Banks still pay wide spreads for term debt
The re-opening of the domestic debt market is gathering pace, a trend likely to continue as the bank profit season kicks off this week, providing fresh insight into the sector's asset quality and margins.Banks may be hoping that the profit updates will provide a rationale for debt investors to re-think the prices they are looking for on new issues.Last week, it was ANZ's turn to have a big week, with activity being in different sectors of the domestic debt market.On the same day that its capital notes commenced deferred-settlement trading on the ASX, ANZ launched and priced a benchmark-size floating rate note issue.ANZ (rated AA-) sold A$1.75 billion of four year FRNs at 85 basis points over the 90 day bank bill rate. The pricing on the ANZ FRN is in line with that achieved in mid-July by Commonwealth Bank when it sold A$1.25 billion of four year FRNs.This shows that credit spreads for the major banks have not moved in that time and still have a little way to go to match the 78 bps achieved on five-year funds by National Australia Bank in mid-May. The NAB issue set the benchmark for post-GFC spread contraction. ANZ followed up its FRN issue by launching and pricing a A$750 million, 10-year covered bond issue on Friday, at 100 bps over swap. This is the longest dated covered bond to be issued in the domestic market.Covered bond issuance has previously been limited to five years or less.Ninety per cent of the issue was taken up by real money investors. This provides further confirmation of the increasing demand for longer dated bonds that has been evident this year.The covered bond issue also follows a A$1.25 billion, three-year covered bond issue by Royal Bank of Canada issued the week before. The issue generated A$1.8 billion of demand from investors.ANZ's benchmark issues were the highlight of an otherwise staid week in the debt market.International Finance Corporation (rated AAA) opened a new $200 million, 10-year line, priced at 80.5 bps over Commonwealth bonds. Nederlandse Waterschapsbank (rated AAA) added $30 million to its April 2023 line.The increase was priced at 124 bps over Commonwealth Guaranteed Securities and takes the total outstanding to $280 million.Offshore, National Australia Bank sold £500 million of three-year, floating rate covered bonds. The bonds were priced at 30 bps over Libor, which is where ANZ priced an identical issue in January. The issue has since traded in to 24 bps over Libor.Macquarie Bank (rated A) sold US$1.0 billion for three years on the US s144A market. The bonds were priced at 143 bps over US Treasury bonds. The return of banks to the debt market after a dormant June and quiet first half of July means banks may once more be net issuers of debt.The Reserve Bank of Australia, in its quarterly Statement on Monetary Policy, issued on Friday, observed that "bond issuance by Australian banks of around $17 billion since the May Statement has been somewhat less than maturities."The RBA said banks re-purchased