What Is a Kangaroo Bond?
A kangaroo bond is a type of foreign bond issued in the Australian market by non-Australian firms and is designated in Australian currency. The bond is subject to the securities regulations of Australia. A kangaroo bond is otherwise called a "matilda bond."
How a Kangaroo Bond Works
Bond issuers that need access to investors and lenders in the Australian debt market would issue a bond alluded to as a kangaroo bond, named in recognition of the country's national animal symbol. A kangaroo bond is a foreign bond issued in Australian dollars by non-domestic elements, including corporations, financial institutions, and legislatures.
Basically, a foreign bond is issued in a domestic market by a foreign issuer in the currency of the domestic country. Foreign bonds are for the most part used to furnish issuers with access to another capital market outside of their own to raise capital.
Major corporations as well as investment firms hoping to expand their holdings and further develop their overall currency exposures can utilize kangaroo bonds to bring funds up in Australian dollars. Kangaroo bonds are commonly issued when interest rates in Australia are low relative to the foreign enterprise's domestic rates, in this manner, lowering the foreign issuer's overall interest expense and cost of borrowing.
Benefits of a Kangaroo Bond
A company might decide to enter a foreign market assuming it accepts that it would get appealing interest rates in this market or on the other hand assuming it has a requirement for foreign currency. At the point when a company chooses to tap into a foreign market, it can do as such by giving foreign bonds, which are bonds designated in the currency of the expected market.
A kangaroo bond is an alluring investment venture for domestic investors who are not presented to currency risk since the bonds are designated in their nearby currency. Moreover, investors who wish to broaden their portfolios past their nearby lines might opt for these bonds and earn incremental yield. In effect, kangaroo bonds give an opportunity to invest in foreign companies without dealing with the effects of currency exchange changes.
Numerous issuers don't be guaranteed to have a requirement for Australian dollars when they issue kangaroo bonds. Proceeds from the sale of the bonds are ordinarily switched back over completely to a currency that the issuer expects through financial instruments, for example, cross-currency swaps.
These swaps are utilized to hedge the foreign exchange risk associated with the issuer's obligation to pay coupons and repay the principal in Australian dollars. For instance, through a cross-currency swap, a kangaroo bond issuer can loan 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.
The risk associated with bringing capital up in a foreign currency can frequently be moderated with risk-the board procedures, for example, cross-currency swaps.
Illustration of a Kangaroo Bond
In January 2018, Emirates NBD, Dubai's biggest bank, priced an A$450 million ($362.03 million) 10-year bond, part of an A$1.5 billion kangaroo bond program, with a 4.75 percent indicative annual coupon. The justification for the bond issuance was to broaden the bank's source of funding and to work with its expansion into new markets.
- Foreign companies frequently try to expand their investor base by bringing funds up in different locales.
- Companies could issue bonds in different currencies to benefit from exposure to that country's market or interest rates, or to bring cash up in the foreign currency.
- Kangaroo bonds are issued in Australian markets by foreign firms and are named in Australian dollars.
- The benefit of kangaroo bonds to Australian investors is that they are not subject to currency risks that they would be if purchasing similar bonds in a foreign currency.