UAE Banks Tap Australian Debt Opportunities

Australia’s A$1.5 trillion bond market is attracting interest from borrowers in the Middle East and Latin America, as they seek to diversify their portfolio and lower funding costs in the world’s fourth-largest pension savings pool.

National Bank of Abu Dhabi, First Gulf Bank , Emirates NBD, Abu Dhabi Commercial Bank and Banco Santander Chile raised this year A$1.3 billion ($1.2 billion) through five kangaroo bonds – Australian dollar-denominated debt from foreign issuers and there is more to come.

Banco de Chile could be next, having met Australian investors last week, according to two portfolio managers who declined to be named.

A big help to kangaroo issuance is a favourable move in the Australian-U.S. dollar cross-currency basis swap rate, an instrument that borrowers use to swap into foreign currencies.

The Australian dollar/U.S dollar three-year currency basis swap, which impacts the cost of swapping currencies, widened to 23 basis points from around 16 basis points since February, making it cheaper to swap Aussie dollars for the U.S. currency.

Robert Moreno, investor relations manager at Banco Santander Chile, estimates a saving of at least 10 basis points on an all-in basis compared to a Chilean peso bond issue, after accounting for the swap of U.S. dollars into the Chilean currency.

“The trigger (to our Australian issue) was the basis swap,” he said on the phone from Santiago. “At the time, it looked cheap compared to what we could do in our local market.”

Underpinning issuance is demand from yield-hungry Asian private wealth investors with Australian dollars to recycle. With coupons as high as 5.75 per cent over a five-year horizon, such kangaroo bonds offer attractive returns compared with U.S. government bonds yielding as little as 3.4 per cent over 30 years. This pocket of investor demand is creating price tensions, helping to bring down borrowing costs and luring new issuers.

“It’s good to see issuers from new regions in our capital markets because it also draws new offshore buyers and the more participants, the more liquidity it brings,” said Greg Stock, a portfolio manager at Perpetual Ltd which has more than A$5 billion in fixed income.

DIVERSIFICATION

Australia’s bond market is among the world’s 10 largest but is often criticised for lacking the depth and liquidity of its U.S. and European peers.

Debt issues from the Gulf and South America are very rare in Australia with the vast majority of the A$167 billion kangaroo bonds coming from Western Europe and North America.

Recently, more lenders worldwide are willing to tap smaller and more illiquid debt markets to diversify from their core investor base.

“We want to be able to go to them and say ‘look, we don’t only depend on you, we can do it all over the place,'” said Banco Santander’s Moreno.

The bank, which is rated Aa3 by Moody’s and A by S&P, typically sources half of its $1 billion-$2 billion annual funding requirements in Chilean pesos and the rest in U.S. dollars.

But since late last year, the bank has added Australian dollars, Swiss francs and yen bonds to its borrowing.

ThomsonReuters data showed the share of global debt issuance outside U.S. dollar, euro, yen and sterling –called G4 currencies–leapt to nearly 20 per cent last year from five per cent seven years ago.

Australia dollar debt issuance worldwide more than doubled to $153 billion in 2013 to take the third spot behind the Chinese yuan and Canadian dollar.

First Gulf Bank decided to make an Australian bond debut early in the year before local fund managers reached their maximum credit exposure to Middle Easter borrowers.

“We were aware that several banks from the region were looking at issuing in Australia and wanted to be among the first,” said Chris Wilmot, head of treasury and global markets at First Gulf Bank on the phone from Abu Dhabi.

Having already been in discussion with a couple of key potential investors in Australia for some time, First Gulf’s aim was to give priority allocation to local fund managers, which received more than 40 percent of the A$250 million A2-rated transaction.