Kangaroo market’s destination Canada

Source: KangaNews 24 April 2024

Harald Eikeland, Sydney-based director, debt capital markets at RBC Capital Markets – which led all four province deals alongside TD Securities (TD) – says the leads were confident going into the first deal this year that a step-change in Kangaroo volume for Canadian provincial issuers was on the cards given the shape of sector deal flow in Australia in recent years. Indeed, he reveals Province of Québec’s surprise at the suggestion that a transaction of A$500 million – A$1 billion might be available.

The reason for this confidence is the evolution of demand for Australian dollar product in recent years. This is in part cyclical, Eikeland acknowledges, as a wider group of investors have developed comfort buying Australian dollar bonds at tenor out to 10 years thanks to the rates environment.

But there may also be a structural element at play. Eikeland tells KangaNews: “Spreads blew out in general in 2022, but particularly so in Australia – and this set the scene for massive issuance volume last year. It is not hard to find demand for SSA [supranational, sovereign and agency] bonds at 100 basis points over sovereign, for instance.

“This story has moved on but the demand has lingered, to the extent that I would say the local market has become something bigger and more international.”

Investor motivation further hints at the stickiness of demand for Australian dollars. Apoorva Tandon, managing director and head of Asia debt origination and syndicate at TD in Singapore, says: “The investor base universally favoured 10-year maturity given the spread, pickup versus benchmark and yield. Not everyone wants to take a view on what today or tomorrow’s move will be in fixed income, but with attractive returns available many in the investor community approached the transactions from a strategic rather than a tactical sense.”

The Canadian provinces were prepared to fill a supply gap at this tenor. There had been very little benchmark 10-year Australian dollar supply from the SSA sector ahead of the Québec deal, the most recent previous such deals being a A$1.5 billion print by CPPIB Capital in late February and a A$500 million tranche issued by New Zealand Local Government Funding Agency on 1 March.

Meanwhile, long-dated semi-government issuance has been well received and corporate 10-year issuance has also flourished.

The Canadian issuers also appear to be in the middle of a sweet spot that gathers a wide range of investor bids. While transaction outcomes have generally been good for issuers across the credit spectrum, some of the most eye-catching outcomes have been for names ranging from higher-yielding SSAs through big-four banks to high-rated corporates like the double-A rated Nestlé.

"Investors are clearly axed to buy ‘spready’ names in a more liquid format,” Tandon tells KangaNews. Québec priced its transaction at 96.7 basis points over Australian Commonwealth government bond (ACGB) or 85 basis points over semi-quarterly swap – a level Tandon says is always likely to attract relative-value interest while at the same time satisfying requirements for high-quality credit.

The four Canadian province deals all offered similarly appealing spreads: Province of Ontario came to market at 97 basis points over ACGB or 83 basis points over swap, Province of Alberta at 96 basis points and 84 basis points, and Province of British Columbia at 97.1 and 85 basis points over the same benchmarks.

“It is certainly true that a wide group of investors is seeking lower-beta names with good relative value to government bonds, especially if they also offer the expectation of decent liquidity,” Eikeland adds.

The Québec orderbook peaked at just less than A$2 billion, a level that was then shattered by Ontario’s A$4 billion peak volume – size that allowed for a 2 basis point tightening from initial price guidance and from where Québec’s deal landed. Pricing so close together is typical among the Canadian provinces domestically and offshore, leads say.

Deal books for the Canadian benchmarks were notably diverse geographically and by type. EMEA was particularly prominent in the geographical breakdown with Asia and Australia also present, while no single investor type took the majority of any deal (see charts 2 and 3). A total of 46 accounts bought the Québec deal and 43 took part in the Ontario transaction.

Eikeland says comps for Québec included CPP Investments – which was particularly useful as a high-grade Canadian issuer that had recently placed 10-year Australian dollar bonds – as well as the same issuer’s US dollar curve and Australian semi-governments. Significantly, the final margin landed flat to or slightly inside Québec’s Canadian dollar curve and issuance from the sector in the US market – Eikeland says the issuer “did not pay up” for its Kangaroo return.

The provinces’ position as effectively new issuers in the Australian dollar benchmark market may actually have had a positive impact on execution dynamics, especially price discovery. Stale secondary marks can imply pricing well wide of where issuers would land globally – a phenomenon Tandon says applies in the SSA and financials sectors.

“In some ways it is easier for Nestlé or Québec to access the Australian dollar market than some more established names – there is certainly interest in a new name that can issue in Australian dollars at levels in line with global relative value,” Tandon suggests.

Source: KangaNews 24 April 2024

Source: RBC Capital Markets, TD Securities 2024

Source: RBC Capital Markets, TD Securities 2024

With four jumbo transactions now in the books, the outlook for follow-on issuance is less certain. On the other hand, leads say these issuers do not require long-dated demand to re-enter the Kangaroo market even though all four trades were at 10-year tenor.

“Québec and Ontario’s trades prove there is strong demand at 10 years,” Eikeland says. “But while 10 years suits the provinces’ funding needs, I don’t see any reason why they would not consider shorter tenors if demand and pricing stacked up.”