The show goes on for NAB as it tests demand for major-bank AT1

National Australia Bank (NAB) launched an Australian dollar additional tier-one (AT1) capital transaction on 11 February, its first in more than two years. The deal’s arranger predicts robust demand despite various headwinds, based on recent secondary-market activity and appropriate primary-market pricing.

NAB Capital Notes 3 has indicative volume of A$750 million (US$532 million) and is being undertaken ahead of a A$1.5 billion tier-one call on 20 March. The new offer, which has a call date in June 2026 and will mandatorily convert two years later, is being arranged by NAB and led by Morgan Stanley, Morgans, NAB, Shaw and Partners and Westpac Institutional Bank.

Nick Chaplin, NAB’s Sydney-based head of hybrids and structured capital origination, says he is confident the issue will be upsized to at least A$1 billion. He says there is scope to issue more should demand allow.

According to KangaNews data, NAB’s most recent AT1 transaction was a A$1.5 billion, eight-year non-call six-year deal completed in July 2016. Commonwealth Bank of Australia (CommBank) and Westpac Banking Corporation (Westpac) issued A$1.6 billion and A$1.4 billion deals in December 2018, each with call dates in 2024.

Known headwinds for NAB’s AT1 include the potential revision of franking-credit policy should there be a change of government at the upcoming federal election, the fallout from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, and the Australian Prudential Regulation Authority’s consultation on loss-absorbing capital.

While Chaplin acknowledges that any and all of these could test demand for major-bank capital, he also says they are counterbalanced by a couple of factors that could drive robust demand for NAB’s new offer.

First is signals from the secondary market. “The market for AT1 capital has been strong throughout late December and January, tightening materially after it widened in early December – a period which corresponded to equity-market volatility,” Chaplin tells KangaNews.

He also suggests the indicative margin, of 400-420 basis points over bank bills, on NAB Capital Notes 3 will support demand. ANZ Banking Group, CommBank and Westpac each have AT1 deals with 6.1-6.6 years outstanding to call date which Chaplin says were marked at 355-370 basis points over three-month banks bill swap rate (BBSW) on the day of launch of NAB’s new transaction.

The most recent primary market AT1 forays by Australian major banks – from CommBank and Westpac – set margins in November last year, both at 370 basis points over BBSW.

There is therefore additional compensation for NAB’s extra tenor to first call date and a new-issue concession. “At this price we expect strong participation from institutional investors, which will provide another proof point on price to the rest of the market. Even so, we anticipate that – as is typical for AT1 deals – the bulk of demand will come from sophisticated noninstitutional investors,” says Chaplin.