FWIW, the AFR had a take on the recent announcement - copy below. Given one can earn 4-5% in a government-guaranteed sub-$250,000 bank deposit I gather the yields on these notes are going to have to be pretty high to attract investor interest. As a reference, back in October 2022 Macquarie had notes offering 7% and NAB had some at 7.17%. Latitude's were offering 9.67%. Is the market perhaps concerned (further) on costs of funding for Judo? Not really sure myself, just a guess. For disclosure, after some thought I decided to exit my position post results and just sit it out on the sidelines (where I had patiently been for over 18 months since IPO). Nothing negative, I think the Judo proposition is very solid but I think it may take the market some time to get comfortable with it. I had a $1.29 average so ended up copping a 22% haircut which with hindsight could have ended worse... it's an interesting one, are investors being lazy and mis-pricing the business, or is it simply a matter of a market chasing much easier gains than a young regional bank in a recessionary environment and higher-for-longer funding costs? My on-the-fence guess is it's probably somewhere in between. Will continue to watch it closely and enjoy the great commentary on these threads. Cheers
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Judo looks to get ahead of APRA with first-ever hybrid deal
(10 Oct)
Judo Bank revealed its plans to raise capital with one of the financial markets’ more arcane, and recently controversial, instruments – additional tier 1 hybrid bonds – on Tuesday. If they can get the deal away, this would represent the business lending specialist’s first-ever AT1 hybrid and signals a growing-up milestone of sorts, putting it in league with the more established banks on funding. A cross between equity and a bond, hybrids are used by the bank to top up capital holdings.
Sources who spoke to Street Talk said the raise was not so much about raising capital but showing the market Judo can get an AT1 in the market. It also shakes up the bank’s funding stack, giving it access to a more flexible and efficient way of raising capital than equity. However, there’s another factor at play here. The issuance comes as the banking regulator APRA is becoming increasingly tetchy about hybrids.
Hybrid bonds pay interest to holders and are typically seen as a safe bet by retail investors. However, in a crisis, banks can exchange these bonds for equity, or regulators wipe them out entirely if the situation is dire enough, as was the case in UBS’s $4.5 billion shotgun marriage with Credit Suisse. The possible contagion effect of such an event in Australia – 53 per cent of AT1s are held by small investors – set off the alarms at APRA, which is now reviewing possible changes to the hybrid system. Submissions are due by November 15.Sources reckon Judo wants to get ahead of anything that would clamp down on demand for hybrids. Further, it is likely any changes APRA makes to the structure of the product would be grandfathered away, so Judo can keep the product as is as long as it acts quickly, giving it an extra selling point. The bank has not put a price on the hybrid offer just yet, most likely because it is waiting to see what term lengths it can get for the bonds. The instability in the Middle East following Hamas’ attack on Southern Israel has raised concerns credit spreads could blow out.
The worry would be if they don’t get an offer away soon, APRA’s changes could hurt hybrid demand. Judo has called up Barrenjoey, E&P Advisory, Morgans Financial and Westpac as joint lead managers if the offer proceeds. Given this lineup, we expect it to be substantial. The timing is still up in the air, with Judo telling potential backers it will all “depend on market conditions and relevant approvals”. Whatever the case, it comes hot on the heels of the bank’s first securitisation deal last month when it said it would raise between $350 million and $500 million to better diversify its funding sources. Judo was previously relying entirely on deposits and warehouse funding. Judo shares finished 3.2 per cent lower to 90¢.
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