Stuart Washington
January 17, 2008
AUSTRALIAN superannuation investors have billions of dollars linked directly to US companies at the centre of the credit crisis, through the sale in recent years of unsecured "kangaroo bonds".
Potential exposures include $1.2 billion raised in 2006 for Northern Rock in Britain, $1.6 billion for US mortgage provider Sallie Mae, and $925 million for US lender Countrywide.
Kangaroo bond is a term for unsecured notes issued in Australian dollars and marketed in Australia and Asia as large offshore companies attempted to diversify their funding streams.
Last week Countrywide was forced to repeatedly deny it was facing bankruptcy before Bank of America stepped in to buy it.
Issues of kangaroo bonds also include a total of $6 billion for Citigroup and $6 billion for Morgan Stanley - among a host of other US financial institutions. Both banks have experienced billions of dollars of write-downs as a result of their exposure to US mortgages, and have been forced to accept capital injections from foreign investors. On Tuesday, Citigroup announced $US18 billion ($20 billion) in losses as a result of the credit crisis.
Exactly where the kangaroo-bond holders are located is not clear, given the hidden nature of the investors in the bond market. Some of the issues would also have been marketed offshore. "It's somewhere," a Wilson HTM banking analyst, Brett Le Mesurier, said yesterday.
"No one's going 'It's me'."
The bonds would have been bought by fixed-income managers in large funds management groups as part of a fixed-income portfolio. It is also possible the bonds are held by Australian banks, although they do not disclose their individual investments in bonds.
Mark Garrick, the head of capital markets for National Australia Bank, which was a lead manager in the sale of the Northern Rock bonds, said the bank held no investment in the bonds, which were predominantly sold to domestic investors.
"Obviously there's a lot of uncertainty about how the Northern Rock situation works its way out," he said yesterday.
"From the debt holders' perspective to date, obviously the support provided by the UK Government has been important."
Simon Maidment, the head of fixed income at UBS, which was also lead manager in the Northern Rock transaction, said the impact had been felt by bond holders but, for varying reasons, the ratings of the bonds still remained relatively strong.
"While obviously there has been a mark down in pricing or a widening of credit spreads, it has not reflected a bond that is going into default," he said.
Bond-holders, while ranking last among lenders, still rank ahead of shareholders. Prospects for default among the troubled lenders appear to be receding. Countrywide's imminent demise appears to have been halted by the Bank of America. The Bank of England appears to be standing behind Northern Rock. Sallie Mae, one of the largest lenders in the US, is regarded as too big to be allowed to fail.
The chief impact for Australian superannuation funds is that, when the bonds are priced or marked to market, this is reflected as a loss in their overall portfolio.