Last Friday saw the completion of the bookbuild for the National Australia Bank’s Capital Notes 2 (ASX Code: NABPD) at a margin of 4.95% p.a. above the 90-Day BBSW (low end of the range offered of 4.95 – 5.10%). The deal was closed early with an offer size of at least $1.35 billion, up from the initial target of $750 million. This indicates there is still substantial demand for high-yielding hybrid securities in a low interest rate environment. Investors also remain wary that the banks may either reduce common equity dividends or issue more common equity at some stage to further increase their Core Tier 1 (CET1) capital ratios in response to ongoing regulatory requirements.
We are now in a position where 3 of the 4 major banks have successfully completed new tier 1 hybrid capital raisings (totaling ~$4.25 billion within a 100 days). Our analysis suggests  that ~16% (or ~$700 million) of this is existing investors committing to rollovers (i.e. 22% and 58% in PERLS III and WCTPA respectively), ~25% (or $1 billion) was committed as new money from institutions and ~59% (or $2.5 billion) was provided by new retail investors. The demand for these transactions has been high primarily due to the strong secondary market trading on comparable securities (i.e.PERLS VIII).   On the supply side of the equation ANZ is expected to provide further details of the potential US$ hybrid following last week’s the global roadshow and still expected to issue domestically later in the year. If given the go ahead, this will represent the first offshore hybrid issue by a major bank since 2009. ANZ has been able to obtain an ATO private ruling that will allow ANZ to issue hybrids via an offshore branch (London) without having to attach franking credits to distributions.  Once swapped back into A$, the AFR estimated the effective margin of this U$ issue would be ~5.50%. While ANZ in November 2015 stated “it expects to fully frank dividends for the foreseeable future”, the strategy of issuing hybrids from an offshore branch does lend credence to the hypothesis that they are actively managing their hybrid issuance to ensure sufficient franking credits will be available for Australian investors.   In other news Sydney (and other parts of the East Coast) have experienced severe storms over the last 48 hours. Whilst still early days we expect that insurers such as the CommInsure, Suncorp and IAG will experience a significant upswing in claims due to this event.   In terms of primary activity Apple completed their second A$ issue raising $1.425 billion of fixed rate bonds over 3 maturity dates that ranged from 4.3 to 10.3 years in tenure.

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Chart 1: Bloomberg AUSBond Composite Index (Monthly) Chart 2: Bonds vs Equities 2014/15/16 (Monthly)