FI bond issuance builds on record 2023 as Kangaroo market deepens

CBA sees the outlook for both the FI Kangaroo issuance and the broader FI bond market remaining robust. This rise in overall FI issuance early in 2024 has occurred even as banks' funding requirements have tapered amid slower loan growth, strong deposits, and a subdued 2024 maturity tower of around A$63.8 billion. 

Kangaroo bond issuance among offshore FIs has grown faster still, climbing 18% year-on-year to A$6.35 billion as seen in Figure 1. That's despite a relative pullback in Canadian bank issuance to date in 2024, the jurisdiction accounting for more offshore supply than any other last year.

"We believe FI issuers domestically and abroad are seeking to take advantage of highly buoyant debt market conditions. Attractive pricing, where major bank and Tier 2 spreads are at levels not seen since April 2022, and relative value compared to offshore markets, have underpinned supply," says Enrico Massi, Commonwealth Bank's Executive Director, Head of FI Debt Capital Markets.

According to Enrico Massi, intersecting drivers are supporting the appeal of FI bonds. For one, there’s broad-based demand, with orderbooks oversubscribed by an aggregate of 1.88 times and as high as 3.97 times. This has helped issuers tighten their pricing by 7.8 basis points this year on average.

Director, Bond Syndicate at Commonwealth Bank, Tom Rankine, adds that for offshore issuers, secondary market liquidity in the Kangaroo bond market has helped provide greater confidence.

"Last year we saw more challenges to price discovery in the market, but with higher secondary trading levels and a diversity of supply in 2024, issuers can now more efficiently price and execute transactions. That's attracted investors and led to more market depth, so heightened supply has been taken in its stride." Rankine says.

Pricing and demand support Kangaroo FI bond market 

While average deal sizes across the Australian FI bond market are little changed from last year,  Kangaroo issuance transactions have broken significantly higher according to Kanganews. This has been supported by demand, with stronger oversubscription rates than last year.

Vera Savina, Commonwealth Bank's Director Debt Capital Markets, Europe, says that for many offshore FI issuers, competitive pricing has helped bring funding costs in line with what they can achieve in their domestic markets. The benefits of diversification and a more active investor pool are also attractive.

"We're seeing this play out for European FIs where demand is particularly strong. Amid rising Kangaroo issuance volumes and better market liquidity, the delta between Aussie Dollar-pricing and Euro-pricing continues to compress. Last year, that differential may have been as high as 20 or 25 basis points, but now looks more like 10 to 15 and are trending tighter."

Larger Kangaroo bond deal sizes have been seen in a range of transactions this year alongside more heavily oversubscribed books. This includes Credit Agricole issuing A$1.75 billion in fiveyear senior-preferred Kangaroo bonds in January 2024, up from the A$900 million printed last year. The case was similar for BNP, which issued A$300 million in senior-preferred notes in 2023 and A$1.2 billion this year.

While at an overall FI bond market level, senior-preferred issuance is up almost 92% year-onyear, subordinated debt issuance has grown the most by value, as shown in Figure 3. Tier 2 bonds have also been the most oversubscribed, at an average multiple of 2.5, including the recordbreaking A$1.5 billion 10NC5 Kangaroo bond printed by HSBC with an A$5.8 billion orderbook.

"We're speaking to more FIs outside Australia that are considering subordinated issuance in the Aussie Dollar and stepping out from their core currencies. The market is growing and supporting larger deals, which means they are looking more closely at the Australian market for funding programs," Savina says.

Outlook supported by the appeal of resilience

The outlook for both the FI Kangaroo issuance and the broader FI bond market remains robust, a view shared across Commonwealth Bank's global Debt Capital Markets and syndication desks. However, there are potential crosswinds ahead.

Tom Rankine says that while inflation is proving to be sticky, the Australian economy remains resilient. He adds that conditions should continue to support spreads and demand for fixed income assets unless the rates outlook materially changes.

"The market is performing well, and spreads are at the low end of the average over the past few years. Unless there's an unexpected event, they should be range-bound for the next six months as inflation flows through," Rankine says.

As Rankine points out, the geopolitical landscape also poses a common risk to all financial markets. However, he notes that "the Australian FI bond market tends to outperform in risk-off cycles".

Massi agrees, saying that expected market volatility later in 2024, amid ongoing global conflicts and the upcoming US election, could lead to more offshore FIs seeking the relative shelter of Australian dollar-denominated bonds.

As Savina explains, another factor that may influence FI kangaroo issuance volumes is that many appear to be "frontloading their funding needs" early in 2024 amid strong domestic demand and to avoid anticipated volatility.

"When our team talks to global FIs, many are well-advanced through their funding needs. However, if that leads to lower issuance levels over the rest of 2024, but investor demand remains consistently strong, we could see spreads tighten further. If they compress enough, some issuers may consider pre-funding for the coming year," Savina concluded.