In the game of Monopoly there's nothing worse than going to jail. Thanks to a bizarre negative-pledge clause written in the mid-1980s, Westpac has suffered the capital markets' equivalent. For more than a decade, it has been locked away from the international bond markets. But not any more. The Australian bank received its get-out-of-jail-free card on August 26. Now, free to borrow without constraint, it is mustard-keen to enter the bond market.
The negative-pledge clause dated back to a 12-year bond issued in 1985. Attached to this deal was a clause that stated the bank could not do anything beyond the "ordinary course of banking business". No-one in the Westpac team thought very much about this when they signed off on it. However, the gaffe quickly became apparent when Australian lawyers then told the funding team that ordinary banking business was retail banking. Issuing fixed-rate Eurobonds in the international markets on the other hand was not in the ordinary course of banking business.
Accordingly, Westpac's funding strategy was constrained from that day forward. To add insult to injury, another clause stated that the bank could not borrow at maturities beyond two years. So even when it cleverly got round the "ordinary course of banking business" problem - for example, by issuing depositary receipts which put a trustee between investor and borrower - the maturities always had to be short. Many financial institutions consider it imprudent to over-rely on very short-term funding. But, for Westpac, a sophisticated funding strategy was out of the question. "It had an impact on the way we funded ourselves," says funding head Jonathan Minor, with uncharacteristic Australian understatement.
Freed of its straitjacket, the bank now plans to take the fixed-rate Eurobond market by storm over the coming months. It has already embarked on roadshows around Asia organized by Nomura, with HSBC Markets co-arranging a presentation in Hong Kong and SBC Warburg those in Europe. The plan is to issue a benchmark bond, with speculation that its size will be upwards of $750 million.
The roadshow itself will be used to explain what group treasurer Marten Touw refers to as "a very interesting credit story". For example, in 1992 the bank had non-performing assets that were around 11% of total loans. These days it's less than 1%. Similarly, the bank made losses five years ago whereas today its reported after-tax profits are A$1.2 billion ($896 million). This leads Touw to conclude that Westpac is "one of the great turnarounds in the banking industry".
Westpac is likely to be a big borrower. In addition to its desire to take advantage of fresh borrowing opportunities, it has to refinance a spate of redemptions which are upcoming from previous short-term issuance.
It has a $250 million bond maturing in December, a $500 million in April and a £250 million ($404 million) in February. If its proposed acquisition of Bank of Melbourne goes ahead, Westpac will have to refinance a $500 million bond too.
"We plan to go to the public market at least a couple of times in the next six months," says Minor. The bank also intends to complement this over the course of the year with more than $1 billion of securitization issues. By extending its maturities and diversifying its investor base - the bank did only floating-rate note-style issuance before - Minor reckons "we're going to remove a lot of the funding risk from our balance sheet". Steven Irvine