Unguaranteed issuance untested
The announcement two weekends ago of the removal of the guarantee over wholesale bank funding by the federal government from the end of March 2010 had the expected impact in the debt market last week.Two issuers stepped up to sell guaranteed debt, and no doubt a few more will emerge by the time the eligibility for this aid expires. Arab Bank Australia, which had established a domestic medium-term note program back in 2005 but never issued it, decided it had better get in now with a government-guaranteed issue. The bank said that it may return to the market again before the end of March. Arab Bank raised A$150 million for three years at 47 basis points over bank bills. ME Bank (rated BBB) was next, raising A$500 million, increased from A$400 million at launch, for four years. ME Bank raised A$175 million, fixed at 38 bps over swap, and A$325 million, floating at 38 bps over bank bills.Regional banks and other small ADIs seem certain to make the most of the government guarantee before its availability ceases. No ADI in this class, bar one, has sold non-guaranteed wholesale since the guarantee was made available in November 2008.None have issued in the domestic market without a guarantee and only Suncorp Metway has issued offshore without a guarantee, when it raised ₤300 million for five years in October 2009. For that debt Suncorp paid 190 bps over mid-swaps.So the questions that remain to be answered are how much investor appetite is there for bonds issued by the regional banks and smaller ADIs without government support, and at what price? The answer to the first question is, not as much as there might have been if global investors were not worried about Greece and other out of favour sovereign borrowers in Europe. And the answer to the second question is that investors will probably look for credit margins a little wider than the 30 bps Bank of Queensland paid to top up its October 2012 bonds last month, plus another 150 bps, in place of the guarantee fee, for example.Market practice for unguaranteed issuance by the big four banks last year was simply to take the latest guaranteed price as the benchmark and add on the guarantee fee. While this practice should continue for the regional banks and smaller ADIs this year, things are often not that simple.For one thing, there are fewer current guaranteed pricing benchmarks for these issuers. This is where they are likely to be again disadvantaged relative to the four big banks. It's a good thing that activity in the market for mortgage-backed securities is starting to recover.