Debt storm brews as big four tackle $120 billion cash call
Debt capital markets have rarely been so sexy.
The often overlooked (in Australia) but often very profitable debt side of investment banks' capital markets teams could be in for a bumper few years should the local banks regulator get its way.
While their equity capital markets colleagues have been busy pulling deals, debt capital markets bankers have been thinking about how to raise $80 billion for their biggest clients - the big four banks.
It's a huge ask.
While the big four banks are sophisticated issuers and familiar to big bond funds around the world, the quantum of funds raised and relatively short time to get the cash would be unprecedented.
The Australian Prudential Regulation Authority would like to see each of the banks add another four per cent to their risk weighted assets by 2022 - and they want them to do it using "tier 2" subordinated bonds.
That means another $17 billion to $20 billion for each of the big four - according to calculations from both equities research analysts and debt bankers - or about $80 billion all up.
Add in refinancings to existing subordinated debt and the combined cash call grows to about $120 billion across the four years.
The problem is that globally, only about $50 billion is raised every year. So in theory, four Australian banks would account for more than half of that global issuance each year for the next four years - and then well into the future as they refinance what's likely to be seven and 10-year money.
As one onlooker put it, the tank is too small for the fish.
The question is what the banks - and those often overlooked DCM bankers who are preparing for a busy few years - can do about it.
The obvious answer would be to structure the debt raisings differently and issue a new type of debt - tier three or non-preferred senior - which sits higher up the capital structure.
It would be in line with other big banks globally - and investor mandates, which have evolved to tip in about $200 billion a year into "T3" raisings.
But APRA likes what the banks currently do with the T2 raisings and doesn't want more complexity. And while APRA's new guidelines are still technically in a consultation period, if there is one thing the big four banks do know it is that the regulator has probably already made up its mind.
So cue the sharp minds inside DCM teams, who are very much in demand. It'll be interesting to see what happens.
