Understanding kangaroo bonds
What is a kangaroo bond?
Kangaroo bonds, which are also known as Matilda bonds, are issued in Australia by firms that do not come from Australia then use an Australian currency as a denomination. These bonds follow the rules and regulations of securities in Australia. Foreign companies issue bonds from other countries for exposure and generating foreign cash. They widen their foreign investor base different than their jurisdiction.
Did you know?
Why is the bond called as such? Australia's national animal emblem is the Macropus Rufus or the red kangaroo, hence the name kangaroo bond. These marsupials keep their babies in their belly pouches. The only time the mother red kangaroo puts the baby outside is when it is strong and grown enough to tend for itself.
What does a kangaroo bond do?
As previously mentioned, kangaroo bonds are foreign bonds issued in Australian denominations by non-Australian entities. These entities may include corporations, financial institutions like banks, and governments. Through kangaroo bonds, foreign entities can broaden their capital market outside their jurisdictions. Foreign entities are also able to expand their currency exposure and raise their funds in an Australian currency. When are they issued? Usually, this happens when the Australian interest rates are lower than that of the foreign country's domestic rates. So, kangaroo bonds lower their interest and borrowing expenses.
Are Kangaroo bonds important?
If a company is confident that they will gain enticing market interest rates or have a foreign currency need, they will dive into a foreign market. When they do so, they issue foreign bonds with the denomination of that specific country's currency.
Albeit issued by foreign entities, kangaroo bonds strictly follow Australian securities regulations. These foreign entities aim to attract foreign markets and to have more currency exposure. Investors do this when they are not exposed to currency risks since the denomination is in Australian dollars. Also, this will give portfolio diversity for the investors and then, later on, generate a higher yield. In short, kangaroo bonds offer foreign investors investment opportunities without worrying if the currency exchange rates go up and down.
Cross-currency swaps
Bond issuers do not precisely need an Australian denomination in kangaroo bonds because, after the bond's sale, the returns will go back to the bond issuer's required currency. This process is possible through cross-currency swaps. Cross-currency swaps limit foreign exchange risks along with the bond issuer's responsibility to repay the principal in the Australian currency.
Let's say, in the bank bill swap rate, kangaroo bond issuers can lend Australian dollars, pay fed funds rate, and margins for US dollars. This scenario is possible through cross-currency swaps.
A Kangaroo bond scenario
With a headquarters in
America, the Eagle Company wants to open a training center for the Sydney opera
house artists. Eagle Company intends to build the training center in Sydney for
the easy access and convenience of artists and potential artists. They sold $8
million bonds to make it possible because they believe that Australian investors would support this
business. After all, the Sydney Opera House is one of Sydney's main tourist
attractions.