National Australia Bank’s income securities were among the first of the floating rate hybrids to be issued in the late 1990s. Adelaide Bank, Macquarie Bank and a few others, including NAB, issued securities with $100 face values and floating-rate coupons. Prior to the issue of these securities which became known as income securities, hybrids in the 1990s had been issued as fixed-rate converting preference shares. Before converting preference shares, hybrids had been mostly, if not entirely, limited to convertible bonds which have existed since the 18th century.
Over the years, some investors have been buying NAB’s income securities on the premise they would be redeemed at $100 “soon”. The problem with this idea was the NAB securities traded at a large discount to face value and they had done so for the last decade. Why would NAB redeem them at $100 when they could do what Bendigo Bank did with its income securities? That is, announce an offer to buy them back at a premium to the market value but at a (sizable) discount to face value.
In December 2010, Bendigo Bank made an offer to repurchase its floating rate subordinated notes (ASX code: BENHB, issued by Adelaide Bank in 1998) at $80 or a 13% premium to the price when the offer was made in November 2010. In that offer, 54% of the outstanding notes were repurchased, leaving around 400,000 notes listed. Six months later, another offer was made at $80 or at an 18% premium to the price. This second offer left just over 210,000 notes on issue and they are still listed on the ASX, currently trading at around $76.50.
Bendigo Bank gave no hint of its buy-back plans, so it would be foolish to think NAB would flag such a plan, either. However, there may be a reason to think a buy-back may be forthcoming.
Christopher Joye, economist, fund manager and ex-RBA board member recently wrote how he thinks some interesting times are coming for NAB’s Income Securities (ASX code: NABHA). His team calculated the appropriate trading margin above BBSW for the NAB securities is currently around 360bps. However, as they lose progressively their status as Additional Tier 1 (AT1) securities and become more and more like debt securities, he thinks the appropriate trading margin should drop, and by 2022 the appropriate margin should be around 180bps.