NAB too clever by half

In late January, ANZ launched the first additional tier one capital raising for 2015. The issue known as ANZ Capital Notes 3 came after National Australia Bank had announced in mid-December its intention to do the same following its first quarter update in early February.

At the time Banking Day said: "ANZ gazumps NAB", a claim subsequently denied by NAB. Well, the claim was true.

More than one and a half weeks after it was expected to announce its additional tier one capital raising, NAB launched its NAB Capital Notes issue yesterday, seeking to raise at least A$750 million.

The bank has clearly taken some additional time to sound out the market and revamp the structure of the issue, to come out with an offering that is different from what has become the norm for such issues.
 
At first glance it appears that NAB has been quite clever but a second glance suggests it has shot itself in the foot.

The problem with being gazumped by ANZ was that NAB faced the prospect of coming to market with a second $750 million-plus additional tier one capital raising in less than a month, when the market is still getting over the indigestion caused by CBA's mammoth PERLS VII issue in the last quarter of 2014.

Four issues were undertaken in the December quarter, including the CBA's, raising more than $4 billion in capital. Those securities have been trading below par ever since.

As a result of this, ANZ had to pay a credit margin of 360 basis points over 180-day bank bills to get its $850 million issue away. CBA raised $3 billion at a margin of only 280 bps over 90-day bills.

It looked like NAB would have to pay even more than ANZ to get its deal done and so it changed the rules of issuance.

Both ANZ and CBA's additional tier one capital raisings have a call date eight years from the issue date and a ten-year mandatory conversion date, which has become the norm for such issues. NAB has come out with a much shorter dated structure and is hoping to achieve a credit margin that might even come in tighter than that achieved by ANZ on its Capital Notes 3.

In addition, NAB has scheduled the bookbuild for its Capital Notes on February 24 and the opening of the offer on February 25, well ahead of the listing of the ANZ Capital Notes 3 on the ASX on March 6, when the real value of the notes will become clear.

NAB has set a term-to-call of just five years and provided for mandatory conversion after seven years, subject to all the normal terms and conditions for Basel III compliant additional tier one capital. With this shorter dated structure it hopes to achieve a credit margin of between 350 bps to 370 bps over the 90-day bill rate.

This pricing structure suggests that NAB expects investors will not look at current secondary market levels for its two existing additional tier one capital issues, its CPS 1 (NABPA) and CPS II (NABPB), but rather will just make comparisons with ANZ's Capital Notes 3.
 
CPS I was trading below par value on Monday and offering a trading margin of 368 bps. CPS II was also trading below par and offering a trading margin of 368 bps.

With the CPS I call date being in March 2019 and the CPS II call date being in December 2020, NAB is offering investors little or no incentive to switch into the Capital Notes. The call date for the new capital notes is in March 2020.

And this brings us to the next problem for NAB. Within the space of 18 months or so, NAB will have to refinance $4 billion or more of maturing additional tier one capital from the three issues. There is $1.5 billion of CPS I notes and $1.7 billion of CPS II notes outstanding and NAB hopes to raise at least $750 million from the Capital Notes issue.

NAB will be hoping for much better market conditions then, than the conditions it currently faces.