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Thursday, 18 July 2019

Scanning horizons

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National Australia Bank showcased its ability to vary its financing strategies with the notable debut of a New Zealand Kauri bond and a rare Australian Dim Sum offering.

International Rugby Board referee Steve Walsh gets his eyes tested as part of a publicity event in Sydney.

Source: REUTERS/Daniel Munoz

International Rugby Board referee Steve Walsh gets his eyes tested as part of a publicity event in Sydney.

National Australia Bank cast its net far and wide this year to attract new investors and diversify its sources of funding, selling the equivalent of A$12bn (US$11.34bn) in bonds to overseas buyers in six jurisdictions.

In contrast, NAB’s peers – Australia’s three other major banks, all with identically solid ratings – focused on fewer markets for their overseas offerings, notably leaving out New Zealand and China.

“We value the benefits of diversification in our funding profile and are constantly looking for opportunities to increase this where it makes sense,” said Richard Coyne, senior manager, group funding at NAB.

Australian banks have long had to rely on foreign bond markets for financing, since the domestic market is not big enough to meet their term-funding requirements exclusively. Indeed, year to date, NAB’s overseas bond offerings have far outstripped the A$4.55bn in domestic senior unsecured bonds it issued this year.

This offshore dependence is widely seen as the Achilles Heel of the Australian banking system, one that NAB has sought to address with bond offerings in more currencies and, consequently, increasing its funding options if and when individual markets close down.

The problem of relying on international funding became a reality during the global financial crisis, when Australian Government guarantees were needed to unblock access to frozen credit markets.

Those risks have diminished, however, according to a Sydney-based DCM manager.

“Australia’s major banks had a relatively successful global financial crisis because they emerged, alongside the Canadians and Scandis, as the world’s strongest banks and, so, will be the first in queue in the event of future freezes, especially as they now have access to the ultra-safe Triple A covered bond space,” the DCM manager said.

Perhaps, the standout deal for the Aa2/AA–/AA– rated NAB was the NZ$350m (US$276.5m) it raised on July 17 from the country’s inaugural, 5.59% 10-year covered Kauri bond, as foreign offerings sold in New Zealand are known. That issue was priced to yield 105bp more than New Zealand swaps.

The Kauri offering also marked the seventh currency that Australian banks had accessed in this format since local legislation was passed in October 2011to allow covered bonds. Australian majors ANZ, Commonwealth Bank of Australia, Westpac and NAB had previously issued covered bonds in US dollars, euros, Australian dollars, sterling, Swiss francs and Norwegian krone in that time.

NAB issued three other covered bonds this year. The bank priced a US$1.75bn 1.25% five-year bond to yield 42bp over mid swaps on February 29 and it extended its euro curve with a €750m (US$975m) 12-year bond at mid-swaps plus 33bp on May 28.

“Not only has NAB been willing and able to do the necessary legwork to enter new markets, it has also been quick to act when attractive opportunities present themselves in core markets,” said Grant Bush, head of debt capital markets, Deutsche Bank Australia and New Zealand.

For example, NAB capitalised on a strong bid for secured bank paper at the short end of the sterling curve to issue on August 6 a tightly priced £500m (US$766.5m) covered three-year floating-rate note at three-month Libor plus 30bp.

In the senior unsecured market, NAB drew plaudits for its debut syndicated public bond in the offshore renminbi market on May 31. The bank raised Rmb400m (US$65.6m) from the two-year note priced to yield in line with guidance of 2.40%.

NAB paid a small premium over ANZ, the only other Aussie major to have previously visited the offshore renminbi market. ANZ’s London-listed 2.9% August 2015s (issued in August 2012) were quoted to yield 2.314% in the secondary market when NAB priced.

A 2.4% coupon for a two-year renminbi bond represented an “outstanding result” for NAB, Sean Henderson, head of debt capital markets Australia at HSBC, said at the time. “Its motivation was strategic rather than opportunistic, with the bank looking to underline the importance it places on the renminbi as a funding and business currency going forward.”

NAB considered the New Zealand and Chinese offerings to be significant. “We were really excited by our inaugural Dim Sum and New Zealand dollar Kauri bonds and saw both transactions as establishing presence in new markets with new investors,” NAB’s Coyne said.

NAB visited the Swiss franc market for the second time this year on July 6, when it tapped its 1.0% April 17 2020s for SFr200m (US$215m) at 39bp over mid swaps.

Then, the bank proved it could achieve plenty of depth offshore, especially in the dollar market when it sold its largest bond of 2013 in the US. The US$2.6bn three-tranche 3(a)2 bond was sold in July with a US$500m 1.3% fixed-rate three-year paper priced to yield 72bp over Treasuries, a US$1.35bn three-year floater, priced to yield 55bp over three-month Libor, and a US$750m 2.3% five-year piece priced to yield 98bp over Treasuries.

At home, NAB picked its moments to raise large sums at better prices than it could get overseas. On February 1, its existing March 4 2016 local currency floater was tapped for A$1.3bn. On May 16, NAB priced a five-year A$875m floater and a five-year A$325m 4.0% fixed-rate piece. Then, on August 21, NAB raised A$1.85bn from a new four-year floater. In the subordinated market, NAB issued an increased A$1.4bn Tier 1 hybrid security, known as NAB convertible preference shares.

These notes, rated BBB from S&P, qualify as additional Tier 1 capital under the Australian Prudential Regulation Authority’s new Basel III framework.

However, it is NAB’s overseas strategy that has set the bank apart from peers so far this year. NAB took advantage of the elevated demand for Triple A New Zealand dollar assets, while its Dim Sum debut boosted its links with the regional superpower.

It will not be surprising to see copycat transactions from NAB’s local peers over the next 12 months.

To see the digital version of this report, please click here.

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