What Is a Kangaroo Bond?
Let me explain what a kangaroo bond is directly to you. It's a type of foreign bond that non-Australian firms issue in the Australian market, and it's denominated in Australian currency. This bond follows Australia's securities regulations. You might also hear it called a 'matilda bond.'
Key Takeaways
Kangaroo bonds are issued in Australian markets by foreign firms and are denominated in Australian dollars. Companies issue bonds in other currencies to gain exposure to that country's market or interest rates, or to raise cash in the foreign currency. Foreign companies often aim to broaden their investor base by raising funds in other jurisdictions. For Australian investors, the benefit is that these bonds avoid the currency risks they'd face if buying the same bonds in a foreign currency.
How a Kangaroo Bond Works
If you're a bond issuer looking to access investors and lenders in the Australian debt market, you would issue what's called a kangaroo bond, named after the country's national animal emblem. It's a foreign bond issued in Australian dollars by non-domestic entities, including corporations, financial institutions, and governments.
In simple terms, a foreign bond is one issued in a domestic market by a foreign issuer in the currency of that domestic country. These bonds mainly serve to give issuers access to another capital market outside their own to raise capital.
Major corporations or investment firms seeking to diversify their holdings and improve their overall currency exposures can use kangaroo bonds to raise funds in Australian dollars. These bonds are typically issued when interest rates in Australia are low compared to the foreign corporation's domestic rates, which lowers the foreign issuer's overall interest expense and cost of borrowing.
Benefits of a Kangaroo Bond
A company might choose to enter a foreign market if it believes it can get attractive interest rates there or if it needs foreign currency. When deciding to tap into a foreign market, it can issue foreign bonds denominated in the currency of that intended market.
For domestic investors like you in Australia, a kangaroo bond is an attractive investment because you're not exposed to currency risk since the bonds are in your local currency. If you want to diversify your portfolio beyond local borders, these bonds let you earn incremental yield. Essentially, kangaroo bonds give you the chance to invest in foreign companies without dealing with currency exchange fluctuations.
Many issuers don't actually need Australian dollars when they issue these bonds. They typically convert the proceeds back to the currency they require using financial instruments like cross-currency swaps.
These swaps hedge the foreign exchange risk tied to paying coupons and repaying principal in Australian dollars. For instance, through a cross-currency swap, a kangaroo bond issuer can lend Australian dollars at the bank bill swap rate (BBSW) plus the basis, while paying the fed funds rate plus some margin for U.S. dollars.
Important Note on Risks
The risk of raising capital in a foreign currency can often be mitigated with risk-management techniques such as cross-currency swaps.
Example of a Kangaroo Bond
Take this example: In January 2018, Emirates NBD, Dubai’s largest bank, priced a A$450 million ($362.03 million) 10-year bond as part of a A$1.5 billion kangaroo bond program, with a 4.75 percent indicative annual coupon. The purpose was to diversify the bank’s funding sources and support expansion into new markets.
Major issuers of kangaroo bonds have typically come from the United States and Germany. Other types of foreign bonds include Samurai bonds, Maple bonds, Matador bonds, Yankee bonds, and Bulldog bonds.
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