Those looking for financing can find what they need down under

The Australian dollar bond market has once again demonstrated its attractiveness to global borrowers. The recent flood of funding from foreign banks at the end of the year suggests that other credit issuers should consider the Australian dollar amid looming competition in other major markets.

Last week, BNP Paribas showed the attractiveness of financing Down Under with a A$1 billion (€617m) Tier 2 Kangaroo deal, less than a week after a very similar Tier 2 deal from Barclays.

Even after the two European lenders completed their planned financing for the year, the heavy oversubscription of the deals shows there is still more unmet demand for loans in the currency.

Expectations of rate cuts by the Reserve Bank of Australia have been pushed back from early 2025 to mid-year. This will somewhat delay the immediate appeal of fixed income products, but with interest rate cuts still factored in next year, investors will undoubtedly shift their asset allocation towards bonds, particularly higher yielding instruments.

While the AU$1 billion benchmarks printed by BNPP and Barclays each may not be much larger than the minimum AU$500 million benchmark in euro terms, the deals had so much more to offer – showing that the Australian market is the The right place for large issuers from banks and companies already have Australian bonds and a certain level of recognition.

Since the two lenders had already completed their annual financing programs for 2024, the Kangaroo forays pre-financed for next year. But these banks didn’t just take on debt wherever they could. They did this in addition to pre-financing that was already well advanced.

BNPP had already met a significant portion of its 2025 funding needs in mid-November with a $3.5 billion 144A/Reg S Yankee deal, divided equally into senior, non-preferred and Tier 2 tranches .

In addition to the diversification advantage, the Australian dollar market also offers these banks very cost-effective financing, say market participants in the region.

Its Australian Tier 2 operations are estimated to be close to its dollar funding levels. This is by no means insignificant considering that BNPP only paid about 3 basis points in new issue concessions for its Yankee Tier 2 piece.

And this concession was above the dollar curve. The cost of financing in dollars for many European banks was significantly lower than the cost they would pay for financing in euros.

It’s not just issuers fighting for investors’ attention.

RBA interest rate cuts are not expected until the middle of next year. But as the central bank signaled in its monetary policy meeting on November 19 – well before the two most recent stage two Kangas – the cuts are coming.

This means Aussie dollar bonds will rise in value, mimicking the pattern of spread tightening that occurred on US dollar and euro bonds before interest rate cuts began in those markets.

Investors know it. That’s why they stormed into Barclays’ second tier, amassing a final order book of over A$5.85 billion for the 10.5-year non-call 5.5 deal worth A$1 billion.

Even though BNPP had a longer maturity with a 12-year non-call 7 application at the same 200 basis point spread versus asset swaps, it still closed with orders worth A$3.8 billion.

These results clearly show that investors want to purchase fixed income investments in Australian dollars. This offers issuers the opportunity to either pre-finance their bonds before the end of the year or even issue them into January in order to avoid the strong competition in the euro market.

There is also the unique Aussie solution, which should further attract investors. This market has long welcomed longer-term floating rate bonds, which are not available in either the US or Euro.

The deal with Barclays was equally split, but BNPP opted for a floater worth A$600 million. This is an added benefit for local buyers as they can benefit from the higher interest rates of an FRN before the cuts occur, driving up the price of a fixed rate note.

Furthermore, recent resistance from Euro investors to the historically tight spreads of subordinated bank bonds, such as some Tier 2 bonds sold in November, and corporate hybrids underlines the appeal of yield-hungry Australian investors.

Entering the Australian market is a win-win for both credit issuers and Australian dollar investors.