Bendigo and Adelaide chooses not to follow AMP

The margin on Bendigo and Adelaide Bank's new issue of additional tier one capital looks skinny compared with the AMP deal that preceded it.

Issuance of additional tier one capital has become almost formulaic. The requirements of Basel III are quite clear.

The instrument must be perpetual but can be callable. Coupon or dividend payments must be deferrable and non-cumulative. And, most important of all, the instrument must be capable of absorbing losses by providing going concern capital (conversion via the common equity trigger) and gone concern capital (conversion via the non-viability trigger). Since the start of 2013, this has been standard.

Variations in additional tier one capital issues have been limited to lengthening call dates and narrowing credit margins, up until the start of this year.

Similarly, up until this year all issuance has been aimed at retail investors, with issues being listed on the Australian Securities Exchange. ANZ was the first to market this year with a A$970 million issue of ASX-listed Capital Notes 3.
 
ANZ recognised that market conditions had changed and that it was going to have to offer investors a greater credit margin than the 280 basis points CBA paid on its PERLS VII notes in late 2014. ANZ priced its CPS 3 at the tight end of a 360 bps to380 bps range but left the non-call period at eight years.

Being second to market with its Capital Notes issue, NAB recognised it would have to be a bit more innovative. It shortened the non-call period to five years and ultimately sold $1.3 billion of Capital Notes with a credit margin of 350 bps.

AMP was even more innovative. Coming to the market soon after NAB, it became the first to issue exclusively in the wholesale market, targeting sophisticated and smaller institutional investors.

AMP raised $275 million with a five-year non-call period, and paid a credit margin of 400 bps. AMP's innovation was applauded but doubts were expressed about just how much appetite existed among the investors that AMP reached.

Bendigo and Adelaide Bank has decided not to put that appetite to the test. Yesterday, it announced a new ASX-listed, additional tier one capital issue, to be known as CPS 3.

The bank has $90 million of Bendigo and Adelaide Bank Preference Shares (BPS) due to be called in June. The BPS, which were issued ten years ago, do not have common equity and non-viability triggers but they are perpetual and have deferrable, non-cumulative dividends.
 
The BPS also only pay a credit margin of 150 bps.

With the new CPS 3 issue, Bendigo and Adelaide is looking to raise A$200 million, more or less, including proceeds rolled over from the BPS. The non-call period is six years, placing the CPS 3 between ANZ's Capital Notes 3 and NAB's Capital Notes, and a credit margin of 400 bps to 420 bps is being offered.

The credit margin looks skinny against AMP's 400 bps for a non-call period of five years. Perhaps this is the reason Bendigo and Adelaide chose to stick with a retail offering.

The bookbuild for the issue is scheduled for May 1 and the offer will open on May 5. The closing date is June 5 and deferred settlement trading should commence on the ASX on June 16 under the ticker BENPF.