Canadian borrowers achieve Kangaroo breakthrough

But the explosive return of the provinces is unprecedented in the Kangaroo market: four deals, priced in weekly succession across April and May, for total volume of almost exactly A$5 billion (see table).

Source: KangaNews 14 June 2024

This flurry of deal activity smashes the previous record for annual issuance by Canadian provinces in Australia – of A$1.7 billion, set in 2014 from no fewer than 12 separate transactions (see chart 1). The 2024 average deal size, of more than A$1.2 billion, dwarfs the A$88 million average print across the preceding 100-plus provincial Kangaroo transactions.

The change in deal profile is more of a leap-up than a step-up, and it was something of a shock even to the issuers involved. Province of Québec was the first mover, and its leads – TD Securities and RBC Capital Markets, which jointly arranged all four 2024 provincial benchmarks – subsequently suggested that while they were confident of a positive outcome they were thinking more along the lines of a A$500 million trade than the A$1.35 billion that eventuated. Even the former would have been a record for the sector.

Guillaume Pichard, assistant deputy minister, financing, debt management, banking and financial operations at Québec’s ministère des finances, says: “We were quite surprised by the outcome. This said, we are always monitoring the market and we knew the arbitrage was working. We have a sizeable borrowing programme this year and dealers said we might be able to issue some size in the Australian dollar market.”

Québec had not printed more than A$100 million in any single Kangaroo transaction for a decade. “We used to receive a few reverse enquiries and we would open them to everyone publicly because we wanted to achieve the biggest size possible,” Pichard continues. “We mainly had accounts from Japan participating, though.”

For a period in the mid-part of the last decade, the Canadian provinces were beneficiaries of the Japanese insurance demand that came into the Australian dollar supranational, sovereign and agency (SSA) market at long duration, typically executed via a high number of small tap transactions.

“The duration we offered made a lot of sense for these accounts,” explains Stephen Thompson, executive director, capital markets at Province of Alberta in Edmonton. “Canadian provinces were happy to issue more duration in foreign currencies than a lot of other issuers. For accounts denominated in yen, meanwhile, it was also much cheaper to swap from Australian dollars than almost any other currency.”

By the onset of the pandemic, however, even this relatively narrow demand had eased: aggregate provincial Kangaroo issuance slipped to just A$170 million in 2020, from A$1.1 billion – in a record 20 separate transactions – in 2016. Last year was the first since 2009 in which there was not a single Kangaroo deal from a Canadian province.

Things have changed, on the supply and demand sides. For one thing, the provinces generally have a greater incentive to seek out wider issuance opportunities. The five provinces that have issued Kangaroo bonds had an increase of 50 per cent in their aggregate borrowing programme for 2023/24, to C$109 billion (US$79.4 billion) from C$72.2 billion a year earlier (see chart 2). The task jumps again in 2024/25, to a total of C$125.1 billion.

This has made a material difference to the value of substantial bond transactions in global markets – and the Australian dollar is front and centre.

Jim Hopkins, Province of British Columbia’s Victoria-based assistant deputy minister, provincial treasury, comments: “As government borrowing programmes generally increase across the globe, the ability to issue in benchmark sizes makes a difference and is valued by issuers. The competition among provinces and other SSAs also means our preference is for benchmark-sized transactions as opposed to numerous smaller-sized ones.”

Equally important, a wider investor base has engaged with the provinces. Far from the Japan-only days, distribution data for recent Canadian deals show majority participation from EMEA and, perhaps even more encouragingly, typically solid complementary support from domestic accounts (see chart 3).

“To my knowledge, our last deal is the first time we have had domestic accounts in Australia and New Zealand participating,” Pichard says. “We thought this demand would come gradually, not all of a sudden.”

Hopkins adds: “The recent demand pattern is a sea change compared with what we have seen in the past in the Australian dollar market. The EMEA region, real money and fund managers all becoming more active created a great opportunity.”

The prominence of EMEA investors is relatively unusual in Australian dollar SSA trades but the accounts coming into provincial deals come from a familiar group of investors that buy these credits in other markets. Success is breeding success, in the sense that larger deals promote investor interest and participation.

A spokesperson for Province of Ontario explains: “The larger benchmark issues by Canadian provinces allow EMEA investors to increase their Australian dollar exposure while receiving a spread over government bonds and diversifying their holdings with names and credits they know.”

As deals hit the A$1 billion mark, they can catch even more international attention. Thompson reveals that once Alberta’s Kangaroo deal reached this critical size, its investor base broadened “very quickly” to include central banks and sovereign wealth funds in addition to asset managers, bank treasuries and others with significant holdings of Australian dollars. All four provincial benchmarks in 2024 have attracted diverse books by investor type (see chart 4).

Pricing is clearly helping. One phenomenon of 2024 in the Australian dollar market is the emergence of a sweet spot for high-grade issuers with a more attractive yield proposition. In short, credit in the double-A to triple-A range that can offer close to 100 basis points over Australian Commonwealth government bonds (ACGBs) has reliably been snapped up by the global buy side. This is exactly where fair value has been landing for Canadian provinces’ Kangaroo deals.

“Many accounts are very comfortable with our name and they like the spread we offer,” Pichard confirms. He adds that the Australian dollar is now viewed as a global currency by more central banks, money managers and treasuries. Consequently, these accounts want to hold more Australian dollar paper.

This does not necessarily mean a discount for the Kangaroo market. Pichard says the 85 basis points over semi-quarterly swap offered by Québec seemed fair, while also offering a good pickup over ACGBs. But he adds: “It is the equivalent of what we pay domestically. If we can offer an appealing pickup, we’re glad to be able to attract investors with it. It is a win-win: investors get a spread and we get something comparable to our domestic cost of funds.”

The provinces have also been assisted by the emergence of another substantial Canadian issuer in the Kangaroo market. While its credit profile is rather different, CPP Investments has demonstrated a pricing and volume strategy that is acting as something of a strategic marker for its peers (see first box).

Another Canadian name – Export Development Canada – also has a long-established Australian dollar presence. While its profile is different again, as it is owned by the Canadian federal government and has assets denominated in Australian dollars, EDC tells KangaNews relative value still plays an important role in attracting demand into its Kangaroo deals (see second box).

While the outcomes achieved in 2024 are undeniably eye-catching, the reality is they still represent a single flurry of activity. Whether this scale of demand at pricing that works for the provinces will be available again, let alone reliably so, remains to be seen.

Issuers have varying degrees of confidence about the outlook. Thompson says: “I don’t know if these dynamics will hold. It is like when the US was in love with Crocodile Dundee and everything about Australia was great. I get the sense that Australia might feel that way about the Canadian provinces at the moment – but perhaps we’re just a passing fad.”

On the other hand, Pichard has some confidence that the clutch of provincial Kangaroo deals was not just a one-off phenomenon created by a lucky set of circumstances. “I’m confident the Australian dollar will be a new market where we can execute real benchmarks,” he says.

Jason Lewis, Victoria-based director, capital markets at Province of British Columbia, also expects to see more regular benchmark issuance opportunities in future, provided deals remain well received. Cross-currency swaps to Canadian dollars remains an important consideration for the provinces but the Australian dollar market remains very competitive, he adds. If the depth of the market is maintained it will continue to play a major role in British Columbia’s funding programme.

One positive factor is that at least some of the provinces say they are prepared to meet the Australian dollar market on pricing, even offering a premium when needed, as they attempt to build on the 2024 bridgehead. Pichard explains that waiting for full equivalence with Canadian dollar pricing would likely mean Québec never accessing the US dollar, euro or sterling markets – and the province is willing to show the same degree of flexibility to the Australian dollar market.

Gaining a diverse investor base is also an impetus to be open-minded on price. In Alberta’s case, Thompson says bringing new, high-quality investors such as central banks and sovereign wealth funds into its Kangaroo programme is a completely different motivator, as is the participation of the domestic Australian accounts.

When Alberta was doing smaller Australian dollar deals it was seeking a 10-15 basis point cost saving to domestic levels. However, printing A$1 billion or more in a trade means it is happy to settle for levels closer to flat to domestic funding, Thompson reveals. “As these trades are larger than what we issue domestically we might even pay up a bit,” he adds.

Although Alberta’s funding programme is smaller than its peers, the ability to issue large volume has changed the way Alberta considers the Australian dollar market. Thompson says: “All of a sudden, rather than a niche market the Australian dollar has become one of Alberta’s diversification options.”

For others, Australia remains a noncore currency for now. The Ontario spokesperson tells KangaNews the province seeks to issue in Australian dollars “when it makes sense” for itself and its investors. Nevertheless, building on the positive experience of its most recent deal, the province says it will continue to assess the market and seek to issue benchmark deals.