National Australia Bank (NAB) has announced its first domestic retail offer since 1999 with ‘NAB Subordinated Notes’. The issue reflects investors’ preference for simpler hybrid structures (as demonstrated by the reception to the recent ANZ issue, ANZHA), and as such, this is about as straightforward as a hybrid gets.
A hybrid is a security that combines the elements of debt and equity.
NAB’s issue is of a 10-year term floating rate note, paying interest every quarter at a margin of between 2.75% and 2.85% over the 90-day bank bill rate. With the 90-day bank bill rate at around 3.75%, this is equivalent to 6.50% per annum for the first quarter.
The notes are subordinated and unsecured, which means they rank behind all deposits, bonds and unsecured creditors, and ahead of National Income Securities (NABHA), preference shares and ordinary shares. Interest payments can’t be deferred and aren’t discretionary, however interest will not be paid if NAB is not solvent.
The Notes will qualify as Tier-Two capital. With the approval of the Australian Prudential Regulation Authority (APRA), NAB may elect to redeem the Notes five years out (and then on every interest date thereafter) by repaying the outstanding principal plus any interest to note holders.
The institutional book build this Friday evening will set the final margin. At the lower end of 2.75%, this implies an interest rate of around 6.5% for the first quarter; at the higher end of 2.85%, the rate would be 6.6%.
The NAB issue is almost identical to the ANZHA issue launched in March, which matures on 20 June 2022, and also pays interest at bank bill plus 2.75%. It closed on Wednesday at a gross price of $100.35, having traded at around $101.20 mid last week. With approximately $1.14 in accrued interest, it is now trading at bank bill plus 2.85%.
There is better value in the original NAB Income Securities (NABHA), although it is worth noting they are perpetual securities and rank behind the new NAB Subordinated Notes. At a price of $71.10 and interest paid at a margin of the bank-bill rate plus 1.25% on the whole $100 face value, NABHA are yielding 7.03% per annum.
The bottom line
Among financial stocks, NAB’s new issue looks fairly priced for investors who want simpler hybrid structures and a different ‘name’. At more than 1.3% over term-deposit rates and given the market reaction to the ANZ issue, it should be well bid at the top end of the range (2.85%) and the issue size will likely be increased to accommodate demand.
For those seeking diversification away from financial stocks and willing to accept more complex hybrid structures, have a look on the ASX at ORGHA, AGKHA and TAHHB, which are all yielding around 4% over the bank-bill rate.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should, before acting, consider the appropriateness of the information in regards to their objectives, financial situation and needs and, if necessary, seek professional advice.