SMSFundamentals: Yield On Offer From NAB Note Issue

This story features NATIONAL AUSTRALIA BANK LIMITED. For more info SHARE ANALYSIS: NAB

SMSFundamentals is an ongoing feature series dedicated to providing SMSFs (smurfs) with valuable news, investment ideas and services, in line with SMSF requirements and obligations.

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By Greg Peel

Fixed interest investment specialist FIIG Securities offers valuation and recommendation relating to Australian listed fixed interest and hybrid securities. In the case of National Australia Bank's ((NAB)) new subordinated note issue, FIIG is acting as broker which prevents the firm from offering a rating. However the simple fact that FIIG has chosen to act as broker provides a hint.

Here are the dry bones of the issue:

NAB yesterday launched a $500m subordinated note issue which will be listed on the ASX. Interested investors must register their interest by 5pm tomorrow, Wednesday May 16.

The note will pay an interest rate of 2.75-2.85% over the 90-day bank bill swap rate (BBSW), making it a floating rate at a fixed premium. If priced today that would equate to 6.53-6.63% for the first quarter. The rate will be reset quarterly.

The issue is proposed at $500m but can be increased at NAB's discretion. As subordinated debt, the notes will rank below term deposits and senior unsecured debt but above equity and hybrid issues. Maturity is ten years but the notes are expected to be called after five years with APRA approval. In the unlikely event that they are not called after five years, they can be called quarterly thereafter.

FIIG believes the premium offered over BBSW is appropriate compensation given the risks involved as a lender to NAB and the lower ranking compared to term deposits. The notes are of the same structure as the recent equivalent ANZ issue ((ANZHA)) but provide a slightly superior return on recent pricing. The notes are also of a superior risk/reward value than the bank's more “equity like” hybrid issues.

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