ASB seeking to borrow up to NZ$400m through 'issue of complex financial products that are not suitable for many investors'

ASB seeking to borrow up to NZ$400m through 'issue of complex financial products that are not suitable for many investors'

ASB wants to borrow up to NZ$400 million through an issue of complex financial products that are not suitable for many investors.

The bank has announced an offer of subordinated, unsecured convertible notes that will carry a BBB+ credit rating that's four notches below ASB's own AA- rating. See credit ratings explained here.

The offer, open to retail and institutional investors, is seeking to raise $250 million, plus oversubscriptions of up to another $150 million. The notes will have a term of "approximately 10 years." 

The indicative margin range on the notes is 2.70% to 2.85% per annum. The interest rate paid to investors, until the call option date of December 15, 2021, will be the sum of the margin plus the five year swap rate on the November 2 bookbuild date. Based on Wednesday's 2.34% five-year swap rate, that would see investors receiving between 5.04% and 5.19%. ASB's carded five year term deposit rate is currently 3.55%.

The Offer will open on November 3 and is expected to close on November 25. The notes may be repaid earlier than their approximately 10 year term "in certain circumstances." They will be converted into ordinary shares in ASB's parent Commonwealth Bank of Australia or written off if a non-viability trigger event occurs. A non-viability trigger event can occur if, among other things, ASB or CBA experience severe financial difficulty. CBA does not guarantee ASB or the ASB notes.

"This investment is riskier than a bank deposit. ASB Notes 2 are complex financial products that are not suitable for many investors. If you do not fully understand how they work or the risks associated with them, you should not invest in them. You can seek advice from a financial adviser to help you make an investment decision," ASB says.

"These ASB Notes 2 carry similar risks to shares but do not have the same opportunity for growth as shares. If ASB or CBA experiences financial difficulty, ASB Notes 2 can be converted into CBA Ordinary Shares (which may be worth less than your investment) or even written off completely. This means you could lose all of your investment."

These are a type of bank security similar to the controversial CoCo securities issued by banks in Europe. A range of other New Zealand banks have also issued these securities including ANZ, BNZ, The Co-operative Bank, Kiwibank and Westpac. (See more on such securities here).

"The Offer raises Tier 2 Capital to meet ASB’s and CBA’s regulatory capital requirements. Interest is scheduled to be paid quarterly in arrears and is subject to ASB satisfying the solvency condition. Any interest that is not paid because ASB has not satisfied the solvency condition will also earn interest," ASB says.

On and from the December 15, 2021 call option date the notes will pay investors interest that's the sum of the margin and the five year swap rate on the call option date.

ASB's product disclosure statement for the offer is here. The notes will be quoted on the NZX Debt Market.

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Only one question - why would you?

Considerably better margin than some of the rubbish that has been flogged to punters lately

Some companies seem to be taking the opportunity to get cheap finance (via bonds) as yields are so low - I don't think the yield reflects the true risk.

murray86,

Precisely. Sadly however, I suspect that many retail investors will snap it up-major bank,high yield,what could possibly go wrong?

Is it a coincidence that banks are offering these risky securities at a time when banks worldwide seem to be at their most vulnerable?

"This investment is riskier than a bank deposit...."

Isn't it about time this risk was quantified, publicly disclosed, and compensating returns declared mandatory by the banks' regulator?

To begin with, a bank deposit is "significantly" risky. A depositor has virtually no protection and can lose their deposit in the case of a major banking crisis or bank failure, so the debate is largely about varying shades of rubbish. The reality is that banks are getting desperate for deposits and the pain has barely begun. Why save money in the bank when the returns are so low and the risk of deposit loss is anything but negligible? What's worse is that when interest rates do turn up then taxes will go up as well as mortgage repayments and disposable income (read savings) will turn down hard. Then the liquidity crunch will begin...