Late last week, Bloomberg, Reuters and other top news agencies reported that the Commonwealth Bank of Australia (ASX: CBA) had successfully raised $1.25 billion of subordinated debt in the United States.
Here is what you need to know about this transaction:
- The debt was raised via a subordinated Tier 2 bond
- It's a 30 year bond that is scheduled to mature on 10 January 2048
- This is set to be the longest maturity USD benchmark Tier 2 bond issued by an Australian bank
- The instrument will be rated Baa1/BBB/A+ according to Bloomberg
- CBA had initially indicated that it would pay 1.75 percent over the U.S. Treasuries rate for the bond, but this was cut to a 1.53 percent spread after the bank received overwhelming demand
- CBA received three times the anticipated demand for the bond
- Fund managers anticipate that the terms of this bond (particularly the spread and maturity) are so favorable to CBA that other big four banks Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX:NAB) might be tempted to go to market and raise Tier 2 capital under similar terms.
One might wonder why foreign investors are so keen to buy CBA's debt at such a low price. After all, the bank's assets comprise mainly of housing loans backed by a property market that many feel could be overvalued.
CBA has also faced negative publicity in recent times with allegations that it breached anti-money laundering laws and the government also announced a Royal Commission investigating the Banking sector.
The answer appears to be the current low interest rate environment which has led to a massive global search for yield with little or no regard to risk. In addition to this, Australia has some of the world's most profitable banks. CBA's ROE of 16% is higher than its US peers US Bancorp (14%), Wells Fargo (12.5%) and Bank of America (8.1%). Whatever the reason, CBA shareholders will be happy the bank is able to raise cheap funding abroad.
