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Bond Markets: An old new borrower

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.

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