July 10, 2017 / 1:31 AM / 15 days ago

CBA seizes on swap moves to find 30-year sweet spot

4 Min Read

* Aussie major opens the door for other banks to move to ultra-long issuance

By Will Caiger-Smith and John Weavers

NEW YORK/SYDNEY, July 10 (IFR) - Commonwealth Bank of Australia, rated Aa3/AA–/AA–, looks certain to encourage copycat ultra-long issuance from other Australian banks after breaking new ground with last Thursday’s hugely popular 30-year US dollar bond.

The $1.5 billion 3.90 percent 144A/Reg S note, the largest 30-year from an Australian bank in any currency, priced at 103 basis points over Treasuries, well inside initial price thoughts of 120bp area. The spread is believed to be the tightest for any 30-year bank bond in dollars, and the coupon the lowest in the Yankee market at that maturity, according to bankers close to the deal.

CBA, Goldman Sachs, JP Morgan and Morgan Stanley were joint bookrunners on the sale, which attracted a hefty order book of $3.4 billion and priced with a new issue concession of 3.5bp versus CBA’s 2.265 percent September 2026s after allowing 7.5bp for the 10 to 30-year curve extension.

"Commonwealth Bank is delighted with the result of this landmark 30-year financing," CBA group treasurer Paolo Tonucci said. "While we had confidence in the market appetite for long-dated paper, the outcome was better than anticipated."

Kylie Robb, head of group funding at CBA, emphasised two key drivers behind the transaction: "Firstly, favourable market conditions in general and very strong demand for long-dated paper from US and Asian insurance companies in particular, has led to secondary trading levels within even 10-year levels.

"In addition, the regulatory environment ahead of the implementation of Australia’s net stable funding ratio on January 1 2018 supports such a long issue, which materially increases CBA’s average maturity while reducing the bank’s maturity concentrations."

The NSFR requires banks to maintain a stable funding profile in relation to the composition of their assets and off-balance-sheet activities.

Swap Spreads

CBA took advantage of a significant move in 30-year swap spreads from around -43bp a month ago to -29bp last Thursday – the biggest such move since at least 2011 – which makes it cheaper for banks to issue fixed-rate paper at the long end of the curve and swap it back into floating-rate notes.

The trigger for the near 15bp shift was a Treasury report suggesting the removal of US Treasuries, cash and some interest rate derivatives from the denominator for the Supplementary Leverage Ratio.

The post-US election rally in bank stocks has stalled of late as investors question the potential for true regulatory reform to clear the Senate, but analysts see the move in swaps spreads as a sign that some investors believe the Treasury's suggestions will become reality.

"The Treasury report is where financial reform is really going to occur. A lot of these proposals can be implemented with just personnel changes, rather than new legislation," said David Knutson, head of Americas credit research at Schroders.

"This is the true low-hanging fruit for the Trump administration to deliver results," wrote Bank of America Merrill Lynch analysts.

The implication is that if 30-year swap spreads continue to become less negative, there should be more long-end issuance from banks, which has been extremely rare in recent years.

“Thirty-year swap spreads are negative because banks have to hold capital against US Treasuries. If you take that capital requirement away, Treasuries should trade richer to swaps,” said a rates analyst in New York. (Reporting by Will Caiger-Smith and John Weavers; Editing by Vincent Baby and Daniel Stanton)

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