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Kangaroo Bond Issuance in Australia
Jonathan A. Batten, Warren P. Hogan and Peter G. Szilagyi
Jonathan A. Batten
Department of Finance
Hong Kong University of Science & Technology
Clear Water Bay, Kowloon, Hong Kong
Tel: ++852-2358 8202, Fax: ++852-2358 1749, Email: [email protected]
Graduate School of Management
Macquarie University
CBD Campus Level 6, 51-57 Pitt St
Sydney, NSW 2000, Australia
Phone: ++61-2-8274-8344, Fax: ++61-2-8274-370, Email:[email protected]
Warren P. Hogan
School of Finance and Economics
University of Technology, Sydney
Haymarket NSW 2007, Australia
Postal: PO Box 123, Broadway, NSW 2007, Australia
Phone: +61 2 9514 7777, Fax: +61 2 9514 7711, Email: [email protected]
Peter G. Szilagyi Judge Business School
University of Cambridge
Trumpington Street, Cambridge CB2 1AG, UK
Tel: +44 (0) 1223 764026, Fax: +44 (0) 1223 339701, Email: [email protected]
Paper Prepared for the 13th
Melbourne Money and Finance Conference
JEL: F34, G18, O57
Key Words: Australia; Asia-Pacific; financial market development, bond markets;
Kangaroo bonds; foreign bonds
Abstract
We explore the recent development of the foreign bond market-termed Kangaroo Bonds-
in Australia. Initially a perspective is provided on the scale and scope of this market with
particular attention paid to the characteristics of issuers. Overwhelmingly this market is
high-credit quality and comprises sovereign, supranational or major financial institutions.
Investors appear to have a preference for simple fixed rate pricing structures, which
require issues to then swap bond proceeds into the currency and coupon type of choice.
Consequently, the highly liquid Australian foreign exchange and derivatives markets,
which easily accommodate risk transformation, appear as an important facilitator to
foreign and ultimate local bond market development. Impediments to market
development and implications for other markets are considered.
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Kangaroo Bond Issuance in Australia
1. Introductioni
Australia is a small open economy strategically placed to leverage the fund flows that
arise from the close of trading in currencies and derivatives in the United States (US) and
Europe and the opening of these same markets in Japan and Asiaii. In addition, from an
investor perspective, Australia is now one of the world’s leading centres for asset
management and partly due to the diversification demands of these same funds has also
become a major supplier of funds to international investment funds. Thus, given these
capital flows it is not surprising that in recent year’s growth in foreign exchange and
derivatives turnover has increased to the point where Australia now ranks in the top ten
of these markets worldwide (BIS, 2007).
However, surprisingly the stock of external finance provided by the banking, bond and
equity markets remains amongst the smallest relative to GDP of the major developed
economies such as the USiii
. When considered in terms of the contribution to total
domestic finance, Australia remains most dependent upon stock markets and banks than
domestic debt securities markets (Eichengreen and Luengnaruemitchai, 2004). This
places Australia’s dependence for bank financing more in line with civil law and bank-
based Europe, while its stock markets appear more important for external finance than in
the USiv. Notwithstanding this fact, Australia’s bond markets are amongst the most
economically significant in the regionv and while there is still a need for longer term
development of the local corporate market it has developed as a preferred regional
location for issuance by high credit quality nonresident issuers.
The issuance of bonds by nonresidents, termed foreign bonds or more specifically when
denominated in Australian dollars “kangaroo” bonds by the financial markets, remain at
the core of the Australian corporate bond market. The key objective of this paper is to
understand those factors that have facilitated development of this particular market and to
identify impediments preventing application of these same principles more broadly to
other market segments, notably the corporate bond market within Australia, and others
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overseas. This country study then contributes to the ongoing and developing literature on
corporate bond market development: the “missing market” of Herring and Chatusripitak
(2000), and extends recent work on foreign bond market development in developing
markets (Batten and Szilagyi, 2008). The unique circumstances of Australia suggest that
these experiences will be of interest and value to other nations undertaking a programme
of financial market reform with the aim of developing domestic or international bond
markets as alternate funding mechanisms for domestic corporations (Jiang and
McCauley, 2004).
From a regional perspective there has been considerable growth in bond markets after the
Asian Crisis of 1997-1998. After this time Asia-Pacific governments specifically set
about developing local and regional bond markets as an alternative to the traditional
forms of intermediated (bank) financing (see Kim, 1999; Rhee, 2000; Thompson and
Poon, 2000; Park and Park, 2005). For example, since the Asian Crisis period, Thailand’s
debt markets have nearly quadrupled from 9.6% to 37.4% of GDP, while Korea’s nearly
doubled from 45.9% to 82.5% of GDP, whereas stock markets have generally struggled
although most have regained at least the significance of their earlier levels (Lejot et al.
2004). From this perspective Australia’s corporate bond markets could be larger and
better developed, especially given the sophistication of its financial market infrastructure
and the savings that are channeled from statutory savings schemes.
This picture is further complicated by the fact that since the 1980s the more credit-worthy
Australian firms and institutions have accessed international markets, in particular
Eurobond, US and more recently Japanese financial markets for funding. In turn the more
credit-worthy international borrowers have sought financing through Kangaroo bonds.
Thus, it would seem from the perspective of the local institutional investor base that there
is a preference for better credit rated foreign issuers than domestic issuers, even though
many are well known names and carry investment grade credit ratings.
Nonresident bond issues remain an often ignored segment of the domestic bond market in
studies focusing upon financial market development. Although this has changed
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somewhat in recent years with authors acknowledging the stimulus that could be
provided to local markets through the presence of supranational and other high-grade
issues, the literature and experiences offered remain sparse. Within the Asia-pacific
region the development of this specific segment (Samurai bonds in Japan, Arirang in
Korea and Kangaroos in Australia) and often domestic corporate bonds as well, have
made limited progress with issuance remaining concentrated in a handful of advanced
countries. Australia is one such case; others include the financial centres of Singapore
and Hong Kong, and Japan. Only Korea, of those crisis economies that implemented
radical regulatory change, has made some progress to developing a market along the lines
of those in Japan and the United States.
In an earlier paper, Batten and Szilagyi (2008) note that the shared characteristics of these
four major markets are the sophistication of their legal systems and the presence of
complex over-the-counter (OTC) and exchange traded derivatives markets. While foreign
currency bond issues offer financial institutions and corporations the opportunity to
access alternate sources of funds it is necessary that derivatives markets are also available
for hedging and risk management purposes. Of particular concern is the need for currency
and interest rate swap markets to allow domestic bond issues to be converted into the
preferred currency and cash flow pattern of the issuer. In that sense the deep foreign
exchange and derivatives markets in Australia, Singapore and Hong Kong easily
accommodate risk transformation by foreign issuers. Also, academic investigationvi of
emerging financial market developments frequently cite the importance of the “rule of
law” as a facilitator for sustainable economic growth, while others highlight the
importance of bond settlement, clearing and other technology based infrastructure. In this
sense the common law legal heritage of Australia, Hong and Singapore may account for
the relative importance of their bond markets compared with others in the region,
especially Japan and Korea. Such a conclusion would also be consistent with the strong
international evidence linking stock market development and the mitigation of agency
conflicts in common law based legal domains (Nestor and Thompson, 1999; Thompson,
1999; La Porta et al., 2000).
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The paper is set out as follows: Next, the foreign bond markets in Australia; then
discussion will focus on the key issues of concern for participants in the market,
including impediments to continued market development; the final section will allow for
concluding remarks.
2. The Australian Foreign Bond (Kangaroo Bond)
(a) Background
The first foreign issuer in the fledging “kangaroo” market was the issue by Credit Local
de France in 1991. The accompanying Tables provide a perspective of the subsequent
issues until March 2008. The data is sourced from the Reuters Fixed Income Database
(RFID), which includes details of 315 bonds issued during this period. The first bond in
their database is the issue by Eurofima, a Swiss based supranational. This bond was a
fixed rate US$-fixed rate A$ swap driven issue and set the tempo of what was to follow.
The RFID listed A$122.1 billion of issued kangaroo bonds with A$97.6 billion
outstanding. This compares favourably with the data provided by the Reserve Bank
(RBA, 2008: Table D04), which listed A$110.9 billion in outstanding issues. Thus the
RFID captures 88.0% of outstanding kangaroo bonds as at March 2008.
Table 1 provides information on the number and volume of bonds issued by the country
of residence of the issuer. There is one bond recorded for Australia, unusually made by
an offshore subsidiary of John Dere Credit Ltd, which was a private placement made in
March 2005. Some (7%) were issued by companies listed companies in tax havens
(Cayman Islands) although the majority is by companies listed in the US (40.3%) and the
UK (10.2%). High credit quality German and Dutch issuers also comprise a significant
segment (17.5% together). The industry sector of each issuer in recorded in Table 2. It is
clear that most issuers are banking and financial services corporations (together 75.9% of
number of bonds issued and A$80.8 billion in total issues to date) with sovereign and
state (10.5% and A$21.6 billion in issues) and supranational issuers (10.1% and A$21.6
billion in issues) together almost counting for the remaining issuers. Note the State and
Provincial classification refers to the 5 bonds issued by the Canadian provinces.
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Table 3 provides information on the coupon type of each issue. The market is
overwhelming fixed rate with simple “plain vanilla” pricing (62.4%), with the remainder
on a floating rate; of these most (30.6%) are priced over the floating rate BBSW
benchmark. Note that the plain vanilla fixed rate bonds had an average maturity of
6.1years, which was longer than the maturity of index-based floating rate bonds (5.0
years). The remaining 16 bonds with more complex floating rate formulas had an average
maturity of 10 years. The RFID records that only seven of the bonds issued (2.2%) were
private placements, non included put features and twenty (6.4%) were callable.
Interestingly, the callable bonds had significantly longer maturities (an average of 10.4
years) than the non callable bonds (an average of 5.7 years). Thus consistent with issues
in other markets kangaroo bonds rarely contain option features, instead carrying simple
pricing features.
Given the prominence of banking, financial and sovereign issuers it is not surprising that
the credit quality of the issues is very high. Tables 4a and 4b list the credit ratings for
each of bonds by Moody’s and Standard & Poors. While all the bonds listed were rated
by at least one of the rating agencies, not all bonds carried two ratings. A number of
issues (Moodys, 24.1% and Standard and Poor’s 39.6%) had either their rating withdrawn
(due to the bond maturing) or were never rated. The one non-investment grade issue
(rated C by Standard & Poor’s) was one issued by the Korea Exchange Bank in
December 1996. Since then the market has been overwhelmingly high quality with 28.3%
of issues carrying Moody’s highest rating of Aaa and 26.7% carrying Standard & Poor’s
highest rating of AAA.
A list of the top 50 issuers (based on value of issues) in the kangaroo bond market is
provided in Table 5. This league table is clearly dominated by major banks, financial
organizations and supranationals. This is consistent with Table 4, where nearly 45% of
issues were rated AA or better by Standard & Poors. This information validates market
perceptions that the foreign bond market is dominated by high credit quality financial
intermediaries which attempt to create sub-LIBOR/SIBOR funding. These intermediaries
will only access the domestic market if it is opportune to do so.
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In addition to the variable tallies reported above, simple cross-sectional analysis was
undertaken between some of the key variables. The first of these analyses recorded in
Table 6 provides an Analysis of Variance (ANOVA) test of the relationship between the
credit rating of the issue (Moody’s in this instance) and the maturity of the bond. The F-
statistic of 4.68 (p = 0.000) demonstrates statistically significant variation across the
credit ratings the issuers with better quality ratings issuing for longer maturities. For
example, the Aaa category has an average bond maturity of 7.1 years compared with the
A1 category of 5 years. Note the higher standard deviation as ratings increase, which
suggests greater variation in the maturity of issuance as credit ratings improve. In other
words, issues with lower ratings appear to have less choice in maturity and generally
issue in the 3-5 year maturity bucket. This information is repeated when the Standard &
Poors ratings are used. For example, the AAA has an average maturity of 7.4 years
(standard deviation =3.53) and the single A has an average maturity of 3.988 years
(standard deviation 1.20).
Table 7 provides an ANOVA of the relationship between the industry sector of the bond
issuer and the maturity of the bonds issued. The F-statistic of 3.53 (p = 0.000)
demonstrates statistically significant variation across industry groups with sovereign and
supranational issuers issuing for longer maturities. For example, the 32 supranational
issues had an average maturity of 8.2 years compared with the 109 issues by banks which
were of a shorter maturity (an average of 5.85 years). There was also the greatest
variation in the maturities of the bonds issued in the sovereign/supranational class
(standard deviation of 4.34).
The last reported results (Table 8) record the ANOVA relationship between the country
of issuer and the maturity of the bonds issued. The F-statistic of 3.02 (p = 0.000)
demonstrates statistically significant variation across countries with the issuers based
Austria, France, Luxembourg, New Zealand, and Switzerland, issuing with longer
maturities than the Scandinavian countries and those in the US. The Philippines was the
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recorded country for the Asian Development Bank, Luxembourg for the European
Investment Bank and the Ivory Coast for the African Development Bank.
(b) Discussion
Foreign bond issuance represents one segment of a menu of funding alternatives available
to high credit worthy institutions and corporations. Taking the perspective of Australia:
(a) there is the market for foreign bonds issued in local currency (kangaroo bonds); (b)
there is the market for local residents issuing in foreign currencies (US$ Eurobonds and
Yankees); (c) there is the market for local residents to issue offshore in local currencies
(eg. A$ Eurobonds and Uridashi bonds); (d) the market for non-residents to issue in local
currency in offshore markets (eg. IBM NY issuing A$ uridashi bonds in Japan); and
finally (e) local residents issuing corporate bonds in Australia. Cross-currency swap
prices link prices in all these markets. Liquidity mismatches etc. between prices in these
markets creates the opportunities that attract issuance from one segment to the next.
The RBA (2004) note the need for offsetting transactions to drive the spreads- "Foreign
borrowers issuing in Australia and seeking to swap back to their home currency usually
receive favourable prices in the currency swap market because of greater demand by
Australian borrowers to do the reverse – i.e. borrow in foreign currency and swap into
Australian dollars. Record foreign currency bond issuance by Australian entities in 2004
has pushed up the cost of converting foreign currency to Australian dollars and made it
cheap for foreigners to do the opposite".
This situation has been very evident in Australia where Australian resident issuance
offshore (eg. Yankee, Eurobond) is highly correlated with the foreign bond issuance and
to a lesser extent corporate bond issuance. Also, since Australian residents may also
borrow in A$ in domestic and foreign and Euromarkets this helps to limit the cost of
swapped foreign currency bonds. In the case of Australia, a rare opportunity existed for
issuance in the Japanese uridashi market (RBA Bulletin May 2003) and may have
triggered opportunities in the other markets. Hence (RBA Bulletin, 2003): "Increased
demand from uridashi and other Eurobond issuers to pay US dollars and receive
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Australian dollars in the first quarter of 2003 caused the basis swap spread to decline to
the point where it became negative, although it has subsequently recovered somewhat."
Thus the extraordinary rise in foreign issuance in Australia is due to a set of
circumstances, which cannot be easily replicated in other markets. However, it would
appear that in Australia's case the offshore issuance by local residents, first in foreign
currencies and then in local currency may well be the chicken needed for the egg.
However, it is important to recognize that the swap driven foreign bond market in
Australia is concerned with cost and little to do with long-term strategic bond market
development.
From the investors perspective there is an ongoing need for quality investment
opportunities to accommodate the vast sums that accumulate from compulsory
superannuation. While fund managers are able to meet risk profiles through hedged
offshore investment, quality Australian and offshore issuers have also been encouraged to
participate in the domestic markets to satisfy local demand. Apart from the issues by
organizations such as GE Capital, which are rated AAA, there has also been a large
number of sovereign (notably Eurofima) issues. While these issues are encouraging they
also reflect a domestic market bias for issues at the quality end. Developing the non-
investment grade end of the market will present the challenge for the next decade.
3. Discussion of Critical Issues
This final section discusses several key issues that have been raised in interviews with
members of the Australian financial community, including regulators, issuers and
investors. Their perspectives are summarized under three categories: (a) investor
concerns; (b) issuer concerns; (c) impediments, and (d) lessons and conclusions for other
countries.
3.1 Investor Concerns
(a) Maintaining benchmark bond liquidity in the presence of fiscal surpluses
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Fund managers and insurance companies are the major buyers of both corporate and
foreign bonds taking approximately 60-70% of offered bonds. Funds managers- as noted
previously- buy conservatively and do so relative to an index (the UBS index), which
historically has been restricted to issues with credit ratings above A-, have Australian
governing law and have an outstanding of more than $100 million. Most fund managers
have an existing fixed interest portfolio component of approximately 10-15%. Banks are
also buyers (about 10%), insurance companies (15%) with offshore interest in the vicinity
of 5-10%. Given the buy-hold nature of much of this investment there is very little
liquidity in secondary markets. There is negligible retail demand despite the Australian
Stock Exchange introducing bond listing in order to assist development of the retail
market. This is attributed to a lack of support from financial intermediaries.
(b) The ability to diversify across asset classes and countries
Of the non-resident investors, Asian central banks, Singapore based banks and Japanese
insurance companies have been the most active, although this interest has not been
consistent and appear to be influenced by the value of the US dollar against the euro and
the yen. This suggests that the purchase of (quality) Australian dollar paper may be part
of a broader diversification strategy, or one funded by yen carry-trades (ie borrow yen
and invest in higher yielding A$ securities. To avoid credit risk, only the bonds of high
credit quality foreign issuers (Kangaroo bonds) are purchased.
(c) Simple pricing structures are critical
Consistent with investor behaviour in other markets such as the Eurobond market,
investor preference is for simple (“plain vanilla”) structures, which are also option free,
of high credit quality (at least rated A) and with a maturity of less than 5-years. A critical
concern is that the security offered be in the UBS benchmark index. Local investors tend
to have only small credit lines in place for international issuers despite the rating.
3.2 Issuer Concerns
(a) Pricing is imperative
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Numerous funding options exist in the domestic and international bond markets, and the
precise choice of instrument depends on variables ranging from the nature and location of
the issuer's business to the current trends in the capital markets. For corporations with a
choice of facilities it is simply a matter of pricing. More specifically, foreign bonds tend
to be fixed rate issues with maturities of about 5 years. The bond proceeds are swapped
(cross-currency fixed to floating appears the norm) mostly into US$. The critical pricing
issue is obtaining sub-SIBOR or LIBOR funding.
(b) The ability to hedge-via cross-currency swaps-is imperative
Risk management is a critical issue for investors and issuers alike. While issuers –
especially multinational corporations- largely rely upon currency swaps to hedge foreign
currency risk (Goswanmi et al., 2004), investors tend to use interest rate products
available on the Australian futures markets for hedging interest rate risk. An example is
the use of strips (consecutive maturities) of 90-day bank bill futures. Interestingly, rarely
are interest rate options used.
(c) Funding FDI is not a critical requirement
Issuance in Australia, mostly by supranationals and financials, appears unrelated to FDI
and is largely swap-driven. Local subsidiaries of foreign firms may issue A$ bonds
(which are technically not kangaroo or foreign bonds) but these would then be in the
corporate bond market. More likely multinational corporations will use the cross-
currency swap market to leverage a funding advantage in their home currency, or use
borrowings in home markets that are swapped into local currency using the forward
foreign exchange markets.
(d) Maintaining a cost effective international presence is important
Global issuers are very focused upon their spread curve. Within the Australian market
infrequent issuers tend to attract less interest, though this is part may be due to the lack of
credit lines in place by domestic investors. This suggests that in the early marketing stage
of a large issue (say a global bond with an Australian dollar component) that attention be
directed to ensuring credit-line availability and capacity exists in a domestic market.
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3.3 Impediments
(a) Settlement, clearing and secondary trading infrastructure remains vital
Benchmark bond curves, settlement and trading systems, clearing technology, IT
capability for risk management is critical for market development. In Australia, the
federal authorities have maintained the benchmark curve after extensive discussion with
members of the financial industry. While theoretically, it should be possible to have a
bond market without having a risk-free benchmark bond; industry prefers the presence of
a risk-free curve. The state (“semi-government”) authorities, who also have been running
fiscal surpluses, have effectively withdrawn from the Government securities market.
Anecdotal evidence suggests that most State authorities are unwilling to maintain their
respective markets through continued bond issuance. There is a need for adequate
clearing and settlement systems. In the case of Australia, improvements could be directed
to the link between Austraclearvii
(owned by the SFE) and major international settlement
systems, Euroclearviii
and Clearstreamix. Having adequate IT systems is imperative. This
includes settlement, trade, and portfolio valuation. There is also a need for an appropriate
dispute resolution process. Another vital component is having standardized
documentation. In the case of Australia the prospectus requirements are stringent, in
English and governed by Australian law.
(b) The concentration of issues to specific maturities helps liquidity
From a pricing and liquidity perspective having specific maturities appears preferable to
having a scattered range of offerings. An example is provided by the Australian
government bond market, which has outstandings across 9 maturities but concentrated in
the 3, 5 and 10-years, with overall outstandings of about A$55 billion. In recent years,
issues with maturities greater than 10-years have been undertaken.
(c) Simplify the tax system (e.g. with-holding taxes and the 128F exemptions)
In Australia, there has been much debate about dismantling the withholding taxes paid by
foreign investors. However, s128F exemptions under the Australian tax code now allow
13
for corporate bonds. Recent amendments to IWT have made it easier for foreign investors
to purchase Australian securities. Changes to IWT are the only clear policy initiative.
(d) Education, Training and Accreditation
There is a need for comprehensive accreditation and training of professionals (that is they
need to be accountable, registered, monitored and disciplined).
4. Lessons and Conclusions
We argue that the Australian experience with the development of its domestic and foreign
bond markets provides five clear lessons for others interested in developing their
domestic bond markets:
(a) Market forces will drive development and so it is difficult to regulate to avoid the
risks.
Eichengreen and Luengnaruemitchai (2004) have highlighted several obstacles for the
development of bond markets within the Asia-Pacific region. These obstacles include: (i)
The small size of public debt markets in Asia; (ii) the failure of countries to follow
international accounting standards; (iii) the slow development of private debt markets;
(iv) corruption and unreliable securities market regulation; and (v) a legacy of capital of
controls. It is not a simple matter to overcome these obstacles.
Thus it is important to remember that Australia has built up its bond market infrastructure
over many years with a recent focus on corporate markets, although we argue more needs
to be done to encourage domestic issuance by this sector. Initially the corporate bond
market struggled in the early stages of its development in the early 1990s. This also
coincided with pressure on the Australian banking system with massive bad loan write-
offs by several major banks, the most notable being Westpac Banking Corporation. Thus
it was not surprising that on the demand side, markets were sensitive. The Australian
experience suggests that the presence of enabling infrastructure is no guarantee that
corporate and foreign bond markets will develop- one appears to need the right mix of
issuers supply and investor demand. The cross-currency swap market also appears to be
14
critical to the development of the foreign bond markets since it enables the
transformation of both foreign exchange and interest rate risks. The inability to offset risk
via other derivatives is one explanation of why some regional markets are
underdeveloped despite the best deregulatory effects.
(b) Certain risks are predictable and can be managed with the proper guidance from
government and in consultation with industry
In Australia, the withdrawal from the bond markets by government due to fiscal surpluses
has created opportunities for foreign issuers to substitute at the quality end of the
investment spectrum. Noteworthy, is the decision by government to maintain benchmark
liquidity, and the presence of a sophisticated floating rate OTC (FRAs) and the exchange-
traded (90-day bank bill futures) market. In Australia, quality issuers look for pricing
windows where they can achieve sub-LIBOR funding. Deep, liquid and diverse products
crossing a host of derivative and cash based markets are necessary to ensure low cost
arbitrage and the enabling of risk transformation.
(c) An ordering of issuance helped build confidence in the fledging stage of the market
In Australia, supranationals issued first, then quality banks and some multinationals. The
foreign bond market appeared to require an order of issuance. This particular order seems
to have been derived by intermediaries to assist pricing and related issues.
(d) Under what circumstances would foreign firms enter the market- foreigners with local
currency requirements versus those who use it for cost efficient funding that may then
be swapped?
The Australian case suggests that funding FDI or local currency portfolios has little to do
with why foreign firms enter a local market to issue securities. The favoured maturity for
these issuers is 5 years so pricing opportunities must exist in this period. To apply these
experiences elsewhere Governments would need to provide support- for example
15
providing enabling legislation, which facilitates risk management and provides an
environment for the transfer of skills and technology. Consequently the presence of
foreign institutions is a vital ingredient in this process. However, one should not
underestimate the commitment required from industry in particular financial
intermediaries to support the markets in their embryonic stage.
(e) There is an ongoing need to maintain liquidity in all markets and especially
benchmark bonds
The Australian experience with respect to the local Treasury bond market is that risk free
benchmarks remain an integral and necessary part of the corporate bond markets for
pricing and hedging purposes. Thus the strategy of providing adequate liquidity to the
Treasury market, despite the fiscal needs of Government has been of critical importance
to maintaining ongoing market development. Although counterparties of equivalent credit
risk, as those provided by foreign bond issuers in Australia have clearly demonstrated,
may provide pricing substitutes, investors appear to favour these securities over local
corporate bonds, likely due to their ability for short-end cash flow management purposes,
notably for repo transactions.
16
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19
Table 1 Country of Issuer of Kangaroo Bonds
Period: 17/01/1992-1/03/2008
(Source: Reuters Fixed Income Database)
Country of Issuer Number % Number Volume
(million)
%
Volume
Australia 1 0.3 25 0.0
Austria 1 0.3 600 0.5
Canada 5 1.6 1,350 1.1
Cayman Islands 22 7.0 4,525 3.7
Finland 3 1.0 1,600 1.3
France 19 6.0 6,970 5.7
Germany 27 8.6 13,725 11.2
Hong Kong 1 0.3 50 0.0
Iceland 2 0.6 600 0.5
Ivory Coast / Cote d'Ivoire 1 0.3 300 0.2
Luxembourg 7 2.7 6550 5.4
Netherlands 28 8.9 10,050 8.2
New Zealand 5 1.6 899 0.7
Norway 5 1.6 1,400 1.1
Philippines 5 1.6 3,900 2.9
South Korea 5 1.9 730 1.0
Spain 5 1.6 3,750 3.1
Sweden 1 0.3 200 0.2
Switzerland 10 3.2 5,970 4.9
Taiwan 1 0.3 350 0.3
United Arab Emirates 2 0.6 250 0.2
United Kingdom 32 10.2 11,135 9.1
United States 127 40.3 47,400
38.8
Total 315 100.0 122,055 100.0
20
Table 2 Industry Sector of Issuer of Kangaroo Bonds
Period: 17/01/1992-1/03/2008
(Source: Reuters Fixed Income Database)
Industry Sector Number %Number Volume
(million)
%Volume
Banking 109 34.6 40,930
33.5
Business & Public Services 1 0.3 100
0.1
Financial Services 130 41.3 39,869
32.6
Insurance 2 0.6 750
0.6
Real Estate 1 0.3 465
0.4
Sovereign Government 1 0.3 600
0.5
Sovereign Government -
Agency
27 8.6 15,250
12.5
State and Provincial 5 1.6 1,350
1.1
Supranational Organization* 32 10.1 21,595 17.7
Telecommunication Services 1 0.3 265
0.2
Utilities - Electrical & Gas 7 2.2 1,730
1.4
Total 315 100.0 122,304
100
* These included 11 issues by Eurofima, 7 by the European Investment Bank, 5
by the Asian Development Bank, 5 by the International American Development
Bank, 2 by the Nordic Investment Bank, 1 by the African Development Bank and
1 by the World Bank.
21
Table 3 Coupon Type of Kangaroo Bond Issues
Period: 17/01/1992-1/03/2008
(Source: Reuters Fixed Income Database)
Coupon Type Nunber %Number Volume
(Million)
%Volume
Fixed:Plain Vanilla Fixed Coupon 197 62.4 82,834
67.7
Floating: Fixed Margin over Index 96 30.6 33,045
27.0
Floating: Fixed then Floating 10 3.2 3,290
2.7
Floating: Step Up-Margin over Index 12 3.8 3,135
2.6
Total 314 100.0 122,304
100
22
Table 4a Credit Rating (Moodys) of Kangaroo Bond Issues
Period: 17/01/1992-1/03/2008
(Source: Reuters Fixed Income Database)
Moody's Credit Rating Number %Number
Volume
(Million)
%Volume
Ba2 2 0.6 305 0.3
Baa1 10 3.2 3,115 2.6
Baa3 4 1.3 925 0.8
A1 23 7.3 5,405 4.4
A2 12 3.8 2,775 2.3
Aa1 24 7.6 10,075 8.2
Aa2 21 6.7 6,340 5.2
Aa3 54 17.1 20,284 16.6
Aaa 89 28.3 50,140 41.0
Not Available 76 24.1 22,939 18.8
Total 315 100.0 122,304 100.0
Table 4b Credit Rating (Standard & Poors) of Kangaroo Bond Issues
Period: 17/01/1992-1/03/2008
(Source: Reuters Fixed Income Database)
SP Credit Rating Number %Number Volume
(Million)
%Volume
C 1 0.3 180 0.1
BB 1 0.3 125 0.1
BBB- 2 0.6 600 0.5
BBB+ 2 0.6 750 0.6
A 11 3.5 2,200 1.8
A- 9 2.9 2,915 2.4
A+ 25 7.9 5,835 4.8
AA 17 5.4 4,090 3.3
AA- 28 8.9 10,760 8.8
AA+ 11 3.5 3,490 2.9
AAA 84 26.7 48,565 39.7
Not Available 124 39.4 42,794 35.0
Total 315 100.0 122,304 100.0
23
Table 5: Top 50 Kangaroo Bond Issuers
Period: 17/01/1992-1/03/2008
(Source: Reuters Fixed Income Database)
24
Table 6: Analysis of Variance: Credit Rating and Maturity
Period: 17/01/1992-1/03/2008
(Source: Reuters Fixed Income Database)
Moody's
Rating
Number Maturity
(years)
Standard
Deviation
Ba2 2 3.0 0.00
Baa1 8 5.2 1.18
Baa3 4 4.0 1.16
A1 23 5.0 2.22
A2 10 6.6 2.37
Aa1 24 6.8 2.27
Aa2 20 7.0 2.53
Aa3 54 5.8 2.56
Aaa 89 7.1 3.61
Not Available 73 4.7 2.28
F-statistic for differences in the means = 4.68, p=0.000, N = 315.
Table 7: Analysis of Variance: Industry Sector and Maturity
Period: 17/01/1992-1/03/2008
(Source: Reuters Fixed Income Database)
Industry Sector Number Maturity
(years)
Standard
Deviation
Banking 109 5.8 2.80
Business & Public Services 1 3.0 0.00
Financial Services 124 5.4 2.56
Real Estate 1 5.0 0.00
Sovereign Government 1 10.0 0.00
Sovereign Government-Agency 27 5.6 2.19
State and Provincial 5 7.0 2.76
Supranational Organization 32 8.2 4.34
Telecommunication Services 1 6.4 0.00
Utilities - Electrical & Gas 7 7.1 3.27
F-statistic for differences in the means = 3.53, p=0.000, N = 307.
25
Table 8: Analysis of Variance: Country of Issuer and Maturity
Period: 17/01/1992-1/03/2008
(Source: Reuters Fixed Income Database)
Country of Issuer Number Mean Standard
Deviation
Australia 1 1.5 0.00
Austria 1 10.0 0.00
Canada 5 7.0 2.76
Cayman Islands 22 5.0 1.88
Finland 3 4.0 1.00
France 17 7.6 4.73
Germany 27 5.9 2.65
Hong Kong 1 3.0 0.00
Iceland 2 4.0 1.41
Ivory Coast / Cote d'Ivoire 1 5.0 0.00
Luxembourg 7 6.4 4.02
Netherlands 26 6.0 2.88
New Zealand 3 8.0 1.70
Norway 5 4.9 1.42
Philippines 5 7.2 2.57
South Korea 5 3.0 0.02
Spain 5 5.0 2.00
Sweden 1 5.0 0.00
Switzerland 10 10.3 4.84
Taiwan 1 1.0 0.00
United Arab Emirates 2 3.0 0.00
United Kingdom 32 6.6 3.07
United States 125 5.5 2.21
F-statistic for differences in the means = 3.02, p=0.000, N = 315.
26
Endnotes
i The authors wish to thank the Asian Development Bank (ADB) for providing funding to support this
research. Under the working group of ASEAN+3 Asian Bond Market Initiative (ABMI) on Local Currency
Bond Issuance by Multilateral Development Banks (MDBs), Foreign Government Agencies, and
Multinational Corporations, ADB conducted studies on Local Currency Bond Issuance by Foreign Issuers
in selected regional and non-regional countries. These studies were initiated by the Ministry of Finance of
the People’s Republic of China (MOF, PRC) in its capacity as the chair of this working group. Excerpts of
this paper were presented at the ASEAN+3 Deputies Meeting in November 2004. The opinions presented
here are exclusively those of the authors and do not in any way represent those of the ADB, or the MOF,
PRC or any other government agencies; the usual caveats apply. ii Interestingly, the closure of the dealing rooms of Wells Fargo and Bank of America, which moved to New
York, definitely helped the development of the Australian foreign exchange markets. However, the
presence of 24 hours dealing rooms in New York seems to have limited effect. iii
See Table 1 of Eichengreen and Luengnaruemitchai (2004) for a comparison. Relative to GDP,
Australia’s domestic credit provided by the banking sector is 93.99%, stock market capitilisation is
101.55% and domestic securities is 46.13%. On the other hand, the same figures for the U.S. are 160.56%,
137.48% and 152.72%. iv Note the discussion by the BIS (2002: Box 2) on the reasons why stock markets thrive and bond markets
do not. v See Jiang and McCauley (2004) for further discussion. Within Asia-Pacific, the first five largest bond
markets were Japan (US$6735), China (US$465), Korea (US$381), Australia (US$208) and then Malaysia
(US$83). The figures are at 2002. vi Many recent academic studies have focused on this issue. See Nestor and Thompson, 1999; Szilagyi and
Batten (2004) for a discussion of this work and evidence on the impact regional differences in legal and
banking structures have on the growth outcomes. vii
Austraclear is an electronic registry and settlement system for government, semi-government and
private-sector debt securities. It is a wholly owned subsidiary of SFE Corporation Limited. Austraclear has
over 500 financial market participants as members (RBA Glossary). viii
Euroclear is the world's premier settlement system for domestic and international securities transactions,
covering bonds, equities and investment funds. Market-owned and market-governed, Euroclear provides
securities services to major financial institutions located in more than 80 countries. In addition to its role as
the leading International Central Securities Depositary (ICSD), Euroclear also acts as the Central Securities
Depository (CSD) for Dutch, French, Irish and UK securities, a role that will soon be extended to include
Belgian securities (source Euroclear website: www.euroclear.com). ix Clearstream is part of the Deutsche Börse Group, and offers settlement and custody services to more than
2,500 customers world-wide, covering over 150,000 domestic and internationally traded bonds and
equities. Clearstream's core business ensures that cash and securities are promptly and effectively delivered
between parties, and that customers are always notified of the rights and obligations attached to the
securities they keep under our custody. Clearstream maintains strong links to counterparts in 40 domestic
markets, ensuring the timely and secure transfer of securities ownership and matching payment. Backed by
flexible securities lending and collateral management services, Clearstream offers one of the most
comprehensive international securities services available, settling more than 250,000 transactions daily
(source Clearstream website: www.clearstream.com).