Tuesday 31 January 2017 by FIIG Securities chinesenewyear Trade opportunities

New DirectBond - NAB AUD subordinated Tier 2


Subordinated bank bonds have been a favoured investment grade trade over the last six months or so. Many have similar features – floating rate with 10 year, non call five structures. However, the latest NAB subordinated bond is different, so it is worth highlighting 

Many subordinated bonds are floating rate with 10 year, non call five structures. The latest NAB subordinated bond is different, so worth highlighting. 

Key features:

  • Importantly, the bond is fixed rate, a rarity considering practically all recent subordinated debt issues (T2 and hybrids) have been floating rate
  • Interest is fixed at 5% per annum until the first call date, then reset at five year AUD semi quarterly mid swap rate plus reoffer spread of 2.20%
  • The bond has a 15 year non call 10 structure. So, first call is in ten years on 19 January 2027 and then each payment date thereafter. The final, legal maturity is in 15 years on 19 January 2032
  •  The issue credit rating is A3 and BBB+ by Moody’s and S&P, respectively

The bond is only available to wholesale investors, with a minimum initial investment of AUD200,000 and in denominations of AUD2,000 thereafter.

Yield to worst is 3.71% per annum and the same as yield to maturity. Yield to call, which is also the expected maturity date, on 19 January 2027 is higher at 4.78% per annum. If you are of the view that interest rates will be lower for longer – the very low CPI print supports ongoing low interest rates, then this bond is worth considering.

To give you an idea of the relative value of the new NAB subordinated bonds, below is a relative value graph showing a comparison of yield to call between five issuers. The NAB bond is a clear outlier, but will be beyond the reach of many investors with the $200,000 minimum investment.

The other four subordinated bonds from ANZ, Bendigo and Adelaide Bank, Suncorp subsidiary AAI and ME Bank are all floating rate and can be acquired in much smaller $10,000 minimum parcels. 

Source: FIIG Securities

For more information please see the NAB 2032 bond factsheet.External link - opens in a new window

Note: There is a wide range of subordinated bonds available and the above a small sample. Please contact your local dealer for more information.

Prices are accurate as at 31 January 2017 but subject to change.