Income Report / Income Report; A look at the new NAB Hybrid

By Market Matters 13 February 19

Income Report; A look at the new NAB Hybrid

Market Matters Income Report 13th February 2019

An early income report today given we were covering the new NAB hybrid, and we were advised last night the broker book build process was closing early – this morning around 10am from what I hear. As we plan to add the NAB hybrid into the Income Portfolio, it makes sense to give subscribers an opportunity to bid through their broker.

The ASX will open higher this morning – futures suggest a ~30pt rally as the US market applauded news that a second Government shutdown would likely be avoided,. Reporting season remains in focus locally, CSL, Cochlear, Computershare and Carsales headlining the action this morning.

ASX 200 Chart

This week the MM Income Portfolio added 0.52%, taking its financial year to date performance to 1.8% vs the benchmark (RBA+4%) of 3.41%. Since inception, the portfolio has added 8.37% vs the benchmark of 8.85%. This week, strong performances from Genworth (ASX: GMA) and Alumina (ASX: AWC) were partly offset by softness in National Australia Bank (ASX: NAB)

A look at the new NAB Hybrid

Earlier in the week, NAB launched a new Hybrid offer – the NABPF’s – to refinance an existing note that was on issue – the NABPA’s. The new deal  looks attractive and the MM Income Portfolio will be subscribing.

This is a tier 1 security which is the same structure as recent listings from Westpac and CBA, however this is slightly longer dated  (7.25 years) and is going to pay 4.0% over the 90 day BBSW rate of ~2.0%, which totals ~6% inclusive of franking. It’s a better rate than recent issues and attractive versus already listed securities, notwithstanding this is a slightly longer dated note.

Given they’ve launched the offer to re-deem an existing security (NABPA), there will be a  roll-over facility for holders of that note,  however this also plays into the demand side for the new note being issued by NAB. The NABPA has ~$1.5bn on issue and they say they’ll raise ~$750m in the NABPF’s, with the ability to do more or less. They’ll do more and I’d be surprised if they didn’t print ~$1.5bn to fully redeem the existing note.

The income note is out early today as the broker Book build, which is the first avenue into the deal is closing this morning. It was scheduled to close on Monday however this has been brought forward given strong levels of demand.

Looking at this note relative to existing issues highlights some value. Other comparable securities already trading are the WBCPH which has first call date in 6.6 years trading on a margin of 3.70%  and the CBAPG which is trading on 3.56% with a call date of 6.2 years.

 

It’s also worthwhile looking at where tier 1 bank hybrids as a group typically trade in terms of margin over the bank bill rate. This is essentially a function of investor demand for them, the higher the margin, the less demand and vice versa. Just like a stock that has consistent earnings – when the market is bullish they’ll pay 30x those earnings but when the market is bearish they’ll pay 20x.

There was a lot thrown  at the hybrid market last year while we also had a big increase in equity (and bond market) volatility in the December quarter, however the hybrid market remained resilient. As a general rule of thumb for Tier 1 major bank securities, a 4% margin means the security is cheap and a 3.00% means it’s expensive. The average (according to Morningstar) since 2012 is a margin of 3.60% and as at end of December, the average margin was sitting at 3.27% for tier 1 issuance.

The margin on NAB at 4.00% looks attractive, however remember it is a longer dated security. In simple terms, the longer the duration, the more variables that can impact it over time.

Details

·         Interest: It’s a floating rate with the guided range of 4.00% - 4.20%per annum above the 90 day BBSW, which currently sits at 1.99%. They will likely print at the bottom of the range so expect a grossed up yield of ~6%. As shown above, that compares favourably with other currently listed notes, and for that reason, the NAB note should be well bid. The last 6 months (for equities & bonds) have been volatile, however looking at the pricing of hybrids during that time, the most obvious listed comparisons have traded within a range of 3.40% 4.08% over bank bills.

·         Term: This is a tier 1 bank hybrid so therefore does not have a fixed maturity date for repayment while it is possible that NAB Capital Notes 3 could remain on issue indefinitely and the Face Value will not be repaid. That said the first optional call date is 17 June 2026

·         The Reinvestment Offer;  Eligible Holders (NABPA) have the opportunity to reinvest their funds into NAB Capital Notes 3 and maintain an ongoing investment in NAB.

Key Dates

Broker Book Build;  Closes this morning. If Subscribers would like to bid through my desk at Shaw and Partners, please email ([email protected]) or call (02) 92381561 this morning to register interest. You would need to set up an account at Shaw prior to settlement

Security holder offer; NAB shareholders can bid through the security holder offer, however there is likely to be a large scale  back

Commencement of trading; 21st March 2019

Please see  Prospectus for further details.

Risks; Before applying for NAB Capital Notes 3, you should consider whether NAB Capital Notes 3 is a suitable investment for you.
ASIC has published guidance which may be relevant to your consideration of whether to invest in NAB Capital Notes 3 – namely, information for retail investors who are considering investing in bank hybrid securities. This guidance can be found on ASIC’s MoneySmart website at moneysmart.gov.au.

NAB has also developed a web-based Hybrid Securities Education Guide (Guide) to help investors understand some of the typical features and risks associated with an investment in bank hybrid securities. It is available at www.nab.com.au/about-us/shareholder-centre/welcome.
NAB Capital Notes 3 are subject to risks which could affect their performance, including distribution rate risk and market price fluctuation. Information about the key risks of investing in NAB Capital Notes 3 are detailed in Section Seven of the Prospectus

Conclusion (s)

We plan to add the new NAB hybrid to the MM Income Portfolio with a 5% weighting

Have a great day!

James / Harry & the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

Disclaimer

All figures contained from sources believed to be accurate.  Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy.  Prices as at 13/02/2019

Reports and other documents published on this website and email (‘Reports’) are authored by Market Matters and the reports represent the views of Market Matters. The MarketMatters Report is based on technical analysis of companies, commodities and the market in general. Technical analysis focuses on interpreting charts and other data to determine what the market sentiment about a particular financial product is, or will be. Unlike fundamental analysis, it does not involve a detailed review of the company’s financial position.

The Reports contain general, as opposed to personal, advice. That means they are prepared for multiple distributions without consideration of your investment objectives, financial situation and needs (‘Personal Circumstances’). Accordingly, any advice given is not a recommendation that a particular course of action is suitable for you and the advice is therefore not to be acted on as investment advice. You must assess whether or not any advice is appropriate for your Personal Circumstances before making any investment decisions. You can either make this assessment yourself, or if you require a personal recommendation, you can seek the assistance of a financial advisor.  Market Matters or its author(s) accepts no responsibility for any losses or damages resulting from decisions made from or because of information within this publication. Investing and trading in financial products are always risky, so you should do your own research before buying or selling a financial product.

The Reports are published by Market Matters in good faith based on the facts known to it at the time of their preparation and do not purport to contain all relevant information with respect to the financial products to which they relate. Although the Reports are based on information obtained from sources believed to be reliable, Market Matters does not make any representation or warranty that they are accurate, complete or up to date and Market Matters accepts no obligation to correct or update the information or opinions in the Reports. Market Matters may publish content sourced from external content providers. 

If you rely on a Report, you do so at your own risk. Past performance is not an indication of future performance. Any projections are estimates only and may not be realised in the future. Except to the extent that liability under any law cannot be excluded, Market Matters disclaims liability for all loss or damage arising as a result of any opinion, advice, recommendation, representation or information expressly or impliedly published in or in relation to this report notwithstanding any error or omission including negligence.