European Borrowers in Australia See Costs Blowout

Published: Tuesday, 22 Nov 2011 | 1:42 AM ET
By: Reuters
The European Union's crisis of confidence has reached the distant shores of the Australian dollar debt market as once-unimpeachable EU institutions suffer huge rises in borrowing costs.

The last few days have seen a dramatic deterioration in the market for even the highest-rated EU sellers of kangaroo bonds, paper denominated in Australian dollars and sold in Australia by foreign firms.

The starkest example was the European Investment Bank (EIB), a triple-A credit funded by all 27 members of the euro zone and one of a group of borrowers known as supranationals.

Yields on its 2020 kangaroo bond have climbed 90 basis points in just the past week to reach 6.82 percent, the highest in seven months and easily the steepest rise in the bond's life.

The EIB paper is now paying a premium of 292 basis points over comparable Australian commonwealth government bonds (ACGB), a huge swing from just 135 basis points at the start of the month and the widest spread on record.

In comparison, the Asian Development Bank's 2020 kangaroo bonds pay only 102 basis points over ACGB, and even the African Development Bank 2016 issue has a spread of 125 basis points.

"The EIB 2020 issue continues to find few friends in a market that has lost interest in anything with the word "European" in its title," said Sean Keane of Triple T Consulting, who works on behalf of Credit Suisse.

"Despite the sovereign backstop that the EIB has in terms of funding, the market is concerned about the European lending exposure that the EIB holds," added Keane.

"Having watched what has happened to bigger and more liquid sovereign bond markets investors appear unwilling to risk their capital - even at these yields."

The latest wild moves were made on very little volume as liquidity had evaporated, with plenty of would-be Asian and Japanese sellers but no buyers.

One dealer at a European bank said the market had become so illiquid that he saw the spread on EIB bonds widen 45 to 55 basis points in a single trade.

"The EIB has gone out a hell of a lot," said the dealer. "People are concerned about Europe, full-stop. That's why they're selling."

Another casualty was the Council of Europe Development Bank, a triple-A rated borrower tasked with promoting social cohesion in its member states.

Yields on its 2020 kangaroo bond have rocketed 100 basis points in the past week to reach 6.4 percent, some 252 basis points above ACGB.

Even German borrowers are not sacrosanct. The Federally-backed KfW bank, a major issuer in the kangaroo market, has seen yields on its 2020 bond climb 56 basis points in a week to stand at 5.77 percent.

The spread over ACGB yawned out to 191 basis points, from just 102 at the start of the month and again the widest on record.

Frankfurt-based KfW has around A$19 billion of kangaroo bonds outstanding, though issuance has tailed off markedly in recent months with the last being an increase in October.

"Investors are so nervous they don't want to own anything that has the tiniest hint of risk," said Rob Henderson, head of market economics at National Australia Bank.

"It's also showing in the spreads on semi-government (Australian) debt, even though the States are essentially backed by the Federal government."

Bonds issued by the state of Queensland were among the hardest hit, with spreads widening around 35 basis points over ACGB paper, in just two weeks.