New Zealand investors should prepare for a hybrid deluge

There has been little tier one capital issuance undertaken by the major banks in New Zealand. In fact our records show that the last such issue was undertaken by National Australia Bank subsidiary, Bank of New Zealand, in June 2009 when it raised NZ$260 million through the sale of perpetual tier one capital notes, callable after five years.

ANZ National Bank sold NZ$835 million of such notes in April 2008, and now its successor, ANZ New Zealand, is about to undertake the first Basel III compliant additional tier one capital issue seen in that market.

ANZ New Zealand has advised the New Zealand Stock Exchange that is seeking to raise NZ$250 million, with no limit set on the level of oversubscriptions that it is willing to accept.

Coming hot on the heels of ANZ's Capital Note 3 issue launched late last month in the Australian market, it is tempting to think that the bank may be tapping the New Zealand market to cover an unexpected shortfall from the Capital Notes 3 issue.
 
While the size of the Capital Notes 3 issue was increased from A$750million at the launch, it was only increased to A$850 million upon completion of the bookbuild. If the issue closes at this amount, it will be the smallest additional tier one capital issue seen from one of the major banks.

NAB's Capital Note issue, also underway, may soon take this mantle from ANZ.

However, tapping retail investors in New Zealand via its local subsidiary is not an ideal way of making up for any shortfall in tier one capital raised in Australia, and offers only limited capacity to do so.

This is not a comment on the size of the market in New Zealand or the level of demand that may exist among retail investors; it is simply recognising that the capital raised will reside in the New Zealand subsidiary, and will only count in the capitalisation of the consolidated ANZ Level 2 Group and not in ANZ's core Australian banking business.

Nevertheless, it doesn't mean that NAB may not do exactly the same thing, if it finds that its Capital Notes issue raises less tier one capital than hoped for. And if CBA and Westpac have plans for additional tier one capital issues in Australia this year, they too might subsequently follow up with issues in New Zealand.

Such a volume of issuance could test the appetite of retail investors in New Zealand. And, if so, this may give ANZ New Zealand some first mover advantages.

The bank has opted for a shorter term to call and mandatory conversion for its New Zealand Capital Notes. The call date is May 2020 and the mandatory conversion date is two years later.

Reflecting the preference of the local market, the notes will pay a fixed coupon up until the call date and will swap to a floating rate thereafter, if the notes are not called. The credit margin will be set by a bookbuild within a range of 350 basis points to 360 bps.

Coupons will be paid quarterly but will not carry franking credits and, if conversion occurs, it will be into ANZ ordinary shares.

The Capital Notes have the usual features of being perpetual with optional, non-cumulative coupons and being subject to capital event and non-viability triggers. Although in this case, the Reserve Bank of New Zealand can also declare non-viability, along with APRA.

The offer will open on March 6 and close on March 27. Subscribers will receive 4.5 per cent interest on their funds from the time of being received until the Capital Notes are issued.

Trading will commence on the New Zealand debt exchange on April 1, under the ticker code ANBHB.