Judo recently issued at Lower Tier 2 issue at 3m BBSW +500bps, raising A$65m.
Judo Bank is rated BBB-/Positive (S&P) at the senior unsecured level. These notes are rated BB (S&P) and are structured as a 10 non-call 5 product.
Credit
Judo Bank is a purpose-built SME business lender which had a loan book of about A$6bn as of FY22, growing by about 73% pcp. As of FY22, the Common Equity Tier 1 (CET 1 ratio) was a healthy 20.5%. The funding profile is reliant on price-sensitive term deposits.
Judo have now reached their targeted A$2.5bn of committed warehouse capacity, having recently signed agreements with two financiers for an additional A$750mn of capacity. The drawn balance of the bank’s warehouses currently sits at approximately A$600mn, leaving an additional A$1.9bn of committed capacity which provides good flexibility to manage the term funding facility (TFF) repayment period.
Judo bank can absorb credit losses or funding shocks given its higher relative net interest margin (NIM). As an SME business lender, Judo generates higher margins than those of residential mortgage lenders. S&P’s risk-adjusted capital (RAC) calculation incorporates the credit risk differential between Judo’s SME customer segment and residential mortgage customers by applying a higher risk weight to SME lending activities relative to prime residential mortgage exposures. S&P forecast Judo will maintain a very strong RAC ratio of 22-24% in the next two years.
Pricing
The issue is priced at 3mBBSW + 500bps, which in our view represented good value and provides a small new issue concession to investors. A new major bank 5-year subordinated debt issue would price at +225bps (based on today’s levels). A +275bps differential or ~75bps per rating-notch for the four-notches (BBB+ to BB rating) is well priced in our opinion.
The closest comp is the AMPAU Float 07/10/32 (call 07/10/27) which has ~4 years to call and is currently trading at a margin of +384bps with the notes rated BB+ (S&P). We consider the new Judo notes rated BB (S&P) are pricing around +15bps cheap to the AMPAU Float 07/10/32. Adding in one-year to call =25bps and =75bps per rating-notch (BB+ to BB) would likely take the AMPAU Float 07/10/32s to +485bps. The AVAFIN Float 22/02/26 (call 22/02/24) are currently trading at a margin of +490bps but are unrated at the security level. Therefore, there are not the best comp for relative value purposes.
The deal is expected to be approximately A$100mn, offering slightly better liquidity that the previously issued JUDOCA Float @A$50m, which is a private placement.
Westpac Indicative Major Bank Spreads (1, 2, 3, 4, 5yr respectively) are as follows:
Major FRN Curve: 42 59 76 87 96
Major ADI RMBS Indicative 3yr: 110
Major T2 Indicative Curve: 158 178 208 214 224
YB CLOSE (26-MAY-23):
ANZ NC May-28 FRN BBB+/Baa1 +229
CBA NC Apr-27 FRN BBB+/Baa1 +218
MBL NC Jun-27 FRN BBB/Baa3 +240
BOQ NC May-27 FRN BBB-/Baa3 +278
AMP NC Oct-27 FRN BB+/- +384
