What Is a Kangaroo Bond and How Does It Work?

Kangaroo Bonds are issued by foreign companies in the Australian market in the country under the Australian Dollar (AUD) and they have to comply with the rules and regulations of Australian Securities and Investment Commissions securities. They are also known as Matilda bonds.

The primary authority to issue the Kangaroo bond lies with sovereign, universal, and agency (SSA) with others following suit. Kangaroo bonds can be issued by international banks, financial institutions, and overseas corporations as well as individuals. The recent trend has seen a decline in their numbers due to the lower ratings.

What are the benefits of a Kangaroo Bond?

  • With Government and financial support for all the major SSA issuers based in Asia and Europe, they receive significant government support and avoid the risk of default.

  • The bonds carry excellent credit rating and most often have AAA from all the major credit rating organizations. They are an important asset source for the Australian market that carry the all powerful AAA rating as well. The power of these commodities could be leveraged by individuals and businesses for collateral.

  • Kangaroo Bonds started over 25 years ago and remain highly popular even today. Although they are traded by foreign companies, they enjoy a very strong presence in the Australian market as is visible in Bloomberg AusBond Composite Index.

  • The kangaroo bonds, typically provide a better rate of return to maturity than equivalent bonds issued by the state governments, according to the Australian Securities and Investments Commission. In addition to government issuers, the SSAs-issued kangaroo bonds provide risk-averse borrowers with a major source of diversity that is distinct from government issuers.

How do Kangaroo Bond work?

Bond issuers in Australia are looking for a chance to lure lenders and investors in debt market issue a kangaroo bond, with country's national animal emblem and will be traded on the Australian stock exchange. The bonds are allowed to issued by foreign nationals and traded in Australian Dollars to boost the local and internal economy as they are allowed to traded in the international market as well.

When it comes to collecting cash in AUD, Kangaroo bonds are a great option for investment businesses and major corporations looking to diversify their holdings and increase their overall exposure to local currency. It is customary for international firms to issue kangaroo bonds in Australia during periods when interest rates in the nation are low to attract more investors.

When issuing kangaroo bonds, many issuers do not demand Australian dollars as part of the transaction. It is common practice for the proceeds from the bond issue to be converted back into the currency required by the borrower via the use of financial instruments such as cross-currency swaps.

When an issuer is required to pay coupons in return for a return of the principal in Australian dollars, exchanges are utilized to offset the foreign currency liability associated with that obligation. A cross-currency swap, for example, allows an issuer of kangaroo bonds to lend Australian dollars at the Bank Bill Swap Rate (BBSW) and the basis while simultaneously paying the Federal Funds Rate plus any applicable U.S. dollar margin.

Updated on: 02-Jul-2021


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