Judo looks to get ahead of APRA with first-ever hybrid deal
Judo Bank revealed its plans to raise capital with one of the financial markets’ more arcane, and recently controversial, instruments – additional tier 1 hybrid bonds – on Tuesday.
If they can get the deal away, this would represent the business lending specialist’s first-ever AT1 hybrid and signals a growing-up milestone of sorts, putting it in league with the more established banks on funding.
A cross between equity and a bond, hybrids are used by the bank to top up capital holdings.
Judo Bank chief executive Joseph Healy. Justin McManus
Sources who spoke to Street Talk said the raise was not so much about raising capital but showing the market Judo can get an AT1 in the market. It also shakes up the bank’s funding stack, giving it access to a more flexible and efficient way of raising capital than equity.
However, there’s another factor at play here. The issuance comes as the banking regulator APRA is becoming increasingly tetchy about hybrids.
Hybrid bonds pay interest to holders and are typically seen as a safe bet by retail investors. However, in a crisis, banks can exchange these bonds for equity, or regulators wipe them out entirely if the situation is dire enough, as was the case in UBS’s $4.5 billion shotgun marriage with Credit Suisse.
The possible contagion effect of such an event in Australia – 53 per cent of AT1s are held by small investors – set off the alarms at APRA, which is now reviewing possible changes to the hybrid system. Submissions are due by November 15.
Sources reckon Judo wants to get ahead of anything that would clamp down on demand for hybrids. Further, it is likely any changes APRA makes to the structure of the product would be grandfathered away, so Judo can keep the product as is as long
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