The Australian dollar bond market has revealed its appeal to global borrowers once again. The recent flurry of late-year funding from foreign banks argues other credit issuers should consider Aussie dollars, in the face of looming competition in other major markets.
Last week BNP Paribas showed the allure of funding Down Under with a A$1bn (€617m) tier two Kangaroo deal, less than a week after a very similar tier two outing from Barclays.
Even after the two European lenders had completed their year's planned funding, the deals’ healthy oversubscription shows there is more unmet demand for credit in the currency.
Expectations of interest rate cuts by the Reserve Bank of Australia have been pushed back from early 2025 towards the middle of the year. That will somewhat delay the immediate appeal of fixed income products, but with rate cuts still factored in for next year, investors will undoubtedly tilt their asset allocation towards bonds, especially higher yielding instruments.
While the A$1bn size BNPP and Barclays each printed may not be much larger than the €500m minimum benchmark in euros, the deals had so much more to them — showing the Aussie market is the place to be for major bank and corporate issuers that already have Australian bond shelves and a degree of name recognition.
As the two lenders had already completed their annual funding programmes for 2024, the Kangaroo forays were pre-funding for next year. But these banks were not merely raising debt wherever they could. They were doing so on top of already well advanced pre-funding.
BNPP had already raised a substantial chunk of its financing need for 2025 in the middle of November, with a $3.5bn 144A/Reg S Yankee deal, equally split between senior non-preferred and tier two tranches.
The Australian dollar market is giving these banks very cost-advantageous funding, say market participants involved with the region, on top of the diversification benefit.
Their Aussie tier two trades are estimated to be coming close to their dollar funding levels. This is by no means insignificant, considering BNPP paid only about 3bp of new issue concession on its Yankee tier two piece.
And that concession was over its dollar curve. The dollar cost of funding has been substantially lower for many European banks than what they would pay for funding in euros.
The coming cuts
It's not just issuers fighting for investors’ attention.
The RBA’s rate cuts are not expected until the middle of next year. But as the central bank signalled in its November 19 policy meeting — well before the pair of recent tier two Kangas — the cuts will come.
That means Aussie dollar bonds will gain in value, emulating the trajectory of spread tightening that happened in US dollar and euro fixed income before rate cuts began in those markets.
Investors know it. That’s why they swarmed into Barclays’ tier two, piling up a final order book of over A$5.85bn for the A$1bn 10.5 year non-call 5.5 deal.
Even though BNPP went longer with a 12 year non-call seven, at the same spread of 200bp over asset swaps, it still finished with A$3.8bn of orders.
These outcomes clearly demonstrate that investors want to buy Aussie dollar fixed income assets. This makes it an opportunity for issuers looking to either pre-fund before year-end or even issue into January, to avoid busy competition in the euro market.
Furthermore, there is also the unique Aussie solution that should further entice investors. That market has long welcomed longer dated floating rate notes, not available in the US or euros.
Barclays’ deal was equally split but BNPP went for a A$600m floater. This is an added benefit to local buyers as they can reap the benefits of higher interest rates from an FRN before the cuts materialise and boost the price of a fixed rate note.
Moreover, euro investors' recent pushback against the historically tight spreads of bank subordinated debt, like some tier twos sold in November, and corporate hybrids, further highlights the appeal of the yield-demanding Aussie investors.
Hopping into the Aussie market is a win-win proposition for both credit issuers and Australian dollar investors.