Heritage pays up for retail bond

Heritage Bank will diversify its funding, at a price, with the mutual bank yesterday beginning to market a five-year bond. It aims to raise A$125 million, mainly from retail investors.

The bank will pay 7.25 per cent on the bond, which ranks as senior debt.

This compares with a rate of 5.50 per cent on a five-year term deposit with Heritage.

Investors in the bond thus get a yield pick-up of 175 basis points, mainly as compensation for missing out on the government guarantee on a deposit (up to $250,000).

To help market the bond, Heritage has obtained a credit rating from Australia Ratings, the only provider of credit ratings licensed for use in marketing to retail investors.

Australia Ratings assigned a credit rating of BBB+ to Heritage.

Moody's Investors Service rates the long term debt of Heritage at A3, while Standard & Poor's rates the bank's debt at BBB-, although Heritage cannot cite the latter two ratings in the offer document.

Paul Williams,  chief treasury and business strategy officer of Heritage, said of the pricing: "We know BBBs are not afforded a lot of support when it comes to getting a five-year investment. As a mutual, we can afford to pay for duration and pay for access."

Another factor is Heritage's search for a wider investor base beyond its traditional market, which is concentrated in south-east Queensland.

An institutional book build is underway and will close next Thursday.

Williams said the credit rating from Australia Ratings was helping.

"We certainly want to diversify our access points. The rating from Australia Ratings helps with that."