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.


·         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

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
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


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.


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