New Issue: NAB Capital Notes 8 (ASX: NABPK)

On 13 May 2024, National Australia Bank (ASX: NAB, the Issuer) launched an offer for NAB Capital Notes 8 (the Notes, expected ASX Code: NABPK), to raise $750 million, with the ability to raise more or less. The purpose of the Issue is to raise regulatory capital (Additional Tier 1) for NAB, with the proceeds to be used for general corporate purposes.

These securities are structured as convertible, unsecured, subordinated, perpetual notes. Distributions are discretionary, non-cumulative, floating rate, and expected to be franked at the same rate as dividends paid on NAB ordinary shares (currently 100%), paid on a quarterly basis in arrears until converted or redeemed, subject to the payment conditions. The margin is guided at 2.60-2.80% p.a. above 90-day BBSW. There is no obligation on Holders to pay NAB if the distribution rate was to become negative.

This security has no fixed maturity date but is scheduled for mandatory conversion into NAB ordinary shares on 18 December 2034 or on the first subsequent distribution payment date on which the conversion conditions are satisfied. Subject to APRA approval and certain conditions, NAB has the right to convert, redeem, or resell some or all the Notes on 17 March 2032, 17 June 2032, 17 September 2032 or 17 December 2032 or following a Tax, Regulatory or Potential Acquisition Event. NAB must convert the Notes into NAB ordinary shares after an Acquisition Event, subject to certain conditions.

We recommend that investors Subscribe to NABPK. At the left hand side (LHS) of guidance, we see a minor concession offered to fair value when considering our probability-weighted average valuation, which accounts for all lens of analysis. For reference, a concession to fair value signifies added compensation beyond what is deemed equitable in the secondary market. We think marginally better than fair value is provided at the LHS of guidance, and reasonably strong value at the midpoint of guidance, and recommend scaling bids accordingly.

ASX AT1 hybrid spreads are at some of the lowest levels they have ever been. There are fundamental reasons supporting this, including better capitalised and regulated banks but it is nonetheless something that investors need to be aware of. Our analysis says that NABPK is offered at the lowest margin ever in a Basel III regulatory environment (2013 onwards). This is something investors also need to be aware of. Our recommendation does not try to time the broader market, but ascertain if the security is offered at a fair price to the market. In the case of NABPK, we view it as being fairly offered with a modest 5bps concession.