Judo Bank has entered the additional tier 1 securities market, with an issue whose indicative pricing is the highest ever for hybrid securities issued in Australia. The bank is seeking A$75 million or more with a margin of 6.25 to 6.5 per cent over the bank bill swap rate, which is currently around 4.2 per cent. Judo said distributions may be fully franked, part franked or unfranked. Judo Capital Notes will have a first call date of February 2029 and a mandatory conversion date of November 2031. In August, NAB issued NAB Capital Notes 7 at a margin of 280 basis points over three-month BBSW. And in February, ANZ issued ANZ Capital Notes 8 at a margin of 275 bps. BondAdviser reported that Judo’s margin (at the lower end of its pricing guidance) is between 329 and 349 bps wider than the trading margins of ASX-listed hybrids. Market sources have put the high pricing down to the fact that Judo is a first-time issuer in the AT1 market and is still a relatively young bank. Judo has, until recently, relied heavily on customer deposits for funding but is now looking to diversify its funding base.  In a presentation earlier this week, it said its long-term plan was for term deposits to make up 70 to 75 per cent of its asset funding; 15 to 20 per cent to come from a combination of warehouse funding, senior unsecured debt, hybrids and certificates of deposit; and 10 per cent from core equity. It has $3 billion of committed warehouse lines and it raised $500 million through its inaugural term securitisation transaction in September. It borrowed under the Reserve Bank’s TFF program and has $2.8 billion left to repay by the end of the 2023/24 financial year. One reason for the bank’s move to diversify its funding may be that its deposits, predominantly term deposits, are not generating the margin it had expected. It said that in the June half the margin on new term deposits was 74 bps, “well below the through-the-cycle assumption of 80 to 90 bps”. Another factor affecting its pricing may the release of an APRA discussion paper in September, in which the regulator said it was considering changes to the rules covering AT1 securities.  APRA’s concern is that AT1 tends to absorb losses at a very late stage in a crisis, and that Australian banks’ practice of selling a large part of their AT1 issuance to retail investors makes it difficult to contemplate converting the hybrids to equity in a crisis and exposing investors to losses.  Changes up for discussion include restricting retail investor access to hybrids, changing distribution and loss absorbency rules and reducing the level of hybrid capital in a bank’s minimum regulatory capital. Market sources said APRA’s deliberations are at an early stage and there is no evidence of any impact on the trading margins of AT1 securities yet.