“We're extremely pleased with the level of coverage in the deal, and the flexibility it provided to tighten pricing from the IOI stage. The overall demand exceeded our expectations and was significantly different from our experience with our first public tier-two deal in June last year,” Xavier Chapman, Sydney-based treasurer at Judo, tells KangaNews.

In June 2023, Judo printed A$65 million in a 10NC5 tier-two deal with a spread of 500 basis points over BBSW. Judo believes moving above the A$100 million mark and thus into benchmark territory was a key factor in generating demand.

Chapman also suggests uncertainty about additional tier-one instruments after the Australian Prudential Regulation Authority (APRA) announced plans to phase out this slice of the bank capital stack means investors may already be adapting to tier-two as the yield instrument of choice for Australian banks, he continues.

Judo’s deal was offered in wholesale format rather than the retail documentation used by most Australian AT1 deals, however – and it attracted a predominantly institutional investor base supplemented by a significant middle-market component.

“There is strong demand for higher-yielding, assets at the moment – with movement in base rates certainly having an impact – and we are experiencing increased demand from domestic wealth managers and private banks, says Barry Sharkey, Sydney-based co-head of debt capital markets at Judo’s arranger, “As outright yields have risen, there has been a notable increase in demand from wealth managers and private banks , and this growing liquidity pool has been particularly evident in higher beta transactions like tier-two.”

The stage was set for Judo to achieve a significant improvement in pricing relative to its previous tier-two deal. The existing tier-two had rallied by 165 basis points in the year since pricing, Sharkey suggests – adding that this “reflects market conditions and the success of the issuer’s strategic delivery”.

Chapman says the bank did not conduct significant pre-deal engagement activities with investors on this occasion but instead moved quickly to take advantage of a window of opportunity. “Despite the ongoing geopolitical challenges, it seemed to be a suitable time to proceed. Fixed-income markets have remained supportive of deals like this,” he says.

The path was cleared by the fact that three of the major banks are in a blackout period ahead of reporting. Strong market performance after Judo’s own results – announced on 20 August – created a good window for Judo.

In early 2021, Judo Bank established a debt issuance programme and priced its first tier-two deal – a A$50 million 10NC5 – transaction at 450 basis points over BBSW. At the time, Judo was unlisted and unrated. The bank listed on the ASX in late 2021 and solicited an S&P Global Ratings credit rating, receiving a BBB- rating with a positive outlook that was upgraded earlier this year to BBB stable.

Chapman says achieving a A$1 billion orderbook for the first time is a “great milestone” for Judo’s funding platform. Sharkey adds: “It’s a testament to Judo’s consistent execution and business performance since IPO in 2021, and the debt market presence it is building.”

The deal has positioned the bank exactly where it needs to be, Chapman adds. “At our full-year results, we spoke about the capacity for additional non-AT1 capital in our funding stack. With this transaction, we have essentially filled this capacity. Our capital structure is now appropriately balanced between AT1 and non-AT1 instruments.”

Going forward, Judo will likely return to the tier-two market as balance sheet growth demands. The bank has a growth target of A$2-2.3 billion in loans for 2024/25, which will require further support in its capital base.

As for funding transactions, Chapman says the bank is constantly assessing and making decisions based on what is most economically attractive and it will continue to do so over the next 12-18 months, according to Chapman. Judo priced its first public asset-backed securities deal, for A$500 million, in September last year.

Despite expected caution around the US election, Sharkey says new issuance activity should remain active heading into Christmas. As for tier-two supply, Sharkey expects it to remain steady and well supported when deals are offered.