Debt securities wave set to break

A few weeks ago, as 2013 was rapidly drawing to a close, I wrote about the year being a transitional one for the ASX-listed interest rate securities market.

The market really took off in 2012, with $13 billion of interest rate securities listed. Last year was subdued in comparison, with only $8.4 billion of new listings.

I went on to observe, however, that the development of depository interests for listing Australian government bonds on the ASX in 2013 holds the key to listing corporate bonds from the wholesale market on the ASX in 2014. I also raised the prospect of listed companies excluded from the wholesale corporate bond market turning to the listed market to raise debt.

These are companies that do not have investment grade credit ratings as required in the wholesale market, but they could nevertheless find that the retail market can provide cheaper term-debt funding than is available from their bankers. By my estimation there are 19 companies in the S&P/ASX 100 index that are of sufficient credit quality to fall within the quite respectable ‘BB’ rating category.

However, the use of depository interests and the emergence of a new class of ‘BB’ rated issuers are simply (with some justification) items on a wish list for 2014. Even so, it may be that demand from investors looking for a home for the proceeds from matured or called interest rate securities brings on this next stage in the development of the market.

A wave of expiring securities

There is approximately $5 billion of listed interest rate securities that will either mature or that are scheduled to be called this year. Not all of this debt will be refinanced in the market.

ANZ, Commonwealth Bank, Westpac and Bendigo and Adelaide Bank have almost $4.4 billion of transitional Tier 1 capital that is due to be called this year. This capital is virtually certain to be replaced with Basel III compliant, Additional Tier 1 capital.

For investors, this means issuance of an equivalent amount, or more, of capital notes in the same format as the nab CPS I and II and the ANZ and Westpac capital notes issued last year. However, with the exception of the ANZ CPS, which pay a margin of just 2.5% over bank bills, the margins paid on the new notes issued are unlikely to be quite as fat as the 3.4% margin on the CBA PERLS V and the 3.8% margin on Westpac’s SPS II.

Holders of AMP’s subordinated debt, of which there is $172 million left outstanding, will have to look for new investment opportunities come May.  AMP issued $325 million of sub-notes II in December to refinance its maturing notes, but holders of less than $40 million of the old notes chose to roll over into the new notes with a reduced coupon.

Heritage Bank has $50 million of subordinated debt callable in October. It is not known what refinancing plans Heritage Bank may have, but Bendigo and Adelaide Bank set a precedent in the wholesale market last week with the first Basel III compliant subordinated debt issue undertaken since the new rules came into effect at the start of 2013.

Institutional investors in the wholesale market showed they are prepared to buy subordinated debt in small volumes. If they subsequently demonstrate an appetite for large volume issuance from a major bank, listed subordinated debt issuance could well dry up.

It seems the holders of much of the maturing senior debt also will have to look for other investment opportunities. First among this group is the $90 million of retail bonds issued by Bendigo and Adelaide Bank that will mature in March. The bonds, issued three years ago, pay a coupon of 1.4% per annum over the 90-day bank bill rate. 

This debt could easily be refinanced in the wholesale market, and at a cheaper rate. BEN may have done exactly that with a $400 million four-year note issue in November, priced at 1.27% over bank bills.

If BEN is intending to maintain this listed diversification of its debt funding, it will need to launch a new retail bond offer very soon.  

Next to reach maturity on May 1 is Tabcorp’s five-year bonds. Issued at the height of the GFC, the bonds pay a juicy 4.25% over bank bills.

One can contemplate whether it is fortunate or unfortunate that such a margin is unlikely to be seen again, and certainly not come the first of May. Tabcorp announced in December that it will use bank debt to cover the maturing bonds.

Lastly, $165 million of ALE Property Group Notes II are due to be repaid in August. ALE announced last week that it is yet to make a decision on whether it will redeem the notes or not.

Under the issue documentation, ALE can extend the maturity of the notes by up to two years but will pay $101 for each note if maturity is extend by one year, and $102 if maturity is extended by two years.

Given that these notes pay 4% per annum over bank bills, and with the promise of an extra 1% for each year of extension, some investors may be inclined to pray that the notes are not redeemed.

Philip Bayley is a former director of Standard & Poor's and now works as an independent consultant to debt capital market participants. He also writes on matters concerning debt capital markets and banking for various publications and is associated with Australia Ratings.