yielding over 4% when we are scrambling for SGD SUB DEBTS at 3-4% here !

Finally, a mention on domestic bonds. The domestic bond market is dominated by state government bonds such as NSW, Victoria and Queensland, along with banks, universities and corporates such as Toyota. Like I mentioned above, NO JUNK because Qantas is the first junk bond to be issued domestically which is a mind blowing fact.

In fact, OCBC issued a series of domestic floating rate notes this year in AUD. The current 3 monthly coupon paid is 3.305% for their senior 03/2017 paper and 3.385% for their 08/2016 paper, rated Aa1/AA-.

Thus I am very intrigued by the new 7Y Qantas (Ba2/BB+) domestic  issue (hearing coupon to be >7.5%)  that is to be priced soon that even comes with a coupon step up.

“CPN WILL STEP 25BPS PER RATINGS DOWNGRADE BY MOODYS OR S&P, 50BPS PER NOTCH FOR BOTH ISSUERS.  STEP UP SUBJECT TO 75BPS MAX PER AGENCY OR 150BPS CUMULATIVE CAP.”

It is professionalism that I am unused to.

The difficulty for Singaporean investors is that access to Australian kangaroos come at a price if you bank with a non international bank. By the time you get a 3rd hand price, you are better  off just doing their rip off fixed deposit rates for AUD that I am amazed some people fall for.

I think I have said enough.

Hoping readers will find this useful.

 

Qualifiers : This is not a recommendation to buy bonds or constitute as investment advice of any form.

Note that buying a bond denominated in another currency carries foreign exchange risk and can result in capital losses or gains.

Bond prices fluctuate on interest rates and credit pressures. Do not buy bonds if you are unfamiliar with the risks involved.