National Australia Bank has taken the unusual step of refunding A$590m (US$561m) to investors who took part in a bond sale that was finalised only days before the bank stunned the market when it disclosed additional provisions of A$830m against its portfolio of collateralised debt obligations.
The bank said it had agreed to the refund, which sees the amount raised from the June 2011 bonds cut from A$850m to A$260m, as a “gesture of goodwill”.
NAB shares sank 13 per cent on Friday when it told the market it needed to make fresh provisions, mostly related to the US subprime mortgage market.
Analysts suggested that management’s credibility had been stretched, and some investors who had recently taken part in the bond issue complained that NAB had not kept them abreast of the developments.
NAB responded by allowing the bond investors to consider their positions over the weekend, and agreed to a refund if asked.
Bond investors were also unsettled towards the end of last week as US financial stocks suffered one of their worst one-day falls for eight years. And sentiment was further damaged on Monday when ANZ said its full-year earnings could drop as much as 25 per cent as it flagged A$1.2bn of new provisions.
Bond investors are rarely offered the opportunity to withdraw from a completed issue and NAB’s decision was viewed favourably by both investors and analysts, who suggested the bank’s reputation was at risk.
Shares in NAB fell 4 per cent to A$24.78 on Tuesday, their third successive day of weakness. This followed a 2.9 per cent drop on Monday.
Raising cash on the bond markets helps banks meet funding requirements. NAB said it had a total fundraising requirement for 2008 of A$27bn. NAB is typically in the bond market every two months or so, and analysts said it was likely to tap the market again in coming months.
Westpac, NAB’s rival that is trying to buy fifth-ranked St George Bank in a deal worth about A$15bn, on Tuesday said it had raised more than A$1bn from an issue of stapled securities.
The offer of just over 10m Westpac stapled preferred securities at A$100 each had closed and was completed in full. “This issue will further strengthen Westpac’s Tier 1 capital by approximately 50 basis points, which is particularly important in the current operating environment,” said Phil Coffey, chief financial officer.