Depressed Aussie dollar could weigh heavily on kangaroo bonds

* Kangaroo issuance at risk as A$ slides
* Bond underwriters already coping with soaring swap costs
* Key hurdle in assessing counterparty risk
By Cecile Lefort
SYDNEY, May 28 (Reuters) - Bond issuance by overseas borrowers in Australia could face strong headwinds as the once-red hot Aussie dollar suffers a violent turnaround, adding to the soaring costs of capital adequacy compliance for bond underwriters.
Kangaroo bonds, Australian dollar-denominated debt issued by foreign borrowers, was about one third of the A$90 billion ($86.75 billion) of non-government bond debt sold locally last year - a useful fee revenue stream for intermediary banks.
But with the Aussie dollar slumping 7 percent this month and hedge funds having recently declared "shorting" the Aussie dollar their favoured strategy, analysts forecast more losses.
"If the Aussie dollar is about to take a nosedive, kangaroo bond issuance may be about to go the same way, especially if current international holders now decide to take profits and reduce their currency exposure," said Phil Bayley, an academic and debt capital market consultant at ADCM.
The Aussie dollar last fetched $0.9621, a level near its weakest in a year.
So far this year, A$13 billion of kangaroo bonds has been sold, down from A$20 billion in 2011 when the Aussie dollar was near a lifetime high above $1.09, according to ThomsonReuters data.
A sharp drop in kangaroo bond sales, however, would rub salt into the wound for many fixed income securities firms struggling with the soaring costs they must incur to protect bank capital under the Basel III rules set by the Bank for International Settlements.
"It's more expensive now than it's ever been to exchange currencies around cross currency swaps because of bank regulatory costs and how people value the risk of their counterparty," said Steve Lambert, executive general manager of debt markets at National Australia Bank.
RBC Capital Markets and Commonwealth Bank of Australia vanished from this year's top 10 ranking of kangaroo bonds, a debt deal denominated in Australian dollars and issued by offshore borrowers, often multilateral institutions such as the Asian Development Bank.
In the past six years, RBC topped the table three times, while CBA came third in 2008 and 2009, ThomsonReuters data shows.
Swaps are an important financial tool as they allow two parties to exchange future cash flows on debt or currencies to hedge risk or make a profit.
A key hurdle faced by bond underwriters is a costly and massive revamping of the banks' internal assessment of how much collateral, usually cash, is needed to back every single uncleared swap trade.
Since a global investment bank typically holds millions of swap contracts on any given day, the equation involves extremely complex calculations. They include credit value adjustments (CVA) on a mark-to-market basis and modelling assumptions which can lead to notably different pricing outcomes.

One banker reckoned the gap could now be up to 20 basis points for the same contract, against one or two bps before. ($1 = 1.0375 Australian dollars) (Additional reporting by Umesh Desai in Hong Kong; Editing by Eric Meijer)