Fashionable Subordinated Debt With Circa 7% Yields

Fashionable Subordinated Debt With Circa 7% Yields

Investment grade, Australian subordinated debt is highly sought after at the moment in the over-the-counter (OTC) bond market. With yields approaching 7% p.a. it’s seen as attractive and demand is outstripping supply.

A key theme when investing in bonds is to think about the ‘survivability’ of the institution you are investing in. Is the company likely to still be around when the bond matures? For many big companies, this is an easy assessment. So intuitively, taking on more risk in a company you expect to survive, by moving down the capital structure, makes sense.

Also read: A Closer Look At Subordinated Debt

Below, we compare the six most recent sub debt issues.

IAG (15.1NC5.1)
BEN (10NC5)
QBE (15NC5)
CBA (10NC5)
SUN (10.75NC5.75)
Pepper Money (4NC2)
Margin over 3 month BBSW +250bp +260bp +255bp +205bp +235bp +675bp
Issue Yield 6.85% 6.93% 6.45%
Credit Rating  BBB BBB- BBB- BBB+ A- Not Rated
1st Optional Call Date Dec-28 Nov-28 Oct-28 Oct-28 Jun-29 Sep-25
Final maturity Dec-38 Nov-33 Oct-38 Oct-33 Jun-34 Sep-27
Issue value( $m) 400 300 330 700 600 40
Pricing date 1-Nov-23 26-Oct-23 19-Oct-23 17-Oct-23 20-Sep-23 8-Sep-23

Source: KangaNews

Many of the above issues, were oversubscribed, meaning institutional bidders bid for much greater volumes than what the bond issuers were offering. For example, the QBE issue was more than four times oversubscribed with $1.3 billion in bids for the $330m transaction. It was QBE’s second Tier 2 transaction for the year. The company had previously focused on the US for issuing bonds but wants to better develop its presence in the domestic market.

Most transactions are floating rate but, CBA’s sub debt issue was a dual tranche:

  • A $700m floating rate note
  • A $550m fixed to floating issue

The deal brought CBA’s total Tier 2 capital to about A$27.3 billion. This exceeds its requirement of A$23.4 billion for the start of 2024, though the bank expects this to increase to A$30.4 billion by January 2026.

The most recent sub debt issue by insurer, IAG has a longer term to final maturity as does the QBE subordinated issue, which is usual for insurers.

Bendigo and Adelaide Bank (BEN)’s Tier 2 issue priced 5 basis points tighter than 265bp price guidance. Its final order book was A$850m for the $300m transaction.

Pepper Money, one of the non-bank lenders, also issued a non rated short dated note raising $40m and paying 675bp over 3 Month BBSW, paying over 10% at first issue.

To access the OTC market, personal investors need to find a dealer/ broker that will trade in small parcels from $10,000. We have a list of brokers under the ‘Bond Portfolio’ tab on the website.

Note: This article is for educational purposes and none of the securities mentioned are recommendations.

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Elizabeth Moran
Editorial Director
Elizabeth is a nationally-recognised independent expert on fixed income. She has more than 25 years experience in banking and financial institutions in Australia and the UK and has been published in every major Australian newspaper and investment website. Prior to becoming an independent commentator in 2019 she spent more than 10 years as the head of education and research at fixed income broker FIIG Securities. Prior to joining FIIG, Elizabeth worked as an Editor/Analyst for Rapid Ratings a quantitative credit rating agency. She also spent five years in London, three working as a credit rating analyst for NatWest Markets.