MENU

Why overseas investors are rushing to buy Commonwealth Bank of Australia debt

Late last week, Bloomberg, Reuters and other top news agencies reported that the Commonwealth Bank of Australia (ASX: CBA) had successfully raised $1.25 billion of subordinated debt in the United States.

Here is what you need to know about this transaction:

  • The debt was raised via a subordinated Tier 2 bond
  • It’s a 30 year bond that is scheduled to mature on 10 January 2048
  • This is set to be the longest maturity USD benchmark Tier 2 bond issued by an Australian bank
  • The instrument will be rated Baa1/BBB/A+ according to Bloomberg
  • CBA had initially indicated that it would pay 1.75 percent over the U.S. Treasuries rate for the bond, but this was cut to a 1.53 percent spread after the bank received overwhelming demand
  • CBA received three times the anticipated demand for the bond
  • Fund managers anticipate that the terms of this bond (particularly the spread and maturity) are so favorable to CBA that other big four banks Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX:NAB) might be tempted to go to market and raise Tier 2 capital under similar terms.

One might wonder why foreign investors are so keen to buy CBA’s debt at such a low price. After all, the bank’s assets comprise mainly of housing loans backed by a property market that many feel could be overvalued.

CBA has also faced negative publicity in recent times with allegations that it breached anti-money laundering laws and the government also announced a Royal Commission investigating the Banking sector.

The answer appears to be the current low interest rate environment which has led to a massive global search for yield with little or no regard to risk. In addition to this, Australia has some of the world’s most profitable banks. CBA’s ROE of 16% is higher than its US peers US Bancorp (14%), Wells Fargo (12.5%) and Bank of America (8.1%). Whatever the reason, CBA shareholders will be happy the bank is able to raise cheap funding abroad.

Don’t Buy A SINGLE Stock Until You Read This

While conflict overseas is all media talking-heads seem to mention these days, the billionaire founder of Tesla is losing sleep over what he sees as a far bigger threat.

Elon Musk Warns: This has “vastly more risk than North Korea”

If you missed your opportunity to get in on Google, Microsoft, or Amazon in their early days, don't let it happen again. This emerging technology trend could offer a second chance for anyone who wishes they took part in these millionaire-maker stocks.

Click here to discover more!

Motley Fool contributor Kevin Gandiya has no position in any of the stocks mentioned.

You can follow Kevin on Twitter @KevinGandiya.

The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.