ANZ moves towards dual targets with SDG T2

Australia & New Zealand Banking Group sold the first SDG-linked Tier 2 bond in euros on 15 November in a step towards achieving ALAC requirements and a A$50bn sustainability target. Simon Reid, director, group funding, ANZ group treasury, discussed the transaction and the bank’s broader Tier 2 and sustainability strategies with Bank+Insurance Hybrid Capital.

Bank+Insurance Hybrid Capital: What were your increased issuance needs in light of the APRA announcement and how have you planned to meet these?

Simon Reid, ANZ: The TLAC requirement entails an additional A$12bn (€7.4bn, US$8.1bn) of Tier 2 for ANZ, implying a required portfolio increase from A$8.5bn at 30 September 2019 to A$21bn by January 2024. That’s equivalent to A$4bn per year, which we expect to achieve in a broadly linear fashion, although we’ll have a bias towards being marginally ahead of that run rate. Clearly there is a significant cost of carry, but this is a higher risk product and we are aware that there will be times throughout the build-up of this capital that Tier 2 markets won’t be available to us.

BIHC: You moved quite quickly, on 19 July, with the first domestic Tier 2 after APRA’s announcement. Why did you decide to kick off your issuance thus?

Reid, ANZ: We think the domestic market is going to play a really important role in providing us with this capital and that its capacity for subordinated debt investment is likely to increase, both because of our increased requirement and because of the dynamics that are developing in Australia, which most of the rest of the world is very familiar with, particularly the low rate environment.

The 10 non-call five tenor/call combination made sense for us since we had room in that maturity bucket — which essentially you either use then or lose the ability to do so — and particularly at that point in time 10NC5 was the best available Tier 2 trade in Australian dollars. We also had some really constructive feedback from a number of Australian investors that gave us a great deal of confidence to approach such a trade. In spite of the Australian banks’ large Tier 2 issuance requirements, and the fact that meant we would be regular issuers over a fairly long period of time, investors came to us and said that they wanted to buy the paper now, and that was really helpful.

BIHC: Were the pricing and volume in line with your expectations?

Reid, ANZ: The transaction overall surprised us to the upside, but the size of the order book in particular and the size that we were able to raise really surprised us. We discussed at great length the appropriate size for the deal — obviously it was significantly larger than the previous largest deal in the Australian market, and we knew that we had to be really responsible with the first trade since the APRA announcement. But at A$3.6bn the order book was of such size and quality that we felt comfortable doing that size, and on balance we felt we needed to do A$1.75bn in order to have sufficient bonds to sell to investors who really wanted them.

BIHC: On 15 November, you issued a €1bn Tier 2 SDG bond, when any ESG-related subordinated issuance has been rare. What was the thinking behind going ahead with such a transaction?

Reid, ANZ: The SDGs generally are very important to ANZ and we’ve recently announced our commitment to a new A$50bn 2025 sustainability target aligned to the SDGs, which replaces a A$15bn low carbon target that we have met and exceeded. It’s significant that we’ve gone from a low carbon target to a broader SDG target.

So the SDG bond framework is very consistent with the broader goals of the bank and we were the first bank to issue an SDG bond in euros, in February 2018. This was really well received and we were in a position where we wanted to do another SDG-linked bond. We feel that Europe is the centre of excellence for ESG matters — for the time being we still receive far better engagement when discussing ESG in general with European investors than we do in other markets, notably the US, which is our other most significant offshore debt capital market.

We obviously have a significantly increased Tier 2 requirement, which reduces our senior and covered bond requirement basically one-for-one. In addition, balance sheet dynamics including a modestly reduced requirement for funding and a preference for shorter dated, three to five year senior and/or covered funding means that opportunities to issue in euros in senior or covered format are likely to be challenging in the near term, particularly due to the low rate environment.

For these reasons, it made sense for us to proceed with a Tier 2 SDG-linked bond. And during the roadshow our discussions with investors regarding the SDG framework and ANZ’s broader approach to sustainability were largely really positive and encouraging.

BIHC: Why did you choose the 10 non-call five maturity for the euro, like your domestic issue?

Reid, ANZ: We will broadly have a preference for shorter-dated callable subordinated debt, due to the lower cost and the efficiency of the call feature, avoiding the amortisation of our capital. We were, however, open to other tenors, in particular a 10 year bullet. We recognised the importance of this trade being a success and we weren’t going to try to sell bonds to investors that they didn’t want to buy, so there was an active discussion through our roadshow with investors as to their preference between 10 non-call five and a 10 year bullet. To be honest, going into those meetings I thought we would more consistently hear a preference for a 10 year bullet. However, while it was broadly balanced, I would say there was a general preference for a 10 non-call five. Obviously we didn’t meet with all investors, and some investors, particularly insurance companies, have a clear preference for longer dated bullet debt. But generally the feedback for a 10NC5 was favourable, and the transaction we ultimately executed demonstrated that.

BIHC: To what extent do you feel the SDG element affected the execution and outcome, whether that be in demand, pricing or any other aspect?

Reid, ANZ: It’s difficult to say. This was obviously a significant transaction for a number of reasons: there is the SDG angle, but it was also the first Australian bank Tier 2 issue in euros since the APRA announcement, and it was our first euro Tier 2 deal for 10 years. So while we were really pleased with the trade and most particularly the investor response, trying to determine what impact the SDG framework had on demand is hard to say — it certainly helped, but on our senior unsecured SDG trade its influence on the size and composition of the book was a little clearer.

BIHC: You mentioned the broad A$4bn per year Tier 2 issuance target earlier. Where do you currently stand and how do you see issuance developing?

Reid, ANZ: We’ve raised about A$3.3bn so far, and are targeting a further A$2.5bn-equivalent of Tier 2 debt by next September.

I’d consider what we’ve done as a really positive start. There has been good support for Australian bank Tier 2 since the APRA announcement, despite what you might call a supply overhang. I believe the volume of the requirement has in some markets — particularly in euros — helped, because it means that Australian major banks as a group will be regular issuers of subordinated debt and that makes us more relevant to investors. We are very fortunate that this announcement has taken place at a time when there is historically high demand for subordinated debt and riskier higher-yielding assets more generally. We are very pleased with the initial response to Australian bank Tier 2 across US dollars, Australian dollars and euros, and we think there’s really good opportunities to issue in a range of other currencies, including Japanese yen, Great British pounds and others. But we are also aware that this will not be the case consistently over the four year period in which we need to build up this Tier 2 capital, so we do need to be proactive and try to develop as broad an investor base as possible, and that is one of the key reasons that we chose to issue in euros.

BIHC: How do you envisage your SDG issuance going forward?

Reid, ANZ: It is something that we would like to continue to issue, but the frequency will be dependent on both balance sheet dynamics and the activities that constitute the A$50bn sustainability target. That amount includes lending but also facilitation of sustainable financing, for example, taking our customers to the debt capital markets to raise sustainable finance. So it’s hard to say how frequently we will be an issuer in SDG or when our next trade will be, but we do expect to be back in this format.