What is a Matilda Bond
A Matilda bond is a bond denominated in the Australian dollar and issued on the Australian market by a foreign, non-Australian entity that seeks to raise capital from Australian investors. A Matilda Bond may attract demand from Australian investors who wish to diversify their security holdings without the attendant currency risk. A Matilda bond is better known as a kangaroo bond, in reference to the animal kangaroo that is prevalent in Australia. It may also be referred to as the Australian dollar bond. The Matilda bond was created in 1994 and suffered a slow demand initially following its creation.
BREAKING DOWN Matilda Bond
The demand for Matilda bonds has risen substantially in recent years as corporate treasurers look to diversify their exposure. The strong Aussie dollar has also fueled demand for Matilda bonds from cash-rich investors in Asia, since most investors prefer to invest in assets denominated in strengthening currencies in order to boost returns.
As of 2016, kangaroo bonds were the largest segment in the domestic bond market after Australian Government Securities (AGS) and semi-government securities (semis) and represented approximately one-third of non-government bonds outstanding in the domestic market.
There are advantages and disadvantages of Matilda bonds from the perspective of investors and the receiver, although they are generally considered to be very favorable. For example, despite the fact that Matilda bonds are issued by foreign parties outside of Australia, they are still subject to the securities regulations of Australia. On the other hand, a company may find Matilda or kangaroo bonds helpful for diversification purposes or to drum up interest in foreign markets. If they are using the kangaroo bonds to diversity, it is helpful to add the currency exposure, as the kangaroo bonds are issues in Australian dollars. Lastly, Matilda bonds may help foreign issuers raise capital by giving them access to Australian capital markets and they have relatively favorable issuance costs.
Example of a Matilda Bond
As an example of how a Matilda bond might work in action, consider an American company that sells outdoor apparel and is looking to expand. In order to raise revenue for a new factory, which they plan to base in Australia, they sell bonds before construction. The company then lists the bonds on the Australian market, attracting Australian investors who wish to have a stake in the company, and converts the bonds to Matilda bonds. Once the bonds are part of the Australian market, the regulations and laws of purchase and trade of Australia prevail.