Investors take risk on mutual write-down

Heritage Bank yesterday placed A$50 million in subordinated debt of a type that exposes investors to a write-down in the event of severe financial strife at the mutual.

Final maturity is in 2025, although an early redemption is possible after five years (that is, in 2020).

Paul Williams, chief investment and strategy officer at the Toowoomba based mutual bank, said he understood the transaction was the first of its type in the market.

The notes would be subject to a partial or full write-off should the Australian Prudential Regulation Authority deem that without a write-off Heritage would become non-viable, Fitch Ratings said in a commentary.

"Full write-off would be triggered should Heritage require a public sector injection of capital to avoid non-viability," Fitch said.

Williams said Heritage worked on the structure for 16 months, to clarify approvals with APRA and the Tax Office.

"It's very difficult for a mutual to do a conversion to equity. We did not want to go down the path of constitutional changes," he said.

"The investors take the risk of a write down, depending on the size of any loss. Probably, being a mutual, we still would have some retained earnings."

ANZ and National Australia Bank helped Heritage sell the debt to 24 investors, the majority of them "real money" investors, Williams said.

Heritage priced the subordinated debt at 350 basis points more than the three-month swap rate.