ANZ gazumps NAB with tier one issue

National Australia Bank has just learned to its chagrin not to flag its moves to the market too far ahead.

Last month NAB advised that it intended to launch an additional tier one capital issue after providing its first quarter update to the market next month. The issue was expected to be the first to come to the market after the mammoth PERLS VII issue from Commonwealth Bank last September but it has been beaten to the punch by ANZ.

After the close of business on Friday, ANZ announced a A$750 million Capital Notes 3 issue with an indicative margin of 360 basis points to 380 bps.

This will aggravate the indigestion the market has been experiencing since the PERLS VII issue and leave NAB feeling very uncomfortable.

The $3 billion CBA issue overwhelmed the market and still trades below face value. At the close of the market on Friday, CBA's PERLS VII notes were priced at $97.12, offering a trading margin of 331 bps compared with an issue margin of 280 bps.

Following ANZ's announcement, there is no doubt the price will fall and the margin widen when the market re-opens this morning.

Any hopes that NAB had of being able to price its new benchmark additional tier one capital issue with a margin close to that of the CBA's PERLS VII have just been blown out of the water.

If ANZ manages to get the Capital Notes 3 away at a margin of 380 bps - the wide end of the range - NAB could face the prospect of having to offer 400 bps, which would be the largest margin a major bank has paid yet. The alternative, of course, is to try to issue in international markets where franking credits are not valued.

The format for additional tier one capital issues has been well established since the Basel III capital criteria came into effect at the beginning of 2013. Thus, the format of the ANZ Capital Notes 3 contains no surprises.

The notes are perpetual and may pay a deferrable, non-cumulative dividend with franking credits. The notes may also be converted into ordinary equity or completely written-off if ANZ's common equity tier one ratio falls below 5.125 per cent or APRA deems ANZ to be non-viable.

The notes can be redeemed by ANZ after eight years (APRA permitting) or will be mandatorily converted into ANZ ordinary shares after ten years, subject to certain conditions.

The dividend, if paid, will be paid at the 180-day bank bill rate plus the margin, which will be determined in a bookbuild on February 4, adjusted for franking credits. On Friday, this would have resulted in a dividend of 6.5 per cent before franking and assuming the maximum margin of 380 bps.

Given that investors in ANZ's Capital Notes 3 will gain all of the downside risk of equity but none of the upside, the current yield on ANZ's shares of 8.3 per cent, before franking, looks a whole lot better.
      
The offer will open on February 5 and close on February 26. Deferred settlement trading on the ASX will commence on March 6.

At this point the severity of the market's continuing indigestion will become apparent, as will the cost of NAB's flag waving.