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A Broker's PreView - Bank of New Zealand Subordinated Unsecured Debt Security

Issuer: Bank of New Zealand

Type of Instrument: Subordinated Unsecured Debt Security

Overview: Given the low interest rate environment we have at the moment, many investors will look at the 5.314 percent fixed for five years on offer from BNZ with unabashed glee. Most will probably make a direct comparison to the rates available on term deposit and wonder if the 5.314 percent was a misprint. However, given the structure of the Notes, comparing it to term deposits is inappropriate. A more accurate comparison would be the yield on offer from BNZ’s parent company National Australia Bank (NAB).

Pros: The comparison to equity is more apt as these Notes will be treated as tier II capital, and will fall into BNZ’s regulatory capital base. The issuance of this Note comes on the back of a $5.5 billion capital raising undertaken by NAB earlier this year. Both of these issues, along with some asset sales form NAB, mean that both the BNZ and NAB sit in the upper quartile of banks internationally in terms of capital ratios. This is important from an investor’s perspective as this is one of the key measures of the banks strength and resilience should financial markets hit a rough patch.

The Notes are rated BBB+ by Standard & Poor’s and A3 (hybrid) by Moody’s. This means the Notes are ‘investment grade’, or in other words, are of a lower chance of default.

Cons: Although these Notes have a lower chance of default than non investment grade issues, the premium above term deposit rates obviously implies increased risk.

Firstly there is the risk that these investments run for longer than their initial five year interest rate period. The Notes are issued for 10 years, with BNZ having the option to repay them after 5 years. They may be inclined to do this as the Notes start to lose their tier II capital status after the first 5 years.

There is also the risk of a ‘Non-Viability Trigger Event’, which could occur if either NAB or BNZ strike severe financial difficulties. Either the Australian or New Zealand regulatory authorities could trigger such an event, which could lead to the Notes being written off, or converted into NAB shares.

Price performance: These Notes are very similar to Notes issued by ASB last year. These were issued at 6.65 percent initially, but now trade on the market with a yield to maturity of 4.9 percent.

Investment outlook: The on market price of the ASB Notes suggests some upside may exist for the BNZ Notes initially, which are relatively more attractive with a yield of 5.314 percent. Please note that any investor looking to take part in this offer should talk to their advisor to discuss its suitability for them, and read the investment statement for more detail than the brief explanation I have provided here.

Grant Davies
Investment Advisor
Phone: 03 353 0795
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*A Broker's View is written by Grant Davies, Investment Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.

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