Bonds

kangaroo bond

What is a kangaroo bond?

A kangaroo bond is a foreign bond issued in the Australian market by a non-Australian company and is denominated in Australian currency. The bond is subject to Australian securities regulations. Kangaroo bonds are also known as “Matilda bonds”.

key takeaways

  • Kangaroo bonds are issued in the Australian market by foreign companies and are denominated in Australian dollars.
  • Companies may issue bonds in other currencies to benefit from market or interest rate exposures in that country, or to raise cash in foreign currencies.
  • Foreign companies often seek to expand their investor base by raising capital in other jurisdictions.
  • The benefit of kangaroo bonds for Australian investors is that they are not exposed to currency risk like buying the same bond in a foreign currency.

How Kangaroo Bonds Work

The bond issuer, hoping to gain support from investors and lenders in the Australian debt market, will issue a bond called a kangaroo bond, named in honor of the country’s national animal emblem. Kangaroo bonds are foreign bonds issued in Australian dollars by non-domestic entities, including corporations, financial institutions and governments.

Simply put, foreign bonds are issued in the domestic market by foreign issuers in their own currency. Foreign bonds are primarily used to provide issuers with access to another capital market than their own to raise funds.

Large corporations and/or investment firms looking to diversify their holdings and improve their overall currency exposure can use kangaroo bonds to raise capital in Australian dollars. Kangaroo bonds are typically issued when Australian interest rates are lower than foreign companies’ domestic rates, reducing overall interest payments and borrowing costs for foreign issuers.

The Benefits of Kangaroo Bonds

A company may choose to enter a foreign market if it thinks it will get attractive rates in this market or if it needs foreign exchange. When a company decides to enter a foreign market, it can do so by issuing foreign bonds, which are bonds denominated in the currency of the target market.

Because the bonds are denominated in the local currency, kangaroo bonds are an attractive investment for domestic investors without currency risk. Additionally, investors looking to diversify their portfolio offshore may opt for these bonds and gain incremental yield. In effect, kangaroo bonds offer the opportunity to invest in foreign companies without having to manage the impact of currency exchange rate fluctuations.

Many issuers do not necessarily need Australian dollars when issuing kangaroo bonds. Proceeds from the sale of bonds are usually converted back into the currency required by the issuer through financial instruments such as cross-currency swaps.

These swaps are used to hedge foreign exchange risk associated with the issuer’s obligation to pay coupons and repay principal in Australian dollars. For example, 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 federal funds rate in US dollars plus some margin.

The risks associated with raising funds in foreign currencies can often be mitigated through risk management techniques such as cross-currency swaps.

An example of a kangaroo bond

In January 2018, UAE NBD, the largest bank in Dubai, issued A$450 million ($362.03 million) of 10-year bonds as part of the A$1.5 billion Kangaroo bond scheme with an indicative coupon rate of 4.75% per annum. The purpose of issuing bonds is to diversify the bank’s sources of funding and facilitate its expansion into new markets.

The main issuers of kangaroo bonds are usually from the US and Germany. Other foreign bonds include Samurai, Maple Leaf, Matador, Yankee and Bulldog bonds.

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