UniSuper backs NAB hybrid with massive cornerstone bid

UniSuper’s move is likely to come as a surprise. Institutional investors are not normally a meaningful presence in ASX hybrid deals, which are typically dominated by retail punters, although the sector has attracted more interest in recent years from sophisticated super funds as credit spreads have blown out to historically attractive levels.

For context, back in 2007 CBA issued a Perls hybrid at a spread of just 1.25 per cent above bank bills when it was carrying more than twice the risk-weighted leverage it has today.

However, the $70 billion money manager UniSuper has a knack of timing the market well – and is no stranger to such deals. Pearce was rumoured to have invested around $200 million in CBA’s February 2016 hybrid issue, CBAPE, that priced at a chunky 5.2 per cent above the bank bill swap rate.

CBAPE is currently trading at almost $106, way above its par $100 issue price.

The timing is also interesting because it precedes the Federal election, scheduled for May, where the issue of Labor’s proposal to ban cash refunds claimed from the ATO by non-taxpayers on their franking credits has become a key debate.

ASX hybrid spreads are about 0.6 per cent higher than they were before Labor’s announcement of the policy in March 2018 which triggered a wave of selling as affected investors exited the sector.

If trading normalises after the election, Pearce stands to capture significant upside.

As part of NAB’s current hybrid issue, it will be placing $750 million of common equity to institutional investors. It is not known whether this raising also includes UniSuper.

JPMorgan says the move will boost NAB’s pro-forma common equity tier 1 (CET1) ratio from 10.4 per cent to 10.6 per cent, above APRA’s 10.5 per cent “unquestionably strong” target, which does not need to be met until 2020.

This is important for hybrids because they are automatically converted into common equity when the CET1 ratio falls to 5.125 per cent. The greater the equity buffer, the lower the probability of this happening.

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