CPPIB sets Kangaroo standard – again
The Canada Pension Plan Investment Board expanded the scope of the Australian market with another blowout new year trade that delivered both the biggest Kangaroo bond on record and the largest order book for any Australian dollar offering, beyond the Commonwealth government.
The national pension investment manager, rated Aaa/AAA (Moody's/S&P), raised A$3bn (US$2bn) from a five-year offering on Tuesday, passing its own A$2.5bn single-tranche Kangaroo record set 12 months previously.
Last January's sale drew a A$6.4bn final book – a figure dwarfed by the A$16.3bn of orders for its latest trade, including A$1.75bn from joint leads CBA, Deutsche Bank, Nomura and RBC Capital Markets.
CPP Investments managing director Sam Dorri said he was thrilled by the transaction, including the scale of demand, which he said underlined the substantial growth in the Australian market where bigger and bigger volumes have been delivered in recent years.
“Flows beget flows, with the upturn in semi-government issuance a big part of the story as their attractive yields and ACGB spreads brought in more investors from home and abroad,” Dorri said.
“Australia has become a good SSA market with reliable access through cycles. While investors appreciate the absolute returns and high government pickups, from our perspective Australia provides roughly the same cost of funding as the US dollar and Canadian dollar markets.”
Though a little surprised by the scale of demand, Craig Johnston, head of DCM syndicate for Australia and New Zealand at Deutsche Bank, had expected the deal to go very well given the attractive pricing and the issuer's strong track record of investor engagement.
"CPP Investments has done a lot of work with domestic and offshore accounts and [on] their approach to the market to build out a following, and this deal is a reflection of that," he said.
A banker away from the deal offered a note of caution, however. He suggested the reported book may be misleading, reflective of the Australian market's evolution whereby investors, anticipating large scaling back, start to put in increasingly elevated bids.
Compelling pricing
On the pricing front, CPP Investments' new Kangaroo ticked boxes in both absolute and relative value terms.
The 4.75% January 15 2031s priced at a yield of 4.795%, 61bp wide of EFP (three-year futures) and 51.75bp and 51bp over asset swaps and the December 2030 ACGB, respectively.
The backup in the rates market towards the end of 2025 has lifted SSA Kangaroo yields, while, in addition to the 51bp pickup over the Australian sovereign, CPP Investments paid 10bp–13bp more than other regular SSA Kangaroo issuers.
For example, A$1.5bn 5.5-year Kangaroos from KfW and Asian Development Bank priced on Wednesday and Thursday at 39bp and 40bp over asset swaps, respectively.
Another reference point is that, while the spread over Aussie government bonds is juicy, the spread over Treasuries, if swapped into US dollars, is a less impressive 20bp.
Further encouragement for investors was provided by the 5bp–7bp new issue concession on offer as well as the strong trading performances of CPP Investments' previous Kangaroos.
Explaining the attractive pricing terms CPP Investments has consistently offered, Dorri emphasised the company’s close investor engagement and long-term focus.
“Trying to extract the very last basis point makes little strategic sense to us,” he said.
Seventy-eight investors participated in the new Kangaroo, including half a dozen new accounts comprising official institutions and traditional corporate investors.
Australia and New Zealand bought 43%, EMEA 28%, Asia 24% and the Americas 5%. Asset managers were allocated 55%, official institutions 30%, bank treasuries 8% and hedge funds 7%.
The success of the latest trade, including its largest book in any currency, vindicates the decision to make Australia one of the biggest of the issuer's five core funding markets after Canada.
CPP Investments raises around one-third of its annual funding requirement, equivalent to C$7bn–$8bn (US$5.1bn–$5.8bn), from its local market via new five and 10-year bonds.
It also aims to issue two or three A$1bn minimum Kangaroo benchmarks, along with two US dollar issues and either a euro or sterling bond offering each year.
The Kangaroo will fund CPP Investments' Australian assets, which total around A$17bn, invested in infrastructure, real estate, and public and private equity.