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.

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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.

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