NAB achieves targeted spread on subordinated notes

National Australia Bank closed its subordinated note offer yesterday, raising A$1.17 billion. The notes will commence trading on the Australian Securities Exchange today.

NAB is paying 275 basis points over the 90-day bank bill rate, which is at the low end of the range suggested when the bank began marketing the subordinated notes a month ago. Adverse pricing trends in wholesale debt markets over recent weeks thus have had no impact on the pricing of a security marketed at retail investors.

The rate for the first interest period, ending September 18, is 6.24 per cent.

The notes have a first optional maturity date of June 2017 and a final maturity date of June 2022.

The bank will have some incentive to call the bonds on the earliest call date because, while there is no coupon step-up (something that is no longer allowed by APRA), the capital treatment allowed will diminish on a straight line basis to final maturity. Domestic banks have a long track record of calling subordinated debt as expected.

The Australian Prudential Regulation Authority has confirmed that the notes are eligible for inclusion as Tier 2 capital. They will be eligible for transitional treatment as Tier 2 capital when APRA's prudential standards are updated as a result of its implementation of the Basel III reforms.