NAB has announced an important new BBB- rated unlisted or over-the-counter (OTC) hybrid transaction, which will be the first well-structured, public OTC AT1 hybrid deal from a major bank in over a decade.
NAB did print a $500m hybrid deal in the OTC market in December 2019, which had a 10 year call (expected repayment) and priced on a spread of 375bps over swap. But this was dominated by one investor. In our view, it was a de facto intra-day, private placement.
This new BBB- rated (ie, investment-grade) hybrid transaction could be attractive for several reasons, including the fact that Australian institutional investors, and their retail and super fund clients, will be able to use the franking credit investors that it carries (more on this later).
A few quick thoughts on the features of the transaction: The previous NAB OTC hybrid deal priced at 375bps over swap for a 10 year expected maturity whereas this deal has a much shorter 5 year expected call date, which will be more palatable to a wider range of investors (and is frankly short by ASX hybrid standards these days).
NAB has offered a very generous spread in the 400bps to 410bps range to ensure it performs well, which is a materially superior spread to the 375bps instos were happy to accept for the same instrument with twice as long an expected maturity in December 2019. This represents an appealing 50bps to 75bps premium to the ASX AT1 hybrid market, which remains cheap. In particular, the 5 year major bank ASX hybrid curve is currently trading around 350bps, which is still well wide of the 270bps spread that prevailed pre-COVID-19 and way north of the mid-to-low 200bps level that represent the post-GFC tights (cf. 2014).
We expect ASX AT1 5 year major bank hybrid spreads to continue to compress to inside pre-COVID-19 levels (ie, below 270bps), and we think this OTC deal will follow suit. Here we note that 5 year major bank senior bond spreads are trading both inside pre-COVID-19 levels and post-GFC tights (at 57bps).
There is also the precedent of the major banks’ Tier 2 subordinated bond market, which in 2012 and 2013 was exclusively an ASX listed market that over time shifted into the OTC domain. Importantly, OTC Tier 2 bond spreads have consistently traded about 20-50bps tight of their ASX listed cousins.
NAB has taken a very different approach to this […]