ANZ US$1bn blow-out takes Aussie AT1 offshore

Australia & New Zealand Banking Group (ANZ) launched the first Basel III-compliant Additional Tier 1 issue into international markets from Australia on 7 June with a US$1bn (A$1.36bn, Eu881m) perpetual non-call 10 deal.

The transaction is the first hybrid Tier 1 security from Australia since 2009, with only a break-through in the tax treatment of the new international issue making the re-entry possible. Hybrid Tier 1 issuance — usually structured in the form of mandatory convertible securities domestically — is treated as equity for tax purposes in Australia, with investors receiving part of their coupons in the form of tax credits.

According to John Needham, head of capital and structured funding, group treasury, at ANZ, provisions in Australia’s tax legislation allow banks to pay coupons gross if issuing via foreign branches into international markets, but only through recent work with the Australian Tax Office has the administration of the provisions been updated to allow issuers to do this in practice, paving the way for the first international Basel III-compliant Australian AT1 issue.

“If you look back 10 years, ANZ had Tier 1 issues denominated in US dollars, sterling, euros and Aussie dollars,” said Needham. “There were then a range of market and regulatory limitations that resulted in all of our AT1 being issued in Australian dollars and largely to Australian retail investors.

“So diversification of that investor base was our key objective, both in terms of investor type, country and currency. We’ve got some US dollar-denominated risk weighted assets so having US dollar AT1s is very helpful in hedging that.”

He said that the US dollar market’s ability to accommodate longer tenors was also key.

“The first call date is 10 years,” said Needham, “while the recent deals in the Australian market have had call dates in the five to six year period only. The way we view our funding profile is that we aim to complete senior debt at five years and then lengthen out our capital profile to 10 years.”

With the deal being the first international AT1 from the country, investors were focused on the way in which risks such as loss absorption and coupon deferral are treated in Australian structures, said Needham.

“And ANZ’s consistent profitability and its earnings generation, which is really the key to understanding the consistency of coupons,” he added.

ANZ’s issue has an equity conversion trigger at 5.125% of Common Equity Tier 1 capital or at PONV, subject to a conversion floor of 20% of the share price at issue. ANZ’s structure also includes a dividend stopper, which is considered attractive for AT1 investors but not an option for EU issuers under CRD IV. The issuer could also avoid the uncertainty around the interaction between Pillar 2 and MDA that caused volatility in EU AT1 issuance.

Leads ANZ, Citi, Deutsche, Goldman Sachs and Morgan Stanley went out with initial price thoughts for the Baa1/BBB-/BBB perpetual non-call 10 issue of the 7.125% area and after attracting US$18bn of orders priced the US$1bn deal at 6.75%. Market participants described the deal as a blow-out and noted that the level achieved compared favourably for ANZ to international issuers.

Needham said that the US dollar transaction, on an after-swap basis, came in line with ANZ’s Aussie dollar curve.

“There was such strong demand,” he added. “It reflects the level of interest in exposure to the Australian banking system and is a validation by global capital markets of the structure.”

Needham acknowledged that expectations of limited supply from ANZ and other Australian issuers played into both the level of oversubscription and investors’ interest in the paper. ANZ is targeting an AT1 level of around 2% of RWA, which is equivalent to around A$8bn.

“We have a mandatory convertible that comes up to its call date in December, of A$2bn,” said he said. “So this transaction was about partially refinancing that security to keep us at 2% of RWAs.”

“Our AT1 requirements are pretty much around refinancing our existing portfolio as it comes around to our relevant call dates, with a little bit of asset growth. The net result was that we were only ever going to go for US$1bn, and the market understood that.”

Now that ANZ has reopened the international market, the way is clear for its peers to enter the market — albeit for similarly limited needs given the limited amount of new AT1 that the Australian banking system requires.

“For all the reasons that we executed a transaction, you would think that would also be of some attraction to the other banks here,” said Needham.