Guarantee's time is done, say bankers

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Bankers say National Australia Bank's (NAB) A$1 billion ($1.3 billion) term debt issue, the first by a domestic bank without the support of the federal Government guarantee, may lead to the guarantee's demise even though firms may still struggle to find finance.

NAB, owner of the BNZ, became the first Australian bank to raise money in the overseas debt markets without using the Government's triple A credit rating via the wholesale funding guarantee, raising £500 million ($1285 million) in five-year unsecured notes at 5.735 per cent.

Bankers at a corporate lending conference in Melbourne last week said the Government guarantee should be dropped once local banks no longer needed it to tap overseas debt markets.

"I think that's probably the trigger point to actually get rid of the guarantee when we can tap international markets without the Government guarantee," said ANZ Banking Group director of syndication markets Sean Joseph at the Finsia conference.

The guarantee began in October after a credit market freeze triggered by Lehman Brothers' collapse.

It costs the double A-rated big four banks 70 basis points to access funds, while riskier, triple B-rated banks pay 150 basis points.

Global credit market conditions have eased dramatically in the past six weeks as the Libor (London inter-bank offered rate) and credit spreads narrowed, but access to these markets still favours Government and the double A-rated big four banks.

Joseph said dropping the Government guarantee might make debt market access tougher for local corporates as foreign bond investors focused on risk profiles and credit ratings.

"My view is that it is a waterfall and certainly the triple As will get the money, then it'll go to the double As and then it'll go to A and eventually move back to the triple B."

Traders said the debt raising had helped fuel positive sentiment in NAB stock, with the perception the bank offered better value than its peers.

"It is a comforting sign and a big vote of confidence that they can get [the term debt issue] at competitive rates offshore without the guarantee," Macquarie Equities adviser Helen Spencer said.

Sentiment in the NAB stock was also buoyed by the non-dilutive effect of a debt raising for shareholders, IG Markets institutional sales adviser Chris Weston said.

Most investment-grade corporates - triple B and above - still struggle to shrug off their reliance on banks and secure funding in an era where multi-billion-dollar Government bond issues could crowd out other borrowers wanting to access debt markets.

Spencer said the United States Treasury would look to issue US$100 billion ($161.7 billion) of treasury bonds next week, and concerns over the British and American triple A sovereign ratings were making the market a bit skittish.

On Thursday, Standard and Poor's lowered its outlook on Britain's sovereign rating to negative from stable.

Professor Deborah Ralston of the Melbourne Centre for Financial Studies told the conference triple B-rated regional banks had cut their lending in response to the high cost of the guarantee. "The triple B-graded institutions are not putting [loans] out there very much as a consequence.

"I also sit on the board of a mortgage broker and it's extraordinary to watch the loans go from across quite a diversified range of lenders in the home lending market right down to a huge concentration of the majors."

- AAP