The end of NAB’s income securities?

31 July 2017

NAB income securities (ASX code: NABHA) were issued in the late 1990s when floating rate securities were just being introduced. They were not well understood and some time was needed before the market a settled on an accepted band for its spread over BBSW.

Since then people have been speculating about the likely redemption of NAB’s income securities. The more fanciful sales spiel one will hear typically included the suggestion these securities would be redeemed at their face value of $100 and so buying them at $65 or $75 would provide the investor with a tasty capital gain. While such an outcome is not impossible, it has not happened so far and if NAB was inclined to redeem them, it would have done so already.

Damien Williamson from Bell Potter thinks there may finally be an incentive for NAB to now do so. As various income securities issued before December 2009 gradually lose their Additional Tier 1 status under Basel III rules over time until January 2022, their attraction as an inexpensive source of perpetual capital (BBSW +125bps) will fade. He speculated if trading margins were to drop down low enough, there would be an incentive for a bank to refinance these securities by issuing a new AT1 Basel III hybrid.

“It would appear to become increasingly attractive to refinance NABHA if NAB had the ability to issue a new Additional Tier 1 hybrid at a margin of 2.80% (grossed up for franking), the same rate as where CBAPD (PERLS 7) was priced in August 2014, particularly as NABHA’s Additional Tier 1 weighting steps down towards zero in January 2022.”

Bendigo & Adelaide Bank and Suncorp-Metway Bank each made offers to repurchase income securities from holders at prices under face value at various times between 2010 and 2014. While Williamson thinks there is a good chance NAB would make a bid at a modest premium to the prevailing price in the same way, he has not given much weight to a possible redemption at $100.