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1301.0 - Year Book Australia, 2006  
Previous ISSUE Released at 11:30 AM (CANBERRA TIME) 20/01/2006   
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KANGAROO BONDS

Kangaroo bonds are long-term debt securities issued by non-residents in the Australian domestic market. They are denominated in Australian dollars, documented to Australian legal requirements, settled through Austraclear, a central depository providing clearing and settlement facilities to the Australian financial markets, and listed on the Australian Stock Exchange.

The rapid growth in Kangaroo bond issues in the Australian market has given rise to an interest in the nature, trend and impact of this type of bond on Australia's international investment statistics. While Kangaroo bonds have been issued for a number of years, this article focusses on the period from 2000-01, when they became significant in terms of Australia's international investment position.

The growth of non-government bonds, such as Kangaroo bonds, is due in part to the reduction of Australian government bond issues. Non-resident financial institutions are the dominant issuers and most are resident in the United States of America (USA).

This article explains some of the key aspects of this instrument.

KANGAROO BONDS IN AUSTRALIA IIP

Australia's international investment position (IIP) includes all financial positions and transactions between residents of Australia and non-residents. The global bond market may be represented as diagram 30.16 below. The Australian Bureau of Statistics conducts the Survey of International Investment, which collects data for the compilation of the IIP. Debt issues that are in scope of the survey are covered by areas 2, 3, 4 and 7 because they are transactions between residents and non-residents. Of these areas, 2 and 3 represent Australian investment abroad, while 4 and 7 represent foreign investment in Australia. Areas 1, 5, 6 and 8 are out of scope of the IIP because they represent transactions between residents or between non-residents.

Kangaroo bonds are covered by areas 1 and 2 of diagram 30.16.

30.16 THE GLOBAL BOND MARKET
Diagram 30.16: THE GLOBAL BOND MARKET

  1. Issued by non-residents on Australian market, held by non-residents
  2. Issued by non-residents on Australian market, held by residents
  3. Issued by non-residents on foreign markets, held by residents
  4. Issued by residents on Australian market, held by non-residents
  5. Issued by residents on Australian market, held by residents
  6. Issued by residents on foreign markets, held by residents
  7. Issued by residents on foreign markets, held by non- residents
  8. Issued by non-residents on foreign markets, held by non-residents


TRENDS IN KANGAROO BONDS

From the mid-1990s, the Commonwealth and state governments in Australia reduced debt security issues as budget surpluses and privatisation proceeds were used to repay debt. Gross outstanding Commonwealth Government securities and state government securities recorded decreases from 2000 to 2005, while issues of non-government debt securities grew steadily. There was a strong build-up of managed funds over the same period, fuelled by superannuation contributions (see table 26.23 in the Financial system chapter). These funds were valued at $839b as of March 2005. This growth, coupled with the decreasing government bonds on issue, stimulated development of the non-government bond market to meet the resulting high demand for debt securities. As at June 2005, there were $205.2b of long-term non-government securities on issue in Australia. This was an increase of 25.4% over the June 2004 value of $163.7b.

One of the notable contributors to the growth in the non-government bond market has been the increase in non-resident bond issuers (Kangaroo bonds). Kangaroo bonds issued increased to $15.2b in 2003-04 from a level of $1.8b in 2002-03. In 2004-05, non-resident borrowers entered the bond market with $8.4b in issues, of which approximately $5.8b (70%) were taken up by residents.

For Australian investors, Kangaroo bonds became attractive during this period, as did all highly rated corporate bond issues. The credit spread (the price difference between AA bonds from corporate issuers when compared with similarly denominated government issues) decreased in the first half of 2003 then picked up again in 2004. With the decreasing availability of government bonds, AA corporate bonds were being favoured as the best alternative in fixed income securities. This lowered the cost of borrowing for corporate borrowers and helped to increase the attractiveness of Australian denominated debt for non-resident issuers.

From the issuer's perspective, the reasons for the increasing levels of Kangaroo bond issues were less obvious, given the relative changes in official interest rates since early-2001. Since January 2001, Australian interest rates were higher than rates in Europe and the USA. Over time, the gap increased, (graph 30.17). This made issuing competitively priced debt securities in the Australian market more expensive than in other markets.

Graph 30.17: OFFICIAL INTEREST RATES - January 2000 to June 2005


One explanation for the issuer choosing Australia as a market for their bonds was the reluctance of resident fixed interest fund managers to invest in non-resident markets due to the return not being high enough to justify the extra risk of corporate bonds. This made funds less available to non-resident borrowers in other markets. This, however, does not explain why non-resident corporations would rather issue debt than borrow from financial intermediaries in low-interest rate countries.


Anecdotally, it is suggested that two main drivers explained trends in Kangaroo bond transactions. From the issuer's point of view, the first commonly quoted reason for the growth in Kangaroo bonds was a desire to diversify funding. Diversifying currency exposures for issuers lowers the risks associated with foreign borrowings. The second is the widening interest rate basis swap. This widening effectively made it cheaper for borrowers to hedge against interest rate movements.

SOURCE OF KANGAROO BONDS

For the financial years 2000-01 to 2004-05, Kangaroo bonds issued by non-residents in the Australian market totalled $36b (table 30.18). Of this, financial institutions were the dominant issuer, accounting for $25b as at June 2005, while supranational and other organisations accounted for $11b. Total Kangaroo bond issues decreased from $15b in 2003-04 to $8b in 2004-05. The decrease coincided with a decrease in Australian investor demand for bonds issued by non-residents. With domestic and global credit growth, most investors preferred high yield securities rather than the status (credit rating) of the international issuer.

30.18 ISSUES OF KANGAROO BONDS, By type of issuer
2000-01
2001-02
2002-03
2003-04
2004-05
Total
A$m
A$m
A$m
A$m
A$m
A$m

Financial
4,400
1,850
1,320
10,305
7,220
25,095
Supranational
1,175
1,000
500
1,965
340
4,980
Other(a)
800
1,550
20
2.950
795
6,115
Total
6,375
4,400
1,840
15,220
8,355
36,190

(a) Includes government and corporate agencies.

Source: Insto Magazine, Jan 2002 issue (Bond deals for 2001, pp 27-28), Jan 2003 issue (Bond deals for 2002, pp 30-31), Jan 2004 issue (Bond deals for 2003, pp 2-9).


Residents of the USA were issuers of most Kangaroo bonds on issue, as at 30 June 2005 (graph 30.19). Other significant issuers were the Cayman Islands, United Kingdom, Germany, Netherlands and Canada. The value of bonds on issue grew over the five-year period by almost $28b with issues from USA resident institutions accounting for nearly $11b of this total.

Graph 30.19: NATIONALITY OF ISSUER - June 2005


USE OF KANGAROO BONDS

When Kangaroo bonds are taken up by residents of Australia, this represents claims by Australian residents on non-residents, hence Australian investment abroad. During the period 2000-01 to 2004-05, of the total Kangaroo bonds issued, $25.3b (or 70%) were taken up by Australian residents.

New issues of Kangaroo bonds taken up by Australian residents are included in long-term portfolio debt securities (bonds and notes) transactions. These appear as debit entries in the financial account of Australia's balance of payments, representing an increase in assets. The resident holdings of Kangaroo bonds contribute to assets in Australia's IIP and continue to make a substantial contribution to Australia's net position.

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