Investors based in Asia will be an important consideration for Australian bank and insurer issuers over the coming years, said Nick Chaplin, Head of Hybrids & Structured Capital Origination at National Australia Bank (NAB), during a recent conference in Singapore and Hong Kong.
Held over two days and hosted by NAB, the conference selectively showcased a number of Australian corporates and financial institutions to key Asia-based fixed-income investors.
Chaplin led a panel discussion on capital issuance trends, and predicted that Tier 1 issues from Australian banks would remain Australian-dollar focused, for now, and targeted at the domestic retail market. Future Tier 2 capital issues, however, would be marketed to all investors including those outside Australia.
Following is an edited transcript of the panel discussion, which included: Tim Ledingham, treasurer at Bank of Queensland; John Caelli, general manager markets, ME Bank; Arthur Lau, head of APAC fixed-income at Pinebridge Asia; and Matt Price, head of group capital management, NAB Treasury.
Is there a preference from Asian investors for unlisted Austraclear tradeable bonds versus ASX-listed issues, and is liquidity an important consideration when buying A$ issues?
Arthur Lau: I can only speak on behalf of Pinebridge but listed or unlisted is not a material concern for us. We are more concerned about whether the deal is rated or not. We also like liquid deals, though a portion of our portfolio is buy-and-hold. Of course, our main considerations are price and yield.
Can the issuers at the table please outline intentions around issuance of Tier 1 and Tier 2 capital instruments?
Matt Price: We will have an appetite for Tier 1 and 2 issuance over the coming years and want to hold an adequate amount of both. Our Basel II compliant standing stock of Tier 2 capital is subject to transition, which will amortise at 10% per annum over the next few years and we will look to refinance about A$1 billion to A$2 billion worth of non-equity capital issued into the domestic and offshore markets.
John Caelli: ME bank is a privately owned bank so we don’t have a specific requirement for issuing Tier 1 capital, but we are having conversations with the regulator, APRA, regarding potential Tier 2 structures. At some stage in the next 6 to 12 months we would like to issue a Tier 2 deal and we would consider marketing to both Asian and domestic investors.
Tim Ledingham: Back in March 2012 we underwent a recapitalisation exercise and since then we have had strong core equity Tier 1 capital levels. Management is committed to maintaining the Bank’s single-A minus rating, strong core equity tier 1 is key to that. The maturity profile of our Tier 2 holdings means that we won’t need to refinance until 2016 when we will need to issue about A$200 million. In the Tier 1 space we issued a A$300 million CPS at the end of November.
To the issuers, would there be any value in issuing Tier 1 outside of Australia in order to achieve investor diversity for instance?
Price: The amount of value an offshore investor gets from these issues is limited because of the tax treatment in Australia. And since we are a strong household name in Australia there is plenty of demand for our paper. However, investor diversity is a big driver for us and we are always looking for new investor bases.
Ledingham: The majority of the Bank’s income is generated in Australia, we therefore produce franking credits and being able to issue Tier 1 deals in Australia means we use these credits to issue net pay securities. The Bank’s immediate requirements for Tier 1 capital are relative minor and the Australian market is deep enough to meet our needs at present.
Price: Prior to 2009 we were very active in issuing Tier 1 into the offshore markets. Issuing into the institutional market is comparatively quick to execute, compared to the domestic retail market which takes about six weeks from launch to settlement. The legal documentation is also relatively hassle free.
To Arthur again, would you have any interest in gross pay Tier 1 issues from Australian issuers?
Lau: I encourage Australian banks to look to the offshore market because we have a sizable exposure to bank capital paper and as this paper matures and is called, we need to find new issues to invest in. We look at some ASX-listed paper, but buying local currency paper adds an additional currency risk and swap cost. At the moment it is challenging because the yield spread isn’t enough for us to justify the cost of the swap. In recent months, currency volatility has meant we have passed on a few trades.
To the issuers, would you consider offering Tier 2 issues to the Asian investor market and what would be the key drivers behind this decision?
Price: We would certainly encourage Asian participation in our deals. The Asian private bank market was one of the first to embrace the new style of capital securities and interest from private banks in the region has been very resilient.
Ledingham: For Tier 2 issuance Bank of Queensland is more focused on the domestic market, but we would encourage Asian investors to participate in our larger transactions. Our capital requirement are quite small and the local market has proved adequate enough.
Caelli: We strongly encourage Asian participation in our Tier 2 deals and would like to actively market our transactions in the region. We recognise the success of recent transactions that have attracted strong demand from Asia and we would like to be part of this.
Would you consider doing roadshows to the region?
Caelli: Absolutely. It is very important for us to grow our profile in Asia. It is always beneficial to have one-on-one meetings with investors because it is more personal and gives you a better opportunity to sell your story and gauge what investors are interested in.
Do investors have a preference for any particular tenor or structure with Tier 2 capital issues? Is preference yield driven?
Lau: Assuming the credit is solid, we don’t have a preference between 10-year bullets and 10-year non-call-5 structures. But since some of our mandates have a specific maturity date, we tend to price an issue to the call date and prefer bonds that are highly likely to be called. We look at the quality of the company and the strength of the management which is why it is important to have the one-on-one relationship.
Would investors be comfortable buying issues with longer tenors – for example a 12-year non-call-7? Would a 7-year call date be reasonable?
Lau: I think it is feasible. We invest in perpetuals for example, so whether an issue is callable in 5 years or 7 years is only a matter of pricing.
What is the view from issuers on longer tenor Tier 2 bonds?
Caelli: Sometimes it depends how the rating agencies treat the capital and it is important for us to maintain appropriate capital ratios. We would look at what the investor base wants and at the moment the sweet spot for investors is 10-year non-call-5. Having said that, if we can extend the tenor and get reasonable treatment from the agencies, it would be beneficial.