Westpac's $5 billion US debt issue shows foreign investors still love Australian banks

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Westpac issued a bumper $5 billion in debt overnight into US markets.

It’s a deal that shows foreign investors don’t yet seem persuaded by recent domestic fears about the outlook for Australia’s Big Four.

The issue, spread over a number of maturity dates between 2019 and 2026, was conducted by a consortium of banks on Westpac’s behalf, with the margins over US Treasuries being driven in by strong demand which saw around $10-12 billion worth of bids from investors.

That demand helped drive the indicative margins of US Treasuries plus 90 points for the US$1.5 billion 3-year tranche to a final level of US treasuries plus 75 points at the final issue.

That, the NAB said, in its Credit Today note this morning, is equivalent, when swapped back into Aussie dollar terms as a cost of funds to Westpac, of approximately “BBSW/Swap +72 points”.

That’s cheap and it’s not hard to see why Westpac went to US markets.

To put the three-year tranche in context, recent domestic issues of this maturity have been benchmarked at BBSW/swap +84-86 points, sources told Business Insider. Primary issues of 3-years have been priced at margins in the high 80s over the benchmark – 10/12 points above the cost of funds in the US for this 3-year tranche Westpac has issued.

While the 3-year spread was the highlight the demand for this issue, which drove pricing tension and allowed Westpac to issue at such tight margins, also saw the rates on the US$1.5 billion 5-year tranche and the US$1 billion 10-year tranche below current domestic margins.

The NAB said that when swapped back into Aussie dollar BBSW/swap terms, the 5-year issue cost Westpac BBSW +107 points, and the 10-year attracted a margin of 162 points over BBSW/Swap.

This deal is a good one for Westpac treasury, the bank and its shareholders. It’s just one $5 billion deal on a balance sheet which is closing in on $1 trillion, but it shows that foreign investors are continuing to support local banks.

That’s good for their funding costs, which should also be good for shareholders and borrowers

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