National Income Securities (NABHA)
Following the recent Q&A on our Hybrid Portfolio, we answer your questions on National Income Securities.
Following the launch of the InvestSMART Hybrid Income Portfolio, we’ve received questions in regard to our position in National Income Securities (NABHA).
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%.
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.