What it means
The idea is simple: a company or institution from one country raises money in the domestic bond market of another. In this case a non-Australian issuer sells bonds to Australian investors, promises interest and repayment in Australian dollars, and follows Australian securities rules for the offer.
Typical issuers are international development banks, overseas governments and large foreign banks and corporations. Borrowers use Kangaroo bonds for a few practical reasons.
They get access to a deep pool of local savings, such as pension funds, that may not otherwise buy their debt. They also diversify their funding so they are not reliant on one market, and they may match the borrowing to income or assets they already hold in Australian dollars.
Most issuers do not want to carry Australian dollar exposure for its own sake. They often pair the bond with a cross-currency swap, which is a contract that exchanges payments in one currency for payments in another, so that their real obligation is in their home currency.
The all-in cost therefore depends on both the bond's coupon (the stated interest rate) and the price of the swap. Kangaroo bonds sit in a family of foreign-issuer bonds named after the host country's emblem.
Yankee bonds are sold in the United States, Samurai bonds in Japan and Bulldog bonds in the United Kingdom. The label always describes where the bond is sold and which currency it is in, not where the issuer is from.
For investors, the appeal is usually a little extra yield over a comparable Australian issuer, plus exposure to a name they could not otherwise hold in their own currency. The trade-off is credit risk on an overseas borrower who may be harder to analyse and, for the issuer, a disclosure and compliance burden in a second jurisdiction.
In practice
Real-world examples.
Example
A European development bank wants to fund loans to Pacific island projects. It sells a five-year Kangaroo bond to Australian superannuation funds, which want high-quality assets in their own currency. The bank receives Australian dollars that suit its regional lending.
Example
A Canadian mining company with operations in Western Australia has costs and some revenue in Australian dollars. It issues a Kangaroo bond so that part of its debt is in the same currency as its local cash flows. A fall in the Australian dollar then reduces both its income and its debt burden in home-currency terms.
Example
An overseas government agency wants to diversify away from relying on one investor base. It issues a modest Kangaroo bond to build a relationship with Australian investors, and keeps the option to return to that market in future years at better terms.
Formula
Calculation
Annual coupon = face value x coupon rate. Converted cost = coupon x exchange rate.
Suppose a foreign bank issues a Kangaroo bond with a face value of $100,000,000 (in Australian dollars) and a 5% annual coupon. The annual coupon is 100,000,000 x 0.05 = $5,000,000 (in Australian dollars). Paid in two halves, each payment is 5,000,000 / 2 = $2,500,000. At an illustrative exchange rate of 0.65 US dollars per Australian dollar, the yearly coupon is worth 5,000,000 x 0.65 = $3,250,000 in US dollars, and the face value is worth 100,000,000 x 0.65 = $65,000,000 in US dollars. If the rate moves, the home-currency cost moves with it unless the issuer has swapped the exposure.Case study
Seen in the real world.
Southern Cross Harbour Bank is an illustrative, fictional lender from Europe that needed fresh funding for loans in Asia and the Pacific. Its treasurer noticed that borrowing at home had become expensive, while Australian institutional investors were looking for diversified, highly rated paper.
The bank sold a $200,000,000 Kangaroo bond (in Australian dollars) with a seven-year maturity and swapped the proceeds and payments back into its home currency. After the swap and fees, its all-in cost was lower than a comparable domestic issue, and the treasurer also gained a new group of investors.
The illustrative lesson is that the headline coupon is only half of the story. The decision was driven by the combination of coupon, swap pricing and fees, and the bank had to confirm that it could manage the extra disclosure requirements before it went ahead.
Watch out
Common mistakes.
- Assuming a Kangaroo bond is issued by an Australian company, when the defining feature is that the issuer is foreign and the bond is sold in Australia.
- Ignoring currency risk, so a borrower with only home-currency revenue ends up with a debt that grows in cost whenever the Australian dollar strengthens.
- Comparing the coupon with a home-market bond without allowing for the swap cost, issue fees and the extra legal and disclosure work.
Questions
People also ask.
Why is it called a Kangaroo bond?
The kangaroo is a national emblem of Australia, and markets name foreign-issuer bonds after their host country's symbols, as with Yankee, Samurai and Bulldog bonds.
Who buys Kangaroo bonds?
Mostly Australian institutions such as pension funds, insurers and fund managers, who want diversified credit in their own currency without taking currency risk.
Can a Kangaroo bond be issued in another currency?
By definition it is in Australian dollars, and a bond sold in another currency would fall under a different label, such as a eurobond or a foreign bond of that country.
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