Kangaroo_Bond

Key Takeaways

• Kangaroo bonds are issued in Australian markets by foreign firms and are denominated in Australian dollars.
• Companies might issue bonds in other currencies to benefit from exposure to that country’s market or interest rates, or to raise cash in the foreign currency.
• Foreign companies often seek to broaden their investor base by raising funds in other jurisdictions.
• The benefit of kangaroo bonds to Australian investors is that they are not subject to currency risks that they would be if purchasing the same bonds in a foreign currency.

What Is a Kangaroo Bond?

A kangaroo bond is a foreign bond issued in Australia by non-Australian entities, denominated in Australian dollars. These bonds offer foreign companies a way to tap into the Australian capital market, often benefiting from Australia's interest rates, and provide local investors with foreign investment opportunities without currency risk.

We'll cover how kangaroo bonds function, their benefits, examples, and their role in international finance.

How a Kangaroo Bond Works

Bond issuers that want access to investors and lenders in the Australian debt market would issue a bond referred to as a kangaroo bond, named in recognition of the country’s national animal emblem. A kangaroo bond is a foreign bond issued in Australian dollars by non-domestic entities, including corporations, financial institutions, and governments.

Simply put, a foreign bond is issued in a domestic market by a foreign issuer in the currency of the domestic country. Foreign bonds are mainly used to provide issuers with access to another capital market outside of their own to raise capital.

Major corporations and/or investment firms looking to diversify their holdings and improve their overall currency exposures can use kangaroo bonds to raise funds in Australian dollars. Kangaroo bonds are typically issued when interest rates in Australia are low relative to the foreign corporation's domestic rates, thus, lowering the foreign issuer's overall interest expense and cost of borrowing.

Advantages of Investing in Kangaroo Bonds

A company may choose to enter a foreign market if it believes that it would get attractive interest rates in this market or if it has a need for foreign currency. When a company decides to tap into a foreign market, it can do so by issuing foreign bonds, which are bonds denominated in the currency of the intended market.

A kangaroo bond is an attractive investment venture for domestic investors who are not exposed to currency risk since the bonds are denominated in their local currency. Furthermore, investors who wish to diversify their portfolios beyond their local borders may opt for these bonds and earn incremental yield. In effect, kangaroo bonds provide an opportunity to invest in foreign companies without having to manage the effects of currency exchange fluctuations.

Many issuers do not necessarily have a need for Australian dollars when they issue kangaroo bonds. Proceeds from the sale of the bonds are typically converted back to a currency that the issuer requires through financial instruments such as cross-currency swaps.

These swaps are used to hedge the foreign exchange risk associated with the issuer’s obligation to pay coupons and repay the 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 fed funds rate plus some margin for U.S. dollars.

Important

The risk associated with raising capital in a foreign currency can often be mitigated with risk-management techniques such as cross-currency swaps.

Real-World Example of a Kangaroo Bond

In January 2018, Emirates NBD, Dubai’s largest bank, priced a A$450 million ($362.03 million) 10-year bond, part of a A$1.5 billion kangaroo bond program, with a 4.75 percent indicative annual coupon. The reason for the bond issuance was to diversify the bank’s source of funding and to facilitate its expansion into new markets.

Major issuers of kangaroo bonds have typically been from the United States and Germany. Other foreign bonds include Samurai bonds, Maple bonds, Matador bonds, Yankee bonds, and Bulldog bonds.

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