Liberty FRN 2026s (BBB-/Positive with S&P)
IAM View
In our view, Liberty remains an improving credit in the BBB space, and we expect it to be upgraded within the next 12 months. As a nonbank lender, Liberty is benefitting from strong house price growth and low funding costs. The risk profile is also low, with over 70% of its loan book comprised of residential mortgages. Liberty will likely continue to target a customer base that the major banks do not usually service.
As a result of COVID-19, only 0.7% of the loan book remains on partial payments. We believe the bonds can outperform versus other BBB banks as the speed of vaccination rollout increases and NSW/VIC come out of lockdown.
One positive for bondholders is that Liberty bonds are issued from the OpCo and not the HoldCo. While Liberty does utilise secured warehouses in its funding base, the OpCo structure is generally preferred for credit investors. Liberty established eight new funding vehicles in FY21 raising AUD4.9bn in new liquidity.
As a credit investor, it’s always better to have direct access to the assets of the company’s major operating subsidiaries (OpCo) rather than being at the holding company (HoldCo). In a default scenario, if you’re at the OpCo, you’ll effectively be lining up at the front of a que to receive your cash back from the sale of assets. On the contrary, if you’re at the HoldCo, you’ll effectively receive the residual, which may in extreme scenarios be quite limited.
S&P placed Liberty’s outlook on positive in April 2021. The positive outlook reflects a one-in-three chance of upgrade if S&P’s view on Australian financial institutions industry risks decrease in the next two years. Following yesterday’s results, S&P stated that they expect Liberty to continue to manage capital above 15% under S&P’s risk-adjusted capital framework.
FY21 Results
FY21 results were very strong, and equity liked the story with the shares increasing nicely yesterday. The company has a market capitalisation of around AUD2.2bn, with approximately 303 million shares outstanding. These are the first results Liberty has put to the ASX since their IPO.
Chart 1. Liberty FY21 Results
| Metric | Target (exceeded/not exceeded) |
|---|---|
| Underlying NPAT increased 61% YoY | |
| New loan originations increased 17% YoY to AUD4.1bn | Exceeded expectations of AUD3.5bn |
| Loan book on average increased 4% YoY to AUD12.0bn | Above system loan growth of around 3% YoY |
| NIM increased 43bps to 3.1% | Exceeded expectations of 2.8% |
| Cost of funding decreased 67bps to 2.0% |
Over FY21, customers impacted by COVID-19 decreased significantly. Liberty has seen a marginal increase in COVID-19 impacted loans since June 2021 due to the recent lockdowns. Liberty didn’t change collective provisions, though COVID-19 uncertainties remain, but FY21 realised losses were covered from prior provisions.
Chart 2. Covid-19 Loans (AUDm) and 30+ Days Arrears Rate (%)
Source: Liberty Financial Results Presentation
Chart 3. COVID-19 Impacted Loans
Source: Liberty Financial Results Presentation
Relative Value
Liberty FRN 2026s offer significant yield pick-up versus other BBB banks. In May 2021, Liberty priced a 5-year senior unsecured at 3m BBSW +255bps. Those notes are currently trading around 3% yield, according to Bloomberg mid. Compared to other BBB banks, Liberty FRN 2026s are providing around 2% of yield pick-up. Liberty has just over AUD1bn of senior unsecured outstanding across five lines, as shown in the chart below.
Chart 4. LBRFI Float 05/25/26
Source: Bloomberg FIW Function
Chart 5. AUD Financials BBB Relative Value
Source: Bloomberg GC Function
Chart 6. Liberty Bonds Outstanding
Source: Bloomberg DDIS Function
