NAB Capital Notes 5

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Summary

On 16 November 2020, National Australia Bank (ASX:NAB) launched an offer for NAB Capital Notes 5 (ASX:NABPH), to raise $750 million, with the ability to raise more or less. The offer is accompanied by a Reinvestment Offer for holders of NAB Convertible Preference Shares II (ASX:NABPB), which have been called (first call date 17 December 2020).

The purpose of the transaction is to raise regulatory capital (Additional Tier 1) for NAB with the proceeds intended for general business purposes. These securities are structured as unsecured, subordinated, perpetual, convertible notes. Distributions are expected to be discretionary, non-cumulative, floating rate, fully franked, and paid on a quarterly basis in arrears until converted or redeemed. The margin is guided at 3.50% to 3.70% p.a. above 90-day BBSW.

This security has no fixed maturity date but is scheduled for mandatory conversion into NAB ordinary shares on 17 December 2029, or later, when conversion conditions have been satisfied. At the Issuer’s discretion, and subject to approval by APRA, NAB can redeem or resell the Notes for cash at face value or convert the Notes into NAB ordinary shares on 17 December 2027, subject to conversion conditions.

The Notes may also be redeemed subject to APRA approval, resold or converted into NAB ordinary shares if a Tax or Regulatory Event occurs, subject to conversion conditions. The Notes will convert into NAB ordinary shares following an Acquisition Event, subject to conversion conditions.

As this security meets capital instrument eligibility criteria under Basel III, it also contains the loss absorbing terms and conditions known in the documentation as Capital Trigger or Non-Viability Trigger Events. The security therefore qualifies as Additional Tier 1 capital. Upon the occurrence of either of these events this security will be automatically converted into NAB ordinary shares without the protection of conversion conditions. If conversion cannot occur for any reason, the Notes will be written off and all Holders' rights terminated.

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The NAB FY20 result was weighed down by COVID-19 related impacts and a number of large notable items of its own doing that had been already been flagged. Looking through the messy headline numbers, the underlying performance was mixed in challenging operating conditions. Overall, we view the result as neutral from a credit perspective given the stronger capital position and further increase in loss provisions.

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Our valuation assumptions for this security are based on redemption at first call (17 December 2027) and all distributions being made in full in a timely manner. If this security is not called on the first call date, or a distribution payment is missed, the price of the security would likely fall. We do not anticipate this happening.

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