In recent years, when one of a company’s existing hybrid securities approaches its first call date (or first optional resale date in this case), speculation turns to the likelihood of a replacement hybrid security. There is a sound basis for this speculation; most issuers of ASX-listed hybrids have replaced the hybrids which have been called. Now National Australia Bank is replacing its Convertible Preference Shares (ASX code: NABPA) which were first issued in March 2013.
NAB plans to raise $750 million via its issue of Capital Notes 3 (ASX code: NABPF), with the ability to raise more or less than this amount. The new securities will be perpetual, convertible, subordinated, unsecured notes and the proceeds will be used for “general corporate purposes”. General corporate purposes could be reasonably interpreted as the partial funding of the redemption of the NABPAs.
However, there are just over $1.5 billion worth of NABPAs on issue (in terms of their face value) and NAB intends to “resell” them in late March, effectively redeeming them. One could expect NAB to issue more than $750 million of the new hybrids unless NAB decides it already has capital in excess of its medium-term requirements.
The new notes have some features in common with equities and some features in common with debt securities. Distributions are at the discretion of directors but they are calculated according to a set formula with reference to the $100 face value of the securities. The notes will qualify as Additional Tier 1 (AT1) capital under the Basel III bank regulatory framework, which means they have the now-standard “trigger event” clauses which may lead to early conversion into ordinary shares or a write-off of the capital notes should APRA require it. In the event NAB were wound up (and APRA had not already forced a write-off), its hybrids would rank above ordinary shares but below ordinary debt securities and other liabilities.