Key Takeaways
- Foreign bond issued in Australian dollars.
- Offers lower borrowing costs for issuers.
- No currency risk for Australian investors.
- Provides portfolio diversification and high yields.
What is Kangaroo Bond?
A Kangaroo bond is a foreign bond issued by non-Australian entities but denominated in Australian dollars and sold in the Australian domestic market. These bonds comply with local regulations and are typically listed on the Australian Stock Exchange.
Also known as Matilda bonds, they allow international issuers to access Australian capital markets while offering Australian investors exposure to foreign credit without currency risk.
Key Characteristics
Kangaroo bonds offer unique features that benefit both issuers and investors:
- Denomination: Always issued in Australian dollars, reducing currency risk for local investors.
- Issuer: Foreign corporations or supranational agencies seeking funding outside their home markets.
- Regulation: Subject to Australian legal and listing requirements, ensuring transparency and investor protection.
- Credit Quality: Often rated AAA when issued by supranational agencies, providing low-risk options.
- Fixed Income: Typically feature fixed interest payments and a predetermined maturity date with known face value.
How It Works
Kangaroo bonds work like conventional bonds in that investors receive periodic interest payments and principal repayment at maturity. However, the foreign issuer receives Australian dollars and usually converts the proceeds back to their home currency using cross-currency swaps to hedge foreign exchange risk.
This process allows issuers to benefit from Australia's potentially lower borrowing costs compared to their domestic markets while maintaining currency exposure management. Investors gain access to higher yields and diversification without facing currency fluctuations.
Examples and Use Cases
These bonds are popular among large multinational corporations and financial institutions seeking diversified funding sources:
- Financial Institutions: Emirates NBD issued a significant Kangaroo bond to expand its funding base and market presence.
- Airlines: Delta and American Airlines have utilized foreign bond markets to optimize capital costs, though not necessarily Kangaroo bonds specifically, they exemplify global debt issuance strategies.
- Investment Options: Investors interested in fixed income may compare Kangaroo bonds with bond ETFs such as those listed in best bond ETFs to diversify their portfolio.
Important Considerations
While Kangaroo bonds provide benefits, you should consider credit risk, as default depends on the issuer’s financial health. Interest rate fluctuations also impact bond prices and your rate of return.
Additionally, understanding the bond’s terms and issuer creditworthiness is vital. For safer options, bonds issued by supranational agencies rated AAA may be preferable. Always evaluate how these bonds fit within your broader fixed income investments like those found in BND.
Final Words
Kangaroo bonds offer a cost-effective way for foreign issuers to tap into Australian capital markets while providing investors with attractive yields and no currency risk. Consider comparing current offerings and assessing how these bonds fit within your portfolio strategy.
Frequently Asked Questions
A Kangaroo Bond is a foreign bond issued in Australian dollars by non-Australian entities within the Australian domestic market. These bonds comply with local regulations and are listed on the Australian Stock Exchange.
Foreign issuers raise funds in Australian dollars but often convert the proceeds back to their home currency using financial tools like cross-currency swaps. This helps them hedge against currency risk while benefiting from the Australian market.
Issuers benefit from lower borrowing costs when Australian interest rates are favorable, diversification of funding sources, and effective currency management through hedging strategies using cross-currency swaps.
Investors gain exposure to foreign issuers without currency risk, enjoy potentially higher yields compared to other bonds, and benefit from portfolio diversification. Bonds from supranational agencies often provide low-risk investment options due to high credit ratings.
Like all bonds, Kangaroo Bonds carry credit risk if the issuer defaults, and interest rate risk since bond prices fluctuate with market rates. However, bonds from highly rated supranational agencies are generally considered low risk.
Kangaroo Bonds are issued by foreign corporations, banks, and supranational agencies seeking to tap into the Australian capital market and diversify their funding sources.
Issuers convert the Australian dollar proceeds back to their home currency using cross-currency swaps, which hedge foreign exchange risk and allow them to manage currency exposure effectively.
No, Australian investors do not face currency risk investing in Kangaroo Bonds because these bonds are denominated in Australian dollars, eliminating exposure to foreign exchange fluctuations.
