A kangaroo bond is an Australia-dollar denominated bond issued by a non-Australian company in the Australian debt market to raise capital from Australian investors. In the pursuit of funding, these non-native issuers recognize the need to offer attractive terms to a less familiar audience, which can result in a higher new issue concession.
Just last week, three compelling instances spotlighted this trend, featuring NatWest, Mizuho, and Lloyds stepping onto the stage with AUD issuances. NatWest Markets Plc, rated by Fitch with A+ (stable), S&P with A- (stable), and Moody’s with A2 (positive), pioneered an inaugural AUD benchmark 5-year fixed and floating rate senior unsecured transaction. This launch, carrying an S&P A-rating and Moody’s A1-rating, printed at +173 / fixed coupon of 5.899%. Mizuho swiftly followed with a comparable senior fixed-only tranche priced at +180bps, offering a 6.025% yield. Recall that Senior debt takes precedence over tier 2 bonds in the capital stack, ensuring higher priority in repayment and enhanced security for investors.
This was followed up by an issuance from Lloyds Banking Group PLC, with their debut AUD Tier 2 fixed-only deal making waves, pricing at +290bps, with a fixed coupon of 7.068%. Notably, this issuance exhibited an attractive “pick-up” against the domestic issuer curve with the larger-than-usual New Issue Premium (NIP) underscored by it being their first foray into the AUD Tier 2. We viewed this issue as an opportunity for investors to broaden their Tier 2 exposure with an allocation to a well rated UK bank at an appealing outright return.
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From a relative value perspective, at +290, this looked cheap to the A$ T2 curve as well as Lloyds local curve (swapped back into A$). We expect this to perform well given the lack of issuance in the space as well as secondary comps. Lloyds has been a regular issuer in the A$ market, however, hasn’t done a T2 down here before. This is a further reason why there will be a scarcity premium on these securities.
From a credit perspective, Lloyds is one of the standout UK banks and has maintained a solid credit profile during various credit cycles. Its loan book is predominantly residential mortgages which are low risk. Strong underlying profit has helped Lloyds report solid capital ratios in the wake of a tough UK outlook. We see downgrade risk as low in this credit.
Acknowledging the recent strength in domestic Tier 2 markets during July and August, driven by constrained supply, the recent primary kangaroo issuances have been well-received by investors.
Stepping back to evaluate the relative value, consider NAB’s recent launch of a listed hybrid with a 7-year call at +280, with a BBB- rating and 70% cash coupons. In stark contrast, Lloyds’ Tier 2 bonds, shorter in tenor, hold a BBB+ equivalent rating from Moody’s, offer a higher position in the capital stack, and pay 100% cash coupons. This further emphasizes the relative value of Kangaroo bonds.
