January 4, 2018 / 3:57 AM / 3 months ago

CBA bond issue boosts Australian banks' funding options

* CBA bond attracts three times anticipated amount

* Investors shrug off sector woes, govt enquiry

* Fund managers say rest of Big Four could follow

By Paulina Duran

SYDNEY, Jan 4 (Reuters) - Commonwealth Bank of Australia has raised $1.25 billion in 30-year subordinated debt in the United States in a successful auction that fund managers said on Thursday could encourage other Australian banks to follow suit.

Australia’s biggest bank by market capitalisation attracted three times the amount it wanted to raise, a sign offshore investors are not too concerned about a money-laundering lawsuit against CBA and a looming government enquiry into the country’s banking sector.

“It’s a strong result for the issuer given the significant volume, long tenor and competitive funding cost achieved and may prove tempting for other issuers,” said Vivek Prabhu, the head of fixed income at Perpetual.

CBA had first flagged it would offer 1.75 percent over U.S. Treasuries for the bond, but cut that to a 1.53 percent spread after receiving high demand form yield-hungry investors, Thomson Reuters IFR Magazine reported.

Life insurance companies were particularly eager for the bonds, CBA Treasurer Paolo Tonucci said.

“Debt spreads have contracted significantly over the last 24 months,” Tonucci said in an emailed statement. “In particular, subordinated debt has become less costly to issue.”

Australia and New Zealand Banking Group did not immediately reply to questions about whether CBA’s spreads would prompt them to consider such long-dated subordinated issues. Westpac Banking Corp and National Australia Bank declined to comment.

Jonathan Rochford, portfolio manager at Narrow Road Capital, said the solid demand for such issues should encourage banks to further diversify their funding.

“Australian banks (should) fill their boots with ultra-long-term subordinated capital at these levels,” Rochford said. “There’s no excuse for not building subordinated capital further and providing additional buffer against taxpayer bailouts.”

However, one senior executive at a global investment bank said that while CBA had achieved a good price, the extra long maturity was not a natural fit for Australian banks. Speaking on condition of anonymity as he was not authorised to the speak to the media, the executive noted that those assets consisted mainly of housing loans that tended to be repaid in 5 years to 7 years.

Australia’s banks are among the world’s most profitable. But a series of scandals have cost them hundreds of millions of dollars in fines and moved the government to launch a far-reaching inquiry into the sector with the power to recommend criminal charges.

CBA is defending allegations by Australia’s anti-money laundering agency that it allowed thousands of suspicious transactions to pass through its systems, including failing to report attempts to wire money by an individual convicted of terror-related offences.

Reporting by Paulina Duran; Editing by Jane Wardell and Stephen Coates

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