Summary: NAB has sought to differentiate its hybrid offer, rather than offering an even larger credit margin than its rivals. The notes can be called after five years and have a mandatory conversion date seven years after the date of issue – both earlier than its competitors.
Key take out: A shorter term structure will probably be enough to attract investor interest. But comparable hybrid issues in international markets are offering higher margins.
Key beneficiaries: General investors. Category: Hybrid securities.
Have investors regained their appetite for Additional Tier 1 capital issued by banks, otherwise known as hybrid notes, or does a level of indigestion remain after the mammoth $3.0 billion PERLS VII issue from CBA in October?
The ardour of investors for hybrid notes is about to be tested with at least $1.7 billion of hybrid notes listing on the ASX over the next five weeks.
A quick check of prices in the secondary market does not augur well.
The CBA PERLS VII notes are still trading below the face value of $100.00, at $96.30 on Monday. NAB and Westpac also have existing issues that are trading below $100.00.
ANZ doesn’t, but it has its $850 million Capital Notes 3 issue about to list on the ASX in early March. ANZ was first with a new hybrid issue this year but had to pay a credit margin on the notes of 3.60%, 0.80% more than on the PERLS VII, to get the deal done.
That the ANZ had to offer a greater credit margin comes as no surprise but the fact that at this level the ANZ did not exceed the trading margin of the PERLS VII in the secondary market, and was able to increase the issue size by $100 million from the launch amount of $750 million, does.
It will be interesting to see whether the Capital Notes 3 trade at face value or better when listed on the ASX.
Now NAB has jumped into the mix: While NAB had flagged in mid-December that it intended to launch a new hybrid note issue after the release of its first quarter results earlier this month, it did not immediately do so.
NAB had expected to be the first to market this year but ANZ put paid to that.
NAB had to do a rethink. It could follow ANZ with a “me too” issue, which would mean that it would probably have to offer an even larger credit margin than ANZ, or it could seek to differentiate its offer.
NAB chose the latter. NAB’s hybrid issue, referred to as NAB Capital Notes, can be called after just five years and has a mandatory conversion date just seven years from the date of issue.
Both the PERLS VII and Capital Notes 3 have eight year call dates and ten year mandatory conversion dates – a structure that had become the norm for Basel III compliant Additional Tier 1 capital issues in recent times. NAB has broken the mould and in doing so, is hoping to achieve a credit margin that may come in at less than what ANZ will pay on the Capital Notes 3.
NAB has set an indicative credit margin of 3.50% to 3.70% and will obviously hope to achieve the low end of the range in the bookbuild scheduled for February 23. Strategically, NAB has ensured the bookbuild for the offer and the opening of the issue to investors the next day occur well ahead of the Capital Notes 3 commencing trading on the ASX.
Will a term structure three years shorter than usual and a credit margin either in line with that offered by ANZ or less, be sufficient to attract investor interest? It probably will be.
But NAB should hope that investors don’t look too closely at the trading margins available on existing hybrid issues listed on the ASX. And NAB should also hope that investors don’t hear about the credit margins being paid on comparable hybrid issues made in international markets.
Just last Friday, UBS Group AG sold US$1.15 billion of hybrid notes with a five year call date. In Australian dollar terms, the hybrid notes will pay a credit margin of more than 5.70%, more than 2.0% above what NAB is willing to pay.
There are some technical differences in the credit quality of the two issues and NAB is superior, but the differences are just technical.
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.