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Prof. Ian Giddy

Office: Stern 9-197. Tel 212-998-0332; Fax 212-995-4233

E-mail: ian.giddy@nyu.edu Web: http://giddy.org

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The Case Study

Westpac is an Australian bank. It has extensive business in Australia, New Zealand and the Pacific Rim. As a result of all the financing it provides in the region, the bank has an ongoing need for funds. As can be seen from the list of issues below, the bank has borrowed money in a variety of ways. Please examine the information below on the bank and its funding strategy, and try to answer the following questions.

• Why would Westpac issue a US dollar Eurobond?
• Why has the bank issued other kinds of bonds?
• How would you explain the Eurobond issuance process and costs to an issuer?
• What would be involved in getting a rating for the company?

 

About Westpac Bank

• Westpac began trading on 8 April, 1817 as the Bank of New South Wales with a single office in Macquarie Place, Sydney, in the then British colony of New South Wales.
• The Westpac Group employs approximately 28,500 people in Australia and around the world.
• As at 30 September 2001, Westpac Banking Corporation had global assets of $190 billion.
• Westpac is ranked in the top 10 listed companies by market capitalisation on the Australian Stock Exchange Limited (ASX).
• For the full year to 30 September 2001, the Westpac Group's operating profit after income tax and abnormals was $1,903 million, a increase of 11.0% over the previous year.
• About 220,000 people and institutions in Australia and overseas are shareholders in Westpac.
• Westpac concentrates its activities in Australia, New Zealand and the Pacific Islands. It has branches and affiliates throughout the Pacific region and maintain offices in key financial centres around the world.

Westpac's Funding Strategy

Westpac's funding activities are focused on diversity and flexibility, with a view to reducing the volatility and cost of it's wholesale funding base within the parameters of prudent liquidity management. According to company documents, Westpac's strategy wholesale funding covers:

Diversification

The diversity of Westpac's funding base is looked at from a number of different perspectives. These perspectives are considered in light of the nature of the underlying debt profile and include diversity across: - Currency  - Retail and wholesale markets  - Debt product types and maturity term  - Debt investor types and geographical location

Flexibility

Another key aspect of Westpac's strategy is to have the maximum flexibility to access the widest range of funding markets, debt investors and products. As market preferences and investor's demands change, Westpac is required to operate in a variety of jurisdictions. This dynamic environment requires an appropriate and up-to-date documentary infrastructure, a global integrated approach to debt pricing and risk management and an efficient chain of delegated authorities allowing Westpac to execute transactions in a responsive and effective manner.

Global Debt Presence and Performance

The barriers to access international funding markets are continually falling and borrowing spreads for issuers are becoming increasingly "internationalised". As a major commercial bank, Westpac takes the view that a global borrowing profile in these markets is essential, as is the necessity to directly communicate it's current credit, business and funding story to institutional investors and intermediaries. Westpac is very conscious of maintaining and improving this international profile when it accesses the public debt markets. Consequently a significant amount of energy and internal due diligence is put into each public transaction, to ensure that the deal structure, syndicate group, pricing, maturity and timing is right for the market at launch. Westpac expects every public deal to perform well in the primary market. We expect dealers to support the issue price of public transactions which, in turn, will set a base to underpin price performance into the secondary market.

Management of Global Funding
The management and execution of the wholesale funding strategy is the responsibility of Group Treasury. Within Group Treasury, the Global Funding unit manages Westpac's offshore and domestic issuance programmes under three legal entities.

Westpac Banking Corporation
Westpac's funding activities are focussed on diversity and flexibility. This is underpinned by the objectives of reducing the volatility and cost of its wholesale funding base within the parameters of prudent liquidity management.

WestpacTrust Securities NZ Limited
WestpacTrust Securities NZ Limited ("WTSNZ") has been established as a dedicated entity to provide, amongst other things, all offshore wholesale funding for WestpacTrust (the NZ Branch of Westpac Banking Corporation).

Pacific Structured Funding Limited
Pacific Structured Funding Limited ("PSFL") is a Westpac subsidiary established for the sole purpose of structured note issuance. PSFL is an issuer on Westpac's USD$12.5 billion EMTN programme.

Westpac's Outstanding Debt Issues

Euro market

1. GBP 250m Floating Rate Depositary Receipts (due Mar 2002)
2. USD 550m Fixed Rate Note (due Oct 2002)
3. USD 500m Floating Rate Note (due Jan 2003)
4. CHF 200m Fixed Rate Note (due Apr 2003)
5. AUD 300m Floating Rate Note (due May 2003)
6. GBP 250m Floating Rate Note (due Jun 2003)
7. EUR 500m Floating Rate Note (due Mar 2004)
8. USD 500m Fixed Rate Note (due Apr 2004)
9. NZD 100m Fixed Rate Note (due Apr 2004)
10. USD 500m Floating Rate Note (due May 2002)
11. SGD 150m Fixed Rate Note (due Sep 2004)
12. HKD 1,000m Floating Rate Note (due Sep 2002)
13. HKD 1,500m Floating Rate Note (due Feb 2003)
14. USD 250m Floating Rate Note (due May 2003)
15. USD 250m Floating Rate Note (due May 2005)
16. USD 300m Floating Rate Note (due Jan 2004)
17. SGD 100m Fixed Rate Note (due Apr 2003)
18. SGD 100m Subordinated Fixed Rate Note (due Aug 2010)
19. EUR 500m Floating Rate Note (due May 2006)
20. GBP 300m Floating Rate Note (due June 2006)
21. USD 500m Fixed Rate Note (due June 2006)

Yankee market

1. USD 500m Perpetual Floating Rate Note

New Zealand domestic market

1. NZD 50m Subordinated Fixed Rate Note (due Aug 2005)
2. NZD 60m Fixed Rate Bond (due Apr 2003)
3. NZD 50m Subordinated Fixed Rate Note (due July 2009)

Japanese retail market ("Uridashi")

1. AUD 125m Fixed Rate Note (due Jan 2002)
2. AUD 120m Fixed Rate Note (due Oct 2002)
3. AUD 91.4m Fixed Rate Note (due Nov 2002)
4. AUD 3.9m Fixed Rate Note (due Nov 2002)
5. AUD 63.3m Fixed Rate Note (due Dec 2002)
6. AUD 82m Fixed Rate Note (due Dec 2003)
7. USD 20m Fixed Rate Note (due Mar 2004)
8. USD 10m Fixed Rate Note (due May 2004)
9. AUD 600m Fixed Rate Note (due July 2004)

Australian domestic market

1. AUD 350M Subordinated Note (due May 2008)
2. AUD 300M Subordinated Note (due Mar 2009)
3. AUD 500M Fixed Rate Note (due Mar 2003)
4. AUD 300M Fixed Rate Note (due Jul 2005)
5. AUD 350M Subordinated Note (due Aug 2010)
6. AUD 350M Subordinated Note (due Aug 2011)

Global Market

1. JPY 75bn Fixed Rate Note (due Sep 2003)

 

Westpac's Recent Issues

(Excerpts from a company press release)

Westpac Issues Subordinated Notes

On 23 August 2001, Westpac Banking Corporation priced $350 million subordinated notes.

Westpac Group Treasurer, Mr Rob Whitfield said: "Similar to our last sub-debt issue in August 2000 this transaction was driven by investor feedback, received at our annual debt investor update in July, for yield product.

"Given the yield that subordinated debt provides, this issue presented us with the opportunity to strategically match investor's requirements with the bank's regulatory capital needs" he said.

$210 million of the notes were issued as a fixed rate tranche with the remaining $140 million in floating rate tranche. Until the fifth anniversary, the fixed rate tranche pays a semi-annual coupon of 6.25% and the floating rate tranche pays BBSW plus 0.57% on a quarterly basis. From the fifth anniversary both tranches pay a quarterly coupon of BBSW plus 1.07%.

The maturity date of the notes is 30 August 2011. On the fifth anniversary, and on each subsequent coupon date, the notes may be called at the option of the issuer. The notes are expected to be rated A+ by Standard & Poors.

Westpac Institutional Bank acted as Lead Manager for the transaction and was joined by Deutsche Bank and UBS Warburg as co-managers.

Westpac targets Japanese investors with A$600m Retail Bond

On 11 July 2001, Westpac announced it had launched an A$600m Eurobond into the Japanese retail market (the 'Uridashi' market) with a maturity term of 3 years via Sole Lead Manager Nomura Securities Co Ltd.

"This is the largest offshore A$ issue for a non-Government borrower. A deal of this size represents a milestone for Westpac and also the Japanese retail market. Westpac was the first Australian bank to tap the Uridashi market back in 1998 and our sustained marketing efforts have established a strong name recognition with Japanese retail investors" said Rob Whitfield, Group Treasurer at Westpac.

It is anticipated that the final number of retail investors participating in the transaction will be in excess of 25,000.

The bonds were issued under Westpac's established Uridashi shelf, off Westpac's USD$12.5 billion Euro medium term note programme, and have a fixed coupon of 5.5%.

Westpac launches US$500m Fixed Rate Eurobond

Westpac has launched a US$500m fixed rate note into the Euromarkets with a maturity of 5 years.

Westpac's Treasurer, Rob Whitfield said "Viewed alongside our existing 02 and 04 issues, this cements our commitment not only to building a curve in the euro dollar market but also to our existing US$ investors. This issue is consistent with Westpac's strategy to build capacity and diversify our funding base."

"Whilst there has been a good deal of AAA issuance in the euro dollar markets, there has been a real lack of AA names. We felt that there was strong investor demand for an issue offering relative spread over recent AAA 5 year trades, as well as diversification away from European issuers", said Andrew Smith, Head of Global Funding & Capital Management at Westpac.

Chris Bannister, Senior Manager Funding & Liquidity at Westpac said, "We have been monitoring this market closely over the last few months and getting the optimal timing for this issue was critical. Confident of a strong bid from institutional investors, from both Europe and Asia, we moved swiftly to bring the deal to the market"

The bonds have a fixed coupon of 5.75% and are issued under Westpac's USD 12.5 billion Euro medium term note programme.

JP Morgan and Nomura acted as the joint lead managers. The co-lead managers were Merrill Lynch, Salomon Smith Barney, UBS Warburg and Westpac Banking Corporation.

Westpac launches GBP300m Floating Rate Note

Westpac has launched a �300 million floating rate note into the Euro markets with a maturity term of 5 years.

Westpac's Head of Global Funding & Capital Management, Andrew Smith, said, "Diversification continues to be a cornerstone of our funding strategy. The buoyant Sterling floater market has provided us with an excellent opportunity to further develop our presence in the Euro markets. The transaction has been well supported by the traditional FRN investor base, banks and money funds, as well as fund managers."

Chris Bannister, Senior Manager Funding & Liquidity at Westpac said, "The transaction was well received by the market. This was aided by a lack of supply by non UK issuers and in particular a scarcity of Australian bank issuance since Westpac's last issue into this market in 1998. We now have 3 outstanding bonds in this sector of the FRN market."

The bonds have a maturity of 5 years, a coupon of � Libor + 10 basis points and will be issued under Westpac's US$12.5 billion Euro medium term note programme.

HSBC & Royal Bank of Scotland are joint lead managers. Westpac Banking Corporation is co-manager.

Westpac launches EUR500m Floating Rate Note

On 2 May 2001 Westpac issued a EUR500m FRN into the Euro markets with a maturity of 5 years. The bonds have a coupon of Euribor + 10 basis points and were issued under Westpac's US$12.5 billion Euro medium term note programme.

Andrew Smith, Head of Global Funding & Capital Management said, "We have been monitoring this market closely in recent weeks. A number of factors drove this transaction, including the Federal Reserve easing last week which helped to create a positive tone. This transaction represents a further step in developing Westpac's debt investor brand franchise".

Lead Manager on the transaction was UBS Warburg.

 

Details of a Deal

A Eurobond Issue

US$500m Fixed Rate Notes
Issuer	Westpac Banking Corporation
Instrument	Fixed Rate Notes
Amount	US$500m
Maturity	20 June 2006
Issue Date	20 June 2001
Coupon	5.75%
Issue price	99.737
Listing	London Stock Exchange
Governing Law	United Kingdom
Negative Pledge	No
Cross Default	Yes
Rating	Issuer's Rating
Lead manager(s)	JP Morgan, Nomura
Co-managers	Merrill Lynch, Schroder Salmon Smith Barney, UBS Warburg, Westpac Banking Corporation

 

Westpac's Credit Ratings

 

For senior unsecured debt obligations Westpac has been assigned the following credit ratings:

Duration	Short term	Long Term	Outlook
Fitch Ratings	F-1+	AA-	Stable
Moody's Investors Service	P-1	Aa3	Stable
Standard & Poor's	A-1+	AA-	Stable

Long Term Credit Ratings History

Fitch Ratings	Dec 94	AA-
	Jun 92	A+

Moody's	Feb 96	Aa3
	Aug 94	A1
	Jun 91	A2
	Jun 90	A1
	Jan 90	Aa3

Standard & Poor's	Sep 96	AA-
	Jan 92	A+
	May 90	AA-

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