No, NAB did not bail-in NABPC hybrid holders into equity...

Christopher Joye

Coolabah Capital

There was an enormous amount of completely erroneous reporting, and resultant confusion, on NAB's repayment of the $1.34 billion owing under one of its hybrids yesterday (NABPC), which sparked the biggest fall in ASX hybrids in recorded history. 

This is quite ridiculous because NAB did exactly the same thing last year with its NABPA hybrid, as Westpac and others have done in the past. No owners of the NABPC hybrids were converted to equity: they were all paid the $100 per security owed, or $1.34 billion in total. 

NAB did however use the buy-back process as a way to raise $750 million of new ordinary equity from an institutional investor (as it did with NABPA in February 2019), which materially boosts its common equity tier one capital ratio and increases the buffer protecting hybrids. It is only positive for hybrid investors. 

Let's clarify facts:

  • On 17 February 2020 NAB announced that it was calling its hybrid NAB Capital Notes security (ASX: NABPC) through a mandatory buy-back via a third-party, which was UBS, for the full $100 face value of the securities. This was completed on 23 March (ie, yesterday). What that means is that yesterday all NABPC holders were paid the $1.34 billion they were owed. 
  • This buy-back approach, known as an optional re-sale under the hybrid's PDS, has been used before by NAB (eg, last year) and other banks, such as Westpac, when repaying their hybrid securities.
  • The repayment of the $1.34 billion to holders of NABPC on its official "call date" also came with APRA's approval, which is standard.
  • As NAB announced on 13 February 2020, following the re-sale of the NABPC securities to the purchaser, UBS, there would be a partial conversion of $750 million worth of the hybrids into new equity that would be on-sold to new institutional investor(s).  
  • In 2019, NAB did exactly the same thing with its NABPA hybrid, which as you can see from this ASX release, was bought-back by UBS (again) and then converted to raise exactly the same amount of new equity (ie, $750 million). 
  • So with NABPA, as with NABPC, hybrid holders were fully repaid the $1.5 billion they were owed, and then NAB used the option of a resale of the hybrid to UBS to raise $750 million of ordinary shares via a placement to institutional investors.
  • In summary, the major banks use their ability to buy-back hybrids from ASX investors and then the option of selling these securities to a third-party investor that wants to hold ordinary shares, rather than higher-ranking hybrids, as a quick way to raise equity.
  • This extra equity directly protects hybrid holders from being automatically converted into ordinary shares if a bank's common equity tier one capital ratio falls from current levels around 11% to the conversion trigger at 5.125%.

While it might seem a bit confusing, it is not in any way negative for any ASX hybrid investors, because the process of boosting NAB's common equity tier one capital ratio directly reduces default risk on major bank hybrids. I think NAB's media releases are somewhat confusing on this front, and they issued a statement last night that clarifying that all NABPC hybrid holders were repaid their $100 per security, as expected. 

Disclaimer: This information has been prepared by Smarter Money Investments Pty Ltd. It is general information only and is not intended to provide you with financial advice. You should not rely on any information herein in making any investment decisions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Past performance is not an indicator of nor assures any future returns or risks. Smarter Money Investments Pty Limited (ACN 153 555 867) is authorised representative #000414337 of Coolabah Capital Institutional Investments Pty Ltd, which holds Australian Financial Services Licence No. 482238 and authorised representative #001277030 of EQT Responsible Entity Services Ltd that holds Australian Financial Services Licence No. 223271.

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Christopher Joye
Portfolio Manager & Chief Investment Officer
Coolabah Capital

Chris co-founded Coolabah in 2011, which today runs $7 billion with a team of 33 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...

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