NAB Announces Debt Repurchase Plan

Post by NeilMc on July 3, 2009 · Under Australian Economy, Capital Markets, banking, investments · Comment

Australian banking major, National Australia Bank (NAB) is taking advantage of the drop in prices of its own bonds as a result of the global credit crisis, and using the opportunity to repurchase US$250 million of its own long term debt at two thirds of its face value.

The measure is designed to shore up finances and improve its tier 1 capital position. The lender plans on buying back US$10,000 blocks of its own debt at a cost of US$6,250 for each block.

NAB’s decision follows moves by other Australian financial institutions such as domestic investment bank Macquarie to repurchase previously higher priced debt at reduced prices.

Some markets for debt products have become extremely illiquid, with buyers remaining scarce leaving investors unable to exit their positions, causing the value of the debt to fall drastically.

The paper NAB plans on repurchasing is perpetual, with no maturity date, and was issued just before the market crash of 1987.

The debt which is listed on the London stock exchange has seen little trading over the last 18 months as the marker for such securities has all but ceased to exist.

NAB has been paying interest on the debt for almost a quarter century, and has used the opportunity of the nearly frozen market for such instruments to repurchase the debt from remaining investors at a significant discount.

NAB’s offer is thought to be at the same price that the debt last traded at.

Investment bank UBS is handling the buyback offer, which closes on July 22nd, and an NAB spokesperson said that the lender had no defined target for how much debt it would end up repurchasing.

NAB’s move exemplifies one of the few benefits of the freezing over of credit markets for financial institutions or indeed any issuers of paper which has become illiquid. Issuers have been able to profit from the previous issuance of longer term debt, though by the same token, the cost of issuing newer shorter maturity debt has also risen.

There are however indications that primary market conditions continue to ease, with the cost of issuing new debt having fallen recently. Regional lender Bank of Queensland issued $500 million in new debt paying 65 basis points above benchmark swap rates. BoQ’s last issue in January was cost the issuer half a percent more to tap the markets than yesterdays bond sale.

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