Markets: P-Notes and Kangaroo Notes (The Basis Swap Story)

Aggressive SocGen has been banned from dealing in ODI (offshore derivative instruments) and P-Notes (participatory notes) in India following an inquiry by SEBI. In 2008, RBI called for ban on issuance of P-Notes, however foreign investors reacted sharply and the stock market almost crashed. For a background to central banking in India please see the RBI's website. In a nutshell, the RBI was set up in response to the Hilton Young Commission (Hilton Young was a British politician who was educated at Eton and University College London). The RBI was also the central bank for Burma but it seceded from the Indian Union in 1937. The RBI however continued to act as the central bank for Burma until Japanese occupation.

And now to the extraordinary rise in "kangaroo bond" issuance amongst stylized banks.

Bloomberg reports the EIB is seeking (update:has sought) assistance with Australian local banks to help it issue kangaroo bonds (AUD notes sold by foreign issuers in Australia). Certainly the currency has been talked about a lot recently, but why would the Luxembourg lender raise money in AUD? The reason is the extraordinary story of the basis swap (an interest rate swap involving the exchange of two floating rate instruments) and EIB is by no means isolated in their desire for kangaroo issuance (other names include KfW and Nordic Investment Bank). EIB's issuance of A$1.5bn will be the largest tranche issued by a kangaroo issuer, with April 2015 maturity (i.e. 5 year).The bonds are priced at Commonwealth government bonds + 83bps. What's the big driver behind all this kangarooing around? The USD-AUD basis swap has been up to 35bps wide for 5 years, making margins paid by the K-issuers look good, relative to LIBOR - and further issuance should stop the widening. The cause of the chasm in the basis swap is due to Ozzie banks raising debt offshore, such as ANZ bank which raised a billion EURs for three years in the Euromarket (57bps over midwaps).

For those that may not remember KfW, they gained the moniker of "Germany's dumbest bank" when they transferred 300 million EUR to Lehman on the day it filed for bankruptcy. But was it so dumb? Could the administrators have demanded that money after taking over Lehman Brothers?
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