AT1 outlook
Tier-two issuance will likely get most attention but the major banks will still be looking at periodic additional tier-one (AT1) refinancing transactions. A recent foray into the wholesale market by National Australia Bank (NAB) suggests banks may be open to exploring diverse issuance.
MITCHELL I wish I could take a little more credit on this, but Will Nigro, our acting head of capital, went down the path of creating the wholesale AT1 programme in 2019. The genesis of it was around adding flexibility to issue AT1 product.
This came into the spotlight in February this year when we were in the market with a retail transaction. It’s not that the market wasn’t supportive but that retail transactions have such a long open period between pricing and settlement.
Ultimately, market conditions had changed significantly and in the best interest of stakeholders we decided to pull the transaction, which was subsequently followed by Macquarie Bank pulling a similar deal it had in the market. This shows the constraint of only having one market – domestic retail – in which to raise AT1 capital.
The flexibility of being able to access a new set of investors for the AT1 product, and the ability to access the market with a far shorter lead time than retail transactions require, is what we are after.
There is still an impediment to broad participation by investors in the wholesale programme in the form of the franking-credit piece, and there is still a way to go in achieving broad acceptance of frankable fixed-income product. But the direction of traffic seems pretty clear to us.
Wholesale AT1 will not be a replacement of our retail programme, even so. It is complementary to our ability to raise this form of supplementary capital.
There is still an impediment to broad participation by investors in the wholesale programme in the form of the franking-credit piece, and there is still a way to go in achieving a broad acceptance of frankable fixed-income product. But the direction of traffic seems pretty clear to us.
BLACKSTOCK We have only issued in the Australian dollar listed market and we have always found it to be well-received. It has enabled our customers to roll over their AT1 holdings, which they have told us is important to them.
We note the success of other banks’ offshore transactions and NAB’s wholesale AT1 programme. I can see the rationale for having this product available and there is now a clear precedent for it.
KAU The AT1 market has traditionally been underdiversified by Australian banks. This is due to a number of impediments, especially the tax and regulatory laws related to it. Any diversification we can get should be welcomed.
KAU Sadly not. We would love to be back in the US market but the constraints around tax law and other legislation make it impossible. The transaction we completed was always going to be a one-off deal and we were always very open about this. We would love to go into other markets as well, but we just don’t have the specific balance-sheet capacity.
BISCHOFF I agree with this. We would love to issue offshore but it is much more challenging now for a predominately domestic-focused bank to find the capacity to get an offshore AT1 deal done given some of the cross-border impediments and tax rules.
What NAB has done has certainly been positive for the market. To echo some of the other comments, the retail market is likely to continue to be the one that offers the most depth. But having the flexibility to look at both wholesale and retail investors is a positive development for the market.
If we look at where tier-two trades were not even five years ago, deal sizes of A$600 million (US$429.5 million) were not out of place. This is what NAB printed and it should not be regarded as a negative. The market will likely evolve if we see more regular issuance.