Westpac bonds in demand

The final price of Westpac’s latest bond issue was 1.67 per cent above the bank bill swap rate.

Westpac has experienced overwhelming interest in its latest bond issue, attracting more than $4bn of demand on Wednesday for the raise, fixed at $1.5bn.

The final price for the floating offer was 1.67 per cent above the bank bill swap rate (BBSW), taking the coupon close to 6 per cent.

The margin tightened due to excess demand.

It comes after Star Entertainment debt was also snapped up by investors last week, with a yield of 600 basis points above the BBSW.

Debt rating agency Moody’s has given the Westpac debt an A3 rating, and S&P has rated it A minus.

Westpac is raising the Tier 2 capital to meet the requirements of the Australian Prudential Regulatory Authority.

The subordinated and unsecured debt ranks ahead of junior ranking instruments.

The bond matures on July 10, 2034. However, there is early optional redemption in July 2029.

Major Australia banks like Westpac need to issue vast amounts of debt annually as their funding books grow and they replace funds from previous issues that have matured.

Only a few years ago, during the pandemic, bondholders would have received a return of about 2.5 per cent, but last year that shifted to above 4.2 per cent as the Reserve Bank continued to increase official interest rates.

In a note to clients published this week, Goldman Sachs has a sell rating on Westpac, with a price target of $24.10 against $27.12 at close of trade on Wednesday.

“We are sell-rated given Westpac’s technology simplification plan comes with a significant degree of execution risk, given historically banks’ large-scale transformation programs have struggled to stay on budget, and we are currently operating in a stickier-than-expected inflationary environment,’’ Goldman Sachs said.

“Westpac is the most exposed to Australian housing, and we believe the relative outlook for system housing lending is likely to be constrained by an already full indebted household.’’