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ASB sets bond interest rate

Last updated 12:16 25/03/2014

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ASB Bank has announced it will pay investors 6.65 per cent interest on the issue of up to $400 million worth of subordinated notes.

Holders of subordinated or "junior" debt rank behind other creditors in the event of a liquidation, but are rewarded with higher interest rates.

The interest paid on the ASB capital raising is based on a 2.05 per cent margin added to the five-year swap rate.

While the margin will remain the same until the notes mature in June 2024, the interest rate will be reset on the call option date, in mid-2019.

Investors who take up the offer must buy a minimum of $5000 worth of notes.

A note is the same as a bond, except bonds usually refer to longer-term debt issues of at least 10 years.

ASB has applied to list the notes on the NZX debt market, but has not yet been given approval for trading.

Last week, ratings agency Standard & Poor's assigned the notes a BBB+ long-term credit rating, based on the strength of ASB's parent, Commonwealth Bank of Australia (CBA).

However, CBA does not explicitly guarantee the debt.

The debt issue also contains a contingency clause that could force notes to be converted into shares in CBA, based on certain trigger events.

Banks often issue subordinated debt to help meet capital requirements, improve leverage, and buffer senior debt holders from potential losses.

ASB will use the notes to help meet its tier-2 capital requirement, a regulatory threshold overseen by the Reserve Bank.

The joint lead managers for the issue are ASB Securities, Macquarie Capital NZ, Goldman Sachs NZ, Deutsche Craigs and Forsyth Barr.

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- Fairfax Media

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