Judo belts out record margin for hybrid capital

afr.com:

In what has become a highly commoditised sector of Australia’s capital markets, a punchy ASX-listed hybrid capital raising by Judo Bank certainly has investors, bankers and traders talking.

Judo is a much-hyped challenger bank and the size of the transaction, at around $75 million, reflects that. National Australia Bank, for instance, raised more than 10 times as much in August in a $1.25 billion issue.

Judo Bank chief executive Joseph Healy. Louie Douvis

But the juicy margin Judo is prepared to pay also reflects its minnow status. The marketed margin for the new securities, which are callable after six years, is between 6 per cent and 6.5 per cent.

That is the highest-ever premium paid for hybrid capital on the ASX according to fixed income research shop BondAdviser. This, combined with a bank bill swap rate of 4.2 per cent, means buyers will be able to lock in an initial interest rate of 10.5 per cent.

This yield is compelling given the solid track record of Australian banks, the economy’s governance framework, and the fact that Judo’s common equity tier-one ratio of 16.7 per cent is double the regulatory minimum.

The fat capital buffer does beg the question as to why Judo is seeking to raise hybrid capital, particularly as the prudential regulator has hinted that in future it may prefer banks to rely on common, rather than regulatory, capital to build their buffers?

Some investors were cautious about the transaction, even though the yield was high.

One claims Judo has not extended debt through a full economic cycle, and has yet to build up enough diversification in its loan book to give the market comfort. An increase in arrears apparent in its full-year result made some holders of its debt a little uneasy.

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