In a landmark move, on Tuesday National Australia Bank mandated the first Aussie dollar unlisted hybrid from a major bank since the NAB Capital Trust III security was issued in 2006 (it was repaid in 2016).
The new deal will be targeted at institutional investors and if it is successful could see significant hybrid supply shift off the ASX into the unlisted over-the-counter (OTC) market as has been the case with the major banks’ subordinated bonds.
The Australian Securities Exchange used to be awash with listed subordinated bonds, or so-called Tier 2 securities, but all bar one have been refinanced in the much cheaper unlisted OTC market, much to the chagrin of brokers who have lost their lucrative commissions.
The OTC market offers huge advantages for hybrid issuers. It is a fraction of the cost of ASX issues, which means the banks can be more generous with the credit spreads they offer. OTC issues require fewer distributors and with this new deal NAB has notably not included any other joint lead managers thus far. When NAB did its last ASX hybrid issue in February, the deal included Morgan Stanley, Morgans, Shaw, UBS, and Westpac as joint lead managers with further co-managers in the form of Bells, Crestone, Evans, JBWere, and Ord Minnett.
Since NAB has only mandated the deal, and not formally launched, there is still time for commission hungry brokers and advisers to convince the big red star to appoint them.
Another precedent with this deal is that it is expected to have a very long 10 year call date, much longer than the 7.5 year call date on the latest major bank deal on the ASX (CBA’s Perls XII security).
This makes the pricing very interesting. Speaking to smart money in the institutional funds management sector, they highlight that a new 8 year hybrid deal on the ASX would have to currently come in the 315 to 325 basis point area above the quarterly bank bill swap rate.
The problem with the OTC market is there is currently little-to-no liquidity and few market-makers set-up to offer secondary trading services. This contrasts with the ASX where as much as $50 million turns-over every day in the secondary market.
Other fund managers point to the major banks’ OTC hybrids in the US dollar market, which are currently trading in the 375 basis point area for a 10 year expected maturity.
One would think that NAB would have to offer a decent concession to the ASX spreads to attract intelligent institutional capital.
ASX brokers need not fear either because there is a veritable tsunami of fund managers looking to raise capital on the exchange by exploiting the exemption of listed investment trusts from the conflicted remuneration rules.
Tens of billions has been able to be raised for LITs from mums and dads because they are exempted from the Future of Financial Advice (FOFA) laws that otherwise ban the payment of commissions from fund managers to brokers and advisers sourcing money from retail punters. And at this stage Treasurer Josh Frydenberg does not appear to care about the spectre of future mis-selling crises.
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