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Your guide to bank bond offers

Investors looking for yield and safety are flocking to the two 10%-plus bond offers currently in the market, committing well over a $1 billion to the issues.

Thursday, March 20th 2008, 11:13PM
Bank of New Zealand Income Securities is raising $350 million in a perpetual, non-preference share offer and ANZ National is raising at least $400 million through a perpetual, callable sub-ordinanted bond offer.

ANZ National says it has the ability to accept oversubscriptions and currently it has commitments for more than $650 million.

To many the offers look very similar; however there are some key differences.

Firstly the ANZ National Bank offer is slightly higher security than the BNZ one. That it is what's known as Tier 2 capital versus the BNZ's Tier 1 capital.

In addition to that ANZ National's offer is being made by the bank itself, while the BNZ one is a special purpose company established specifically for this capital raising.

When it comes to credit rating and interest rates there is very little difference. Both have a Standard and Poor's A+ grade rating and each will have an interest rate around 10%.

ANZ National's rate is expected to be in the 9.75% to 10.00% range and BNZ's in the 9.90% to 10.20% range.

ANZ National's rate is set for the first five years at a margin of around 200 points about the five-year swap rate. It is reset in 2013.

BNZ dividend rate, too, is set at five-yearly intervals with the margin being 220 points over the five-year swap rate. A key difference is the structures. ANZ National's is a straight bond offer while BNZ's is in a portfolio investment entity (PIE).

The PIE structure is suitable for investors on a 39% marginal tax rate as they will effectively be getting an 11.47% return.

ANZ National chose not to go down the PIE route for two reasons. Firstly, research on previous offers showed that there were only a small percentage of investors who were on the higher marginal tax rates. One of the reasons for this is that many investments are made through family trusts and the like.

The other reason is that there is some uncertainty around the longevity of the PIE structure.

Comments from Wellington suggest it was never intended that fixed interest and cash investments would be able to utilise the PIE regime.

Another key difference which hasn't been made clear to investors is what happens if an interest payment is deferred.

If this happens then they require regulatory approval before this happens. With ANZ National then the interest become cumulative and is paid later. In the BNZ's case if interest is deferred it ends up being wiped.

Both issues are perpetual, that is they don't have a maturity date.

ANZ National pays its interest twice a year, while BNZ will make quarterly payments.

« TSB gets a ratings upgradeBNZ lowers rate on share offer »

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