They are, however, asking for quite a steep discount to the market price and observes say a key reason why Australia has seen a number of follow-on share sales over the past three months, while most other markets have been virtually shut for new equity issuance, is that issuers down under are not only willing to sell at the current depressed prices but to accept a significant discount on top. In most of the rest of Asia, they are not.
NAB was offered to the market at a fixed price of A$20 per share, which represented a 9.7% discount to FridayÆs closing price of A$22.15. However, the stock fell 10.3% on Friday, which pushed down the absolute placement price and the discount to the five-day volume-weighted average price was significantly wider at 16%.
The latter put it on par with Commonwealth Bank of AustraliaÆs $1.4 billion share offering four weeks ago, which was completed at a 15.7% discount to the most recent market price, and shows how much the risk premiums for large-size issues have increased over the past couple of months. In mid-August, telecom operator CSL raised $1.6 billion from the sale of new shares at a 5.8% discount, according to Dealogic data. However, AluminaÆs $819 million follow-on in late September did require a much steeper discount of 32.6%.
NABÆs offering, which was fully underwritten by joint bookrunners Goldman Sachs JBWare, Merrill Lynch and UBS, comprised 100 million new shares and was later increased to 150 million, or 8.7% of the existing share capital. The deal was launched before the stockmarket opened yesterday, at about 7.30am Sydney time, and was covered in 75 minutes, giving good momentum to the bookbuilding. The initial plan was to keep the books open throughout the trading day, but the bookrunners decided to use an option to close them early at about 12.30pm, having told the market that the deal size would be increased to A$3 billion some 45 minutes earlier.
The demand came primarily from domestic institutions, although a number of large Asian accounts were also said to have participated in significant size. Some hedge funds also came into the book, possibly to cover short positions. While short-selling on Australian financial institutions has been banned since September (like in the US and UK, the ban was implemented to ease the massive selling pressure on banking stocks), one source says there was still about A$500 million worth of shorts outstanding in NAB from positions established before the ban came into effect.
Having lost about 50% of its market cap in the market downturn over the past 12 months, NAB is currently also trading at quite attractive multiples. Based on consensus estimates the placement price translates into 7.8 times fiscal 2009 earnings and 1.4 times book value. The stock also trades at a 9.7% cash dividend.
Meanwhile, AustraliaÆs major commercial banks are generally well capitalised and have relatively little exposure to the subprime mortgage-linked securities that have pulled their US and European counterparts into the red this year. NAB posted a A$4.5 billion net profit for the full year to September, which was only 0.9% less than in the previous year. Cash earnings fell 10.7% to A$3.9 billion after including a write-off of about A$1 billion in its investment banking unit nabCapital û still significantly better than many of its global peers.
According to sources, the share sale will replace the planned issuance of new shares to the market to cover dividend payouts for the full year to September 2008 to investors who have elected to receive cash instead of scrip. The decision to do a placement instead of the standard dividend reinvestment programme (DRP) (which was scheduled to start on Thursday) will remove the pressure on the stock that tends to arise from having a constant seller in the market for the 10-15 days it typically takes for a company to convert the dividend shares into cash û thus removing the pricing risk. The pressure on the banking sector was set to be quite significant in the near term since both Westpac and ANZ also have DRPs coming up.
Assuming that 40% of NABÆs shareholders will choose take their dividend in cash instead of scrip, which would be in line with the historical average, the bank would have needed to sell about A$1 billion worth of stock in connection with the full-year dividend. YesterdayÆs placement also replaces the dividend reinvestment programme in connection with the 2009 interim dividend in six monthsÆ time. The DRP that was to begin on Thursday was to be fully underwritten by Goldman Sachs.
The shares sold through this follow-on placement will not give the holders the right to receive the final dividend of A$0.97 per share as NAB went ex-dividend last Friday. The divided alone pushed down the share price by 3.9%, explaining at least part of the sharp drop in the share price that day. The stock also came under pressure after at least one investment bank raised the possibility that the company would need to raise fresh capital and FridayÆs close was only 13% above the 12-month low of A$19.60 from September 18, although the stock has traded above A$25 since then.
The stock was suspended yesterday to complete the placement and will resume trading today.
The proceeds from the share issue will also help to strengthen NABÆs tier-1 capital ratio, pushing it above 8% from 7.35% at the end of September. In a release announcing the completion of the placement, the bank said this supports its aim of maintaining a strong capital base and makes it ôcapable of taking advantage of organic growth opportunitiesö.
Standard & PoorÆs appeared to agree. The ratings agency, which prior to this deal had a negative outlook on NABÆs credit rating, yesterday revised the outlook to stable and also affirmed the bankÆs AA rating.
ôThe outlook revision reflects our view that the risk of a ratings downgrade on NAB in the medium term has been lessened by the bankÆs ordinary equity capital raising,ö S&P credit analyst Sharad Jain said in a statement. ôWe anticipate that similar to its domestic peers, NABÆs earnings are likely to remain under pressure in the near term due to potentially higher credit and asset provisioning, and pressures on asset growth. However, credit losses stemming from mortgage and consumer loans are expected to remain manageable within the AA rating level,ö he added.
The ratings agency did warn, however, that if the current dislocation in global financial markets is prolonged or worsens, NABÆs credit profile û like that of its peers û will be negatively affected in terms of: reduced access to funding and capital (the major Australian banks are highly dependent on offshore wholesale funding to make up the gap between lending and deposits); increased credit losses stemming from exposure to financial counterparties; increased credit losses due to increased corporate and retail defaults; and changes in risk appetite.
Meanwhile, it would have been encouraging for other issuers that the three bookrunners were hard underwriting the deal as it shows that investment banks do still have capital available to put to work and also that they are willing to take on a certain degree of calculated risk to service their clients û even as the markets remain highly uncertain and volatile.
ôWhen there is a good investment case and we are comfortable with the liquidity in the stock and the pent-up demand in the market, we are prepared to continue to commit capital to our clients,ö says Alex Woodthorpe, head of equity capital markets for the Pacific Rim at Merrill Lynch. "NAB is a very significant client for Merrill Lynch and we want to support their growth."
The CBA transaction in mid-October, which was led by Citi, CBA, Credit Suisse and J.P. Morgan, was not underwritten, but the CSL trade in August was. The latter was arranged by Merrill Lynch on a sole basis.
Year-to-date, $22.8 billion has been raised from follow-on offerings in Australia, according to Dealogic data, which is only 10.9% less than in the same period last year. Wesfarmers $2.6 billion rights issue in April is the largest secondary capital raising by an Australian company in 2008 so far. However, IPOs have struggled as much in Australia as anywhere else with only $1.4 billion raised from new listing so far this year, compared to $4.7 billion in the corresponding period last year.
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