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Sydney: A rush of Australian bond issuance from foreign borrowers so far this year could come to an abrupt halt after a sudden steep rise in the cost of swapping currencies put an end to relatively cheap funding conditions.
Yet, it's not all bad news as analysts expect Australian banks to benefit from the change by raising debt offshore and locking in juicy savings.
Kangaroo issuers, or foreign issuers selling bonds in Australia, have taken the lion's share of the bond market this year accounting for more than three-quarters of the A$16 billion corporate bonds sold.
But these issuers, all triple-A rated and mostly backed by governments, are now facing a tough environment as the cost of swapping the bond proceeds back into their home currency has inflated significantly.
Blow
Bankers say it is now almost impossible for these borrowers to meet their funding targets in Australia, a big blow to a domestic bond market already reeling from the global credit crunch.
"The Kangaroo market - for supranationals and sovereigns - is non-existent and this is likely to last until the basis swap comes back to positive territory at the very least," said Chad Karpes, head of debt syndicate at ABN Amro.
The Australian dollar/US dollar 10-year currency basis swap, which impacts the cost of swapping currencies, tightened by 30 basis points just before Easter, making it much more expensive to swap Aussie dollars for the US currency.
The 10-year cross currency basis swap was quoted yesterday at minus 21 basis points, after a peak of minus 28 basis points just before Easter. In the past year, the 10-year basis has been between plus 2.5 basis points and plus seven basis points.
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