The first global buy back of government-guaranteed securities (GGS) from an Australian major bank will not be the last, as a fixed monthly fee to the government means the debt becomes more expensive as it reaches maturity, rendering other options such as covered bonds, senior unsecured debt and even one-year deposits more attractive.
One of the country’s big four lenders, National Australia Bank (NAB) has proposed to buy back five outstanding public GGS, both in Australian and US dollars, worth a total of around AUD7 billion (US$7.25 billion). As part of the offer, the bank has also stated it is open to repurchasing other outstanding GGS debt on a bilateral basis.
Since December 2010, when NAB offered the first public buy back from an Australian major, banks in the country have been slowly repurchasing the debt. However, this recent offer (the largest to date) marks a likely acceleration of the process. According to commentators, alternatives to holding the capital to maturity are becoming increasingly attractive. “This liability management exercise improves the strength of NAB’s balance sheet by effectively reducing relatively expensive short-term debt outstandings in FY13,” explained Christian Joannidis, head of funding at NAB.
GGS debt was issued during the financial crisis as the government offered support to the country’s banks. The guarantee allowed banks to issue debt at a time when market sentiment was very negative, and was used extensively by banks, to issue both local and foreign currency bonds.
The caveat was that the banks had to pay a fee for the guarantee and continue to pay a monthly fee against the bonds to the government: 70 basis points (bp) for ‘AA’ rated lenders, 100bp for ‘A’ rated banks and 120bp for those rated ‘BBB’. This fee is fixed and therefore becomes more relatively more expensive as debt comes closer to its maturity. Most of the outstanding GGS debt is due to mature in 2014.
“As the bonds move towards their maturity, now that’s 70 basis points on what has become a one-year instrument, it becomes quite expensive relative to other debt instruments that the banks can issue for one year. So really the thinking is ‘I’ll buy these back now, so I don’t have to pay the fee anymore,’” said one Australia head of DCM at a global bank.
This fact has combined with several others to provide an incentive for banks to buyback the debt. Firstly, Australia’s regulator facilitated the advent of a covered bond market at the end of last year. This gave the banks an alternative option to issue ‘AAA’ rated-debt at a lower cost without having to pay a fee. NAB, ANZ, Westpac and the Commonwealth Bank of Australia (CBA) and Suncorp have issued the bonds to date.
Secondly, while smaller banks are less likely to successfully issue covered bonds, strong deposit growth has allowed them to reduce their dependence on offshore bond markets, and many of them are in a position where on year deposit money has become more attractive than paying 120bp on the government guarantee fee, according to the Australia head of DCM.
Furthermore, there has been a strong push by the government to encourage Australian issuers to term out their debt.
“They’re reducing their cost of funding and they are managing their maturities. Banks can re-issue debt of equally long tenor if not longer. NAB has done some maturities of 18 or 19 years and that’s something all the banks are doing is trying to term out their funding. They’ll need to in order to meet the incoming Basel III liquidity requirements,” said Patrick Winsbury, a senior vice president at Moody’s Investors Service.
“The advent of covereds has been a key source of competitive funding for the Aussie banks. Credit growth remains subdued while deposit growth and funding markets remain robust. Against that backdrop, NAB's move allows it to lengthen its debt profile and reduce debt classified as short term,” said Chris Viol, analyst at UBS.
Covered bond continuation
Covered bonds will continue to be the replacement instrument of choice among the major banks, according to commentators.
“One of the things we were paying attention to as the banks look to refinance their government guaranteed bonds, especially earlier in the year when market conditions were difficult, is how much they are able to issue covered bonds relative to the amount of government guaranteed debt outstanding,” said Winsbury.
He argues that there is likely to be some level of overlap between the buyers of GSS and buyers of covered bonds. In addition, much of the government-guaranteed debt was up to five years in maturity, which is relatively long compared to some of the funding banks were doing pre-crisis, so ability to issue covered bonds this year has been positive in helping banks to continue with longer duration funding.
“The major banks, they’ve got a lot of capacity to issue covered bonds for the next three to four years and then the ones issued now will start to mature, creating headroom for them to issue on an ongoing basis so we’d expect pretty considerable covered bond issuance from this market for the foreseeable future,” said the Australia head of DCM.
His base case is that there is enough headroom for the banks under the covered bond programme that the government would not have to reintroduce the guarantee scheme even if the global economy took another turn for the worse.
“Touch wood I think the covered bond programme makes it a much more distant prospect,” he said.