* Middle East & Latam banks sell A$1.3 bln in kangaroo bonds
* Banco de Chile could be next in line to tap Australian
* Explosion of non-G4 bond issuance since crisis
* Local funds & Asian private wealth drive demand
By Cecile Lefort
SYDNEY, May 22 Australia's A$1.5 trillion bond
market is attracting interest from borrowers in Latin America
and the Middle East, as they seek to diversify their portfolio
and lower funding costs in the world's fourth-largest pension
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
($1.20 billion) through five kangaroo bonds - Australian
dollar-denominated debt from foreign issuers and there is more
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 3-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
"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 percent over a five-year horizon,
such kangaroo bonds offer attractive returns compared with U.S.
government bonds yielding as little as 3.4 percent
over 30 years. This pocket of investor demand is creating price
tensions, helping to bring down borrowing costs and luring new
"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.
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
"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 US$1 billion-US$2 billion annual
funding requirements in Chilean pesos and the rest in U.S.
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 percent last year from 5 percent
seven years ago. here
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
($1 = 1.0850 Australian Dollars)
(Reporting by Cecile Lefort; Editing by Nachum Kaplan & Shri