Major Australian banks head for Europe

Reuters

* Lenders increase issuance in euros and sterling

* Favourable basis swap lures issuers to Europe

* Issuance in dollars drops as market becomes lesscompetitive

By John Weavers

Nov 14 (IFR) - Australia's major banks are following in thefootsteps of corporate Australia and are heading to Europe forfunding.

The key driver has been a favourable move in cross-currencybasis swaps that has made Europe as attractive a destination forissuing bonds as the traditionally dominant US dollar market.

Five-year euro/US dollar basis swap rates have contracted50bp since June 2012, from 65bp to 15bp, amid growing investorconfidence in the eurozone economy and a dearth of euro supply.

The move in swap rates includes a near 15bp tightening since early September 2013 as October's US government shutdownloomed. The Australian dollar/US dollar swap meanwhile hasremained largely unchanged at about 25bp throughout 2013.

A lower basis swap shaves valuable percentage points off thefinal cost of funding for companies that borrow in euros andswap the proceeds into Australian dollars.

Australian banks go abroad for funding because the domesticbond market is not deep enough to meet all of their wholesalefunding needs. A more diverse investor base also offersprotection in the event issuers are frozen out of markets as theAussie majors were during the global financial crisis before theCommonwealth Government stepped in and provided guarantees.

The banks were heavy issuers in Europe last year, but mainlyin the continent's deep covered bond market. The latest run ofofferings, however, shows that Europe's senior unsecured markethas become an increasingly viable option.

A spate of euro and sterling deals this fall has added upto one quarter of all senior unsecured funding for Australia'smajor banks this year. Only 10% of senior unsecured funding forthe banks was in euros and sterling in 2012.

The euro's share has climbed to 16% from 5% while 10% hasbeen raised in sterling this year versus 4% in 2012.

"There is pent-up Euro demand for Australian major seniorbank paper given the comparable lack of issuance in recentyears," said Paul White, global head of syndicate at ANZ.

Also, the euro/bills basis has contracted "substantiallyfrom the relatively high historical levels seen in 2012, makingfunding levels more attractive," White said.

In contrast, the four biggest Australian banks have cuttheir reliance on the US dollar market from 40% of seniorunsecured funding in 2012 to 35% this year. Samurai issuance hasdropped from 10% last year to nothing this year untilCommonwealth Bank of Australia offered a JPY100bn (U$1.01bn)Samurai bond with fixed and floating three-year tranches onNovember 8.

National Australia Bank, rated Aa2/AA-/AA-(Moody's/S&P/Fitch), started the ball rolling on the latestspree of European borrowings on November 5, when it raised £425m(US$681.7m) from its first senior unsecured sterling issue ofthe year. The new three-year floating-rate note priced atthree-month Libor plus 48bp.

NAB swapped the notes back to a spread in the high 60s overlocal bank bills (BBSW). This is only about 10bp wide of where anew Aussie major three-year floater would price in the domesticmarket, which has the advantage of an elevated bid from localbank balance sheets.

The following day, NAB issued a 1bn (US$1.35bn) 2.0%seven-year bond at mid swaps plus 58bp, believed to be thethinnest spread for a seven-year euro-denominated bond for anybank since 2008.

The seven-year euro print also allowed NAB to diversify itsmaturity schedules. Tenors of three to five years dominate theAustralian market, and it is unusual to see anything printedbetween five and 10 years in US dollars.

NAB and ANZ recently priced Aussie dollar five-yearofferings at 88bp over bank bills, suggesting that a newseven-year bond would probably price at about 110bp over BBSW,according to Sydney syndication desks.

The new NAB euro seven-year bond was swapped back to about125bp over BBSW, 15bp or so wide of a theoretical Aussie dollarseven-year note, but about 10bp inside the interpolated USdollar curve.

On the same day, Westpac Banking Corp became the last ofAustralia's four major banks to issue a three-year euro floaterthis year with a 800m transaction.

The November 10 2016 offering was priced to yield 33bp overthree-month Euribor, which was flat or 1bp inside the 1bn ANZOctober 2016s and the 850bn CBA October 2016s.

Swapping back to Australian dollars would have resulted in aspread of about 65bp over BBSW, which is just 6bp to 8bp morethan where a major bank can expect to issue a local currencythree-year floater. It also priced flat to just back of thebanks' current outstanding US dollar curve, according to thelead managers.

Such competitive pricings suggest that Europe will become anincreasingly frequent destination for Australia's highlyregarded major banks

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