Kauri Bond

What is a Kauri Bond?

A Kauri bond is a bond denominated in New Zealand dollars that is issued by a foreign issuer. The first issue took place in 2004. The name "Kauri" comes from one of New Zealand's larger native trees. These bonds are a significant part of the Kauri market, attracting foreign entities and non-residents to invest in New Zealand dollar-denominated securities.

Example

An example of a Kauri bond is Nederlandse Waterschapsbank, 3.125% 1mar2027, NZD – a social bond issued in March 2022. This is a social bond issued by Nederlandse Waterschapsbank, a prominent foreign issuer. The bond carries an interest rate of 3.125% and matures on 1 March 2027. Denominated in New Zealand dollars, this Kauri bond aims to support social initiatives and projects.

Features

1. Foreign Issuer. Kauri bonds are issued by foreign entities, meaning the issuer is not a resident of New Zealand. This allows international organizations to tap into the New Zealand capital market for funding.

2. New Zealand Dollar Denomination. The issue currency for Kauri bonds is the New Zealand dollar (NZD). This aligns the bonds with the local currency, providing an attractive option for investors looking to diversify their portfolio with NZD-denominated assets.

3. Regulated by New Zealand Laws. The placement of Kauri bonds is regulated by the laws of New Zealand. This regulatory framework ensures that all issuances comply with the local financial and legal requirements, providing a layer of security and trust for investors.

4. Accessible to Non-Residents. Kauri bonds can be freely purchased by non-residents of New Zealand. This broad accessibility attracts a wide range of international investors, increasing the liquidity and demand for these bonds in the Kauri market.

5. Plain Vanilla Structure. Typically, Kauri bonds are plain vanilla bonds, which means they are straightforward and lack complex features. This simplicity makes them easy to understand and manage. Most often, the coupons on these bonds are paid quarterly or semi-annually, providing regular income to investors.

Why Are Kauri Bonds Issued?

1. Investor Base Diversification. Kauri issuers typically do not require New Zealand dollar funding directly. However, one of the main reasons for issuing Kauri bonds is to diversify their investor base. By tapping into the Kauri market, issuers can reach a different group of investors, including local banks, fund managers, insurance companies, and offshore asset managers. This diversification helps to enhance the stability of their overall funding. If there is a disruption in one market, the issuer can rely on funding from alternate sources, providing greater resilience against market volatility.

2. Global Market Presence. Having a presence in multiple markets, including the Kauri market, allows issuers to benefit from favorable funding conditions in different regions at different times. This strategy ensures that issuers can optimize their funding costs by taking advantage of the best available conditions globally.

3. Lower Funding Costs. By issuing Kauri bonds, institutions can potentially lower their overall funding costs. The ability to access funds from various markets enables issuers to benefit from the most favorable interest rates and terms available at any given time. This flexibility in funding can lead to significant cost savings for the issuers.

4. Favorable Market Conditions. The New Zealand financial system is considered stable, and the New Zealand dollar often offers higher returns compared to other traditional reserve currencies. This makes Kauri bonds an attractive option for investors, which in turn can result in more competitive pricing and lower costs for issuers.

5. Enhanced Credibility and Recognition. Issuing Kauri bonds can enhance an institution's credibility and recognition in the global financial markets. The involvement of reputable joint lead managers like the Commonwealth Bank and ANZ, along with the recognition of eligible Kauri bonds by the Reserve Bank, adds to the appeal and trustworthiness of these bonds.

6. Attracting a Diverse Range of Investors. Kauri bonds attract a wide range of investors, including local investors and foreign entities. This broad investor base ensures a high demand for the bonds, further contributing to the stability and cost-effectiveness of the funding.

7. Access to New Zealand’s Financial Market. By issuing Kauri bonds, foreign issuers gain access to New Zealand’s financial market, which is known for its sound financial system and strong fiscal position. This access provides issuers with an opportunity to engage with a financially stable and lucrative market.

How Does Kauri Transactions Work

1. Issuance in NZD. The foreign issuer raises funds by issuing Kauri bonds denominated in New Zealand dollars. This involves selling bonds to local investors, such as New Zealand banks, fund managers, and insurance companies, as well as to foreign investors interested in NZD assets.

2. Currency Swap. Since the issuer's funding targets are typically set in US dollars or euros, the New Zealand dollars received from the Kauri bond issuance need to be converted into the desired currency. This is done through a cross-currency basis swap. In this swap, the issuer exchanges the NZD proceeds from the bond sale for the target currency (e.g., USD or EUR) at an agreed-upon rate.

3. Hedging Interest Rate Risk. To manage interest rate risk, the issuer may also enter into interest rate swaps. These swaps help hedge against fluctuations in interest rates by locking in a fixed rate or converting floating-rate payments to fixed-rate payments, depending on the issuer’s needs.