By Sarah McDonald March 21 (Bloomberg) -- Australia’s banks are buying back bonds sold with a government guarantee during the credit freeze as relative yields on their debt fall to a three-year low, the cheapest compared with global peers in nine months. Westpac Banking Corp., the nation’s second-largest lender, said it plans to repurchase as much as A$3.57 billion ($3.58 billion) of March 2012 sovereign-backed bonds today, the biggest such tender offer by an Australian bank, according to data compiled by Bloomberg. The lender paid 60 basis points more than swap rates to investors plus an annual 70 basis-point fee to the government to guarantee the notes issued in 2009, compared with a spread of 110 basis points on A$2.1 billion of November 2015 bonds sold last month. Australian dollar financial debt is the cheapest relative to global bank bonds since June after spreads narrowed 37 basis points this year to the lowest since January 2008, according to Bank of America Merrill Lynch indexes. Borrowing costs are falling as accelerating growth and a currency that’s strengthened 46 percent against the U.S. dollar in the past two years draw investors including Pacific Investment Management Co. and Loomis Sayles & Co. to the nation’s assets. “The bank bond buybacks, and the narrowing of spreads on their debt, are very clear indications of the market recovery that’s taken place,” said Phil Bayley, principal of Melbourne- based consultancy firm ADCM Services. “Provided we don’t see any market deterioration from here, I think you will see most of that government-guaranteed debt from the four majors progressively bought back.” Government Fee Australian banks have about A$412 billion of bonds maturing by 2015, including A$70 billion in government-guaranteed notes due before the end of 2012 and about A$50 billion in 2014, according to Deutsche Bank AG. The government charges a fee of 70 basis points, or 0.7 percentage point, to 150 basis points a year to guarantee the debt, depending on the credit rating of the borrower. National Australia Bank Ltd., Australia & New Zealand Banking Group Ltd. and Citigroup Inc.’s local unit are among banks that bought back at least A$6.6 billion of guaranteed securities since October, Bloomberg data show. Sydney-based Westpac is offering to buy back the March 2012 notes at 10 basis points less than swap rates, plus accrued interest, according to an e-mailed statement. Philip Christie, Westpac’s director of global funding, declined to comment. Survived the Recession Unlike lenders in the U.S., U.K. and Europe, Australian banks survived the worst global recession since World War II without government bailouts. Then-Prime Minister Kevin Rudd announced the guarantee in October 2008, saying lenders faced “acute funding pressures” that had the potential to hamper Australia’s economic growth. Westpac, Commonwealth Bank of Australia, National Australia Bank and ANZ Bank, the nation’s four biggest banks, control 87 percent of Australia’s mortgage market and 73 percent of business lending, according to data from the banking regulator. They were the biggest users of the program, which stopped guaranteeing new bonds in March 2010 after Treasurer Wayne Swan said banks no longer needed the backing to attract wholesale funding. The extra yield investors demand to own Australian financial bonds instead of similar-maturity government debt fell to a three-year low of 155 basis points on March 16 from a peak of 438 in April 2009 and was last at 157, according to Merrill Lynch index data. The equivalent global index was last at 192 and the gap between the two reached 39 basis points on March 16, the widest since June, the data show. Moody’s Review The average cost of protecting the debt of the four biggest banks from default has fallen about 1 basis point this year compared with a 6.6 basis-point rise for the benchmark Markit iTraxx Australia index, prices from CMA show. That’s even after Moody’s Investors Service said last month it may lower its Aa1 ratings on the lenders because they rely on financial markets for 43 percent of their funding, making them more vulnerable to investor sentiment. Australian financial debt has returned 0.8 percent this month, compared with 0.3 percent for the industry worldwide, Merrill Lynch indexes show. In a sign of investor demand for Australian dollar financial bonds, Commonwealth Bank sold A$2.5 billion of 4 1/2- year fixed- and floating-rate notes to yield 105 basis points more than the swap rate on Jan. 13 in the biggest-ever domestic sale of bank debt without federal backing, the lender said at the time. Slowest Pace Dwindling demand for credit by households and businesses has cut bond offerings by the nation’s banks to the slowest pace since the mid 1990s, Reserve Bank of Australia Assistant Governor Guy Debelle said in a March 15 speech in Sydney. “Banks may be seeing a prolonged period of faster deposit growth but slower asset growth,” as future economic expansion is led by companies that can pay for investments from their own cashflow or by accessing international capital markets, he said. Australia is undergoing a surge in resource investment as mining and energy firms boost output to meet demand from China and India. That’s helped bolster demand for Australia’s dollar, the world’s fifth-most traded currency, which touched a record $1.0256 on Dec. 31. The currency climbed 9.4 percent in the past 12 months against the greenback, the fifth-best performance among major currencies tracked by Bloomberg. It strengthened to $1.0017 at 4:21 p.m. in Sydney today. Ten-year government bond yields rose 3 basis points today to 5.42 percent, or 216 basis points more than similar-dated Treasuries. Breakeven Rate The gap between yields on Australian government bonds and inflation-indexed notes shows investors expect consumer prices will rise an annual 2.91 percent for the next five years, the fastest among eight developed nations tracked by Bloomberg. While Australian business investment climbed to a record in the fourth quarter, households have reined back spending, according to the statistics bureau. The RBA has raised borrowing costs seven times from October 2009 to November last year to 4.75 percent, the highest in the developed world. Sydney-based Commonwealth Bank, the country’s biggest lender, said in February it’s cutting bond-market borrowings by almost 10 percent this year after profit rose to a record in the six months ended Dec. 31 and customers poured A$12 billion into its term deposits. ‘Funding Requirements’ “The growth in deposits has allowed the banks to reduce their wholesale funding requirements,” said Gus Medeiros, a Sydney-based director of credit research and strategy at Deutsche Bank AG. “The buybacks reduce the risks associated with the refinancing of government-guaranteed paper, in particular in 2012 and 2014, when there are significant maturities,” he added. Citigroup’s Australian unit repurchased almost A$1.2 billion of June 2012 debt with sovereign backing in November, while a month later National Australia Bank bought back A$730 million of March 2012 guaranteed bonds, Bloomberg data show. National Australia Bank will continue to consider such buybacks to manage its “redemption profile, reduce the reliance on government support and replace funding that is tending toward less than 12 months to maturity with lower funding costs,” the Melbourne-based lender said in an e-mailed statement. Commonwealth Bank is evaluating whether it will buy back government-guaranteed notes, said spokesman Steve Batten. Westpac bought back $2.1 billion of U.S. dollar-denominated guaranteed bonds in January and in the same month ANZ Bank repurchased $752 million of 3.2 percent U.S. dollar notes maturing in December, Bloomberg data show. Melbourne-based ANZ bought back the notes, which were priced at 99.89 cents on the dollar, at 102.66 cents, Bloomberg data show. “If you can extinguish the government guarantee fee and refinance the debt at a cheaper price it makes sense,” said Kevin Foley, a spokesman for ANZ Bank. --With assistance from Jacob Greber in Sydney. Editors: Edward Johnson, Iain Wilson To contact the reporter on this story: Sarah McDonald in Sydney at smcdonald23@bloomberg.net To contact the editor responsible for this story: William McSheehy at wmcsheehy@bloomberg.net

Source