German agricultural lender Rentenbank expects its Australian dollar bond programme to soon reach A$12 billion, cementing its position as the third-largest issuer of Kangaroo bonds behind KfW and the European Investment Bank.
The bank has been a consistent issuer in the market since 2002 and recorded its biggest volumes ever in 2013 when it issued A$2.85 billion in Australian dollar bonds.
Kangaroos now represent 21% of all Rentenbank’s medium- and long-term funding.
On a non-deal roadshow through Southeast Asia and Australia this week, the bank’s head of treasury Stefan Goebel and head of funding Leopold Olma said the market would remain attractive thanks to robust investor appetite and an ability to execute cross-currency swaps.
The increased volumes in recent years have been made possible by a strong offshore bid, predominately from Asia-based accounts. Order books are routinely split 80/20 in favour of offshore investors.
The sweet spot is in 10-year bonds, where Japanese life insurance companies are the biggest buyers. “Central banks are also active investors but they tend to buy in the five-year space,” Goebel said.
Rentenbank still issues debt denominated in US dollars but favours the Australian dollar over other currencies such as the Japanese yen and Swiss franc. “We haven’t issued in yen since 2007 and Swiss franc since 2011, when the cost-over-swap for these currencies moved massively out of kilter and way beyond our target spreads versus six-month Euribor,” Goebel said.
He said Kangaroo bonds came close to being too expensive in 2007 and 2008 but the market has since recovered and there is nothing on the horizon to indicate a change in current conditions.
“The swap market is impacted by the Australian commercial banks and the size of their offshore fundraising programmes. While they continue to issue in foreign currencies and swap back into Aussie dollars, we can take advantage of the other side of the swap from Aussie into euro.”
10 active lines
Rentenbank takes a disciplined approach to issuance and currently has 10 active lines with one maturity date for each year out to 2024. “Instead of issuing sporadically and insisting on large deal sizes, we are focused on building liquid lines at intervals along the curve,” Olma said. “We have 10 active lines that we increase by making regular taps. The more liquid each line gets, the more additional demand it triggers.”
Investors are attracted to this liquidity but they also like Rentenbank’s rock-solid credit standing, courtesy of a full government guarantee on its bonds introduced by German lawmakers last year. “We don’t get any questions about our credit quality on roadshows,” quipped Goebel.
Looking ahead, Rentenbank faces two heavy years of redemptions with A$1.2 billion worth of Kangaroo bonds due to mature in 2014 and another A$1.3 billion in 2015. Goebel and Olma are confident these levels can be covered. “It would be nice to issue more than the A$1.2 billion that will redeem this year, and we might still achieve that,” Olma said.
Asked whether the bank intends to alter its bond maturities in the medium term, Goebel said it recently issued a 5.5-year deal and might consider a 10.5-year or 11-year deal. Beyond this, he has little interest in longer-dated paper, despite Australian government moves to extend the bond curve out to 20 years.
“Anything longer than 11 years doesn’t match our liability profile,” he said. “And it also becomes harder for the underwriting banks to crunch the numbers on the cross-currency swap.”