Puttables are the prenuptial agreement of the medium term note world. They offer investors the opportunity to hook up with issuers while at the same time giving them the option of pulling the plug if the romance starts to die.
That makes sense on those occasions when caution is the watchword — for troubled banks, say, or debut issuers. In those situations, and in these markets, it's only sensible to line up an escape route.
But not only then, it would seem. Last week saw Rabobank — which many investors reckon is the safest bank credit of all — opting for puttable format for its A$325m five year through HSBC. Coupon for the first year is quarterly BBSW plus 62bp, stepping up to plus 150bp in the second year and plus 200bp thereafter.
Given Rabo's top-notch image, the choice of puttable format looked odd. But on closer investigation the coupling is not so strange. Not only was it the bank’s first ever Australian dollar puttable and its first puttable in any currency this year, but it also had a structural quirk that marked it out from its peers.
Although it is puttable quarterly — which is typical for this type of structure — it has a notice period of one year. That means Rabo has a year to play with the funds and look for new sources of cash before the investor has to be paid back.
Aside from the cheaper pricing that Rabo gains from using the puttable format and the extra safety provided to those investors that are wary about buying longer term bank debt — both of which would be advantages with a standard puttable — the unusually long notice period gives Rabo extra control over its maturity profile. The risk that investors may exercise their put option en masse remains, but the 12 month notice period gives the issuer some breathing space.
Rabobank’s note was also the first time the Australian market had seen a puttable with a 12 month notice period, according to HSBC. In these troubled times for bank funding, anything that can open up new sources of cash should be welcomed by issuers.
It's worth noting also that the notice period was Rabo’s preference. It was a similar story with UAE lender Mashreq Bank when it sold only its second ever MTN in late April. Its first, earlier in the year, had a quarterly put schedule. For its second, the issuer was able to demand that puts be annual.
If Rabo is able to see the benefits of a tweaked puttable, other strong credits must surely look to the format as a route to cheap — and not necessarily short term — funding.