National Income Securities (NABHA)
Following the launch of the InvestSMART Hybrid Income Portfolio, we’ve received questions in regard to our position in National Income Securities (NABHA).
The security
Considering most Hybrid Securities trade slightly above or below face value, the main query we’ve had is in understanding why NABHA trades at a 20% discount to face value.
NABHA is a perpetual security, and like most listed perpetual securities currently on the ASX it’s trading at a significant discount to face. The reasoning for this is partly due to the fact that there is no set conversion or redemption date, making the pricing of risk more difficult.
NABHA pays a quarterly unfranked distribution at a margin of 1.25% over the 90-day bank bill swap rate which at the time of writing implies a running yield of around 3.7%.
The attraction
While the running yield at current prices is nothing special, NABHA ranks ahead of ordinary equity and unlike more recent bank issues it is not convertible into equity at the option of the bank. It is because of this that the security is non-compliant with current Basel III Common Equity Tier 1 Capital requirements and as such is progressively losing its capital weighting and appeal as ‘cheap funding’.
Additionally, there is effectively a ‘dividend stopper’ clause in the prospectus that states that where an interest payment is not made, NAB is not permitted to pay dividends on its ordinary shares until four consecutive quarterly distributions have been paid to the noteholders. This provides additional security to the investor and is a nuisance to the issuer.
There is also some speculation that NAB will be required to frank the distributions at some point in the future.
The combination of these features makes the case for redemption at face or on market buy back of securities at a premium to market more likely in coming years. While this makes the investment case more attractive, as it is not guaranteed the security continues to trade at a discount.
No investment is without risk, and we are happy holding NABHA as part of our overall Hybrid Income Strategy.
To hear more about our Hybrid Income Portfolio, watch the full recording of our recent Q&A with InvestSMART's Head of Funds Management, Alastair Davidson.
Find out more about the InvestSMART Hybrid Income Portfolio.
Frequently Asked Questions about this Article…
National Income Securities (NABHA) are perpetual securities that currently trade at a 20% discount to face value. This discount is primarily because there is no set conversion or redemption date, making it challenging to price the risk accurately.
NABHA offers a quarterly unfranked distribution with a margin of 1.25% over the 90-day bank bill swap rate, resulting in a running yield of around 3.7%. While this yield is not particularly high, it ranks ahead of ordinary equity.
NABHA is non-compliant with Basel III requirements because it is not convertible into equity at the bank's option. This non-compliance means it is progressively losing its capital weighting and appeal as 'cheap funding'.
The 'dividend stopper' clause in NABHA's prospectus states that if an interest payment is not made, NAB cannot pay dividends on its ordinary shares until four consecutive quarterly distributions have been paid to noteholders. This provides additional security to investors.
There is speculation that NAB may be required to frank the distributions of NABHA at some point in the future, although this is not guaranteed.
The combination of NABHA's features, such as the 'dividend stopper' clause and speculation about future franking, makes the case for redemption at face value or an on-market buyback at a premium more likely in the coming years.
Despite its attractive features, NABHA continues to trade at a discount because the potential for redemption or buyback is not guaranteed, and the security's perpetual nature adds uncertainty.
NABHA is held as part of InvestSMART's overall Hybrid Income Strategy. While no investment is without risk, NABHA's features and potential for future redemption make it a valuable component of the portfolio.
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