Pricing references set by Australian domestic covered bond debuts have shifted the balance of incentives away from Kangaroo issuance compared with funding options and relative value dynamics in other currency markets, according to officials at foreign issuers with an eye on the Australian market, with at least one having reined in its issuance ambitions.

Commonwealth Bank of Australia sold the first Australian domestic covered bond, a A$3.5bn five year dual tranche deal, on 17 January, with Westpac Banking Corp following a week later with a A$3.1bn five year dual tranche issue. CBA had previously tapped the euro market while Westpac had in November sold a dollar deal before in February adding a euro deal to its benchmark covered bond funding.

CBA’s Australian dollar deal was said to have repriced the domestic market for Australian bank debt, with Lyn Cobley, the bank’s group treasurer, at the time telling The Covered Bond Report that the deal was priced wider than where domestic senior unsecured transactions were being executed six to 12 months prior, but inside what the issuer believed to be “the realistic level for domestic unsecured funding”.

The Australians’ domestic issuance came after two Swedish issuers, Stadshypotek and Swedish Covered Bond Corporation (SCBC), completed Australian MTN programmes last autumn. Canada’s CIBC and Bank of Nova Scotia, and Norway’s DNB sold Australian dollar denominated covered bonds in 2010-2011.

Per Tunestam, treasurer at SCBC parent SBAB, previously said that the issuer intended to launch a deal in the first quarter of 2012, but yesterday (Monday) told The Covered Bond Report that Australian banks’ euro benchmarks have caused the issuer to postpone its initial thoughts about coming to the Australian market.

“We prepared the ground with a roadshow and by setting up an Australian dollar covered bond programme,” he said, “but the immediate impact of the Australians’ euro issuance was to cause spreads to widen in the domestic market.

“We have not yet really seen the return of the spread development we had hoped for,” he added.

Tunestam also said that a buy-side differentiation between triple-A issuers similar to that in the euro market needs to set in in Australia in order for Nordic issuers to tap the Australian dollar market.

Thomas Åhman, deputy head of treasury at Handelsbanken, Stadshypotek’s parent, told The CBR that Kangaroo issuance is not attractive at the moment given other funding options and relative value dynamics in other jurisdictions.

He said that Stadshypotek issues in foreign markets to ensure a long term funding diversification rather than because of any particular liquidity needs. Bearing this in mind, and that Sweden has a large domestic covered bond market, he added, Stadshypotek needs to be able to achieve all-in levels comparable with pricing available at home for offshore issuance to make sense.

“For some time now, on the back of a volatile basis market, issuing in other currencies would be too expensive all-in,” he said.

Any plans by Stadshypotek to tap the Australian dollar market will have also been complicated by pricing markers set by domestic market debuts for CBA and Westpac, according to Åhman.

“That affects us in the sense that if we went to Australia it would be hard to come at much tighter levels than where the domestic banks are issuing, because the domestic investors will compare us with them,” he said.

But, he added, such a relative value relationship does not make sense compared with the one in evidence in the euro market, where Swedish covered bonds trade considerably tighter than Australian covered bonds.

“We will see,” he said. “The Australian programme is a long term building block for us.”

Other foreign issuer representatives were also sceptical about the attractiveness of the Australian market. One said that the Australian domestic covered bond debuts “repriced the market completely” and that a move to tap that market does not make sense for his institution compared with euro opportunities.

“Prices have to harmonise,” he said.

Another noted that the Australian domestic covered bonds had come at wide levels, and that this then raised the question of whether Australian dollar investors would buy foreign bank risk at tighter spreads than those for Australian bank debt. He said that indicative Australian dollar covered bond levels for his institution are around 20bp-25bp more expensive than the cheapest funding source it has at its disposition.

“Yes, Australian issuance at wide levels has potentially put a damper on foreign issuance,” he said. “It hasn’t helped, but whether it has effectively shut it off remains to be seen.”