* Australian hybrid debt sales seen around A$10 bln in 2014
* DIY pension funds driving demand for hybrid bank issuance
* Retail demand strong thanks to favourable tax treatment
By Cecile Lefort
SYDNEY, Nov 26 (Reuters) - Australian banks are preparing toissue a flurry of hybrid debt instruments in early 2014 thanksto red-hot demand from self-managed retirement funds and a quirkin the local tax code that makes hybrids a cheap way for banksto borrow.
Sales of listed hybrid securities are expected to kick offwith gusto in 2014 after National Australia Bank (NAB),the country's largest lender by assets, last week doubled itsplanned convertible preference share issue to at least A$1.5billion ($1.37 billion). The deal will be finalised inmid-December.
Hybrid securities combine features of both debt and equity but those now being issued in Australia qualify as equity foraccounting and tax purposes, and are traded on the AustralianSecurities Exchange.
This year has been big for listed hybrid issuance withThomson Reuters data showing more than A$8 billion of issuance, mostly by Australian banks.
Issuance is likely to accelerate next year as a key group ofinvestors -- individuals who manage their own pension funds --keep asking for more.
"I don't see any slowdown in growth of self-managed pensionfunds and that money needs to be put to work," said NickChaplin, NAB's head of hybrid and structured debt capitalmarkets origination. He expects between A$9 billion and A$10billion of listed hybrid offers in 2014.
About A$500 billion, or almost a third of the nation's total retirement savings, is self-managed by investors who avoidpaying fees to professional managers. Self-managed funds are thefastest-growing segment of the pension system and are tipped torise to 40 percent of the total pool by 2018.
Even after NAB increased its issue and offered to pay thelowest possible margin from the offer's initial marketing range,some investors could still not get as much of the issue as theywanted, a banker involved in the offer said.
Australian banks are expected to account for most of 2014'slocal hybrid issuance because they need to boost their Tier 1capital -- secure liquid assets banks must hold to ensure minimum capital adequacy -- which global regulators keepincreasing to avoid a repeat of the 2008 financial crisis.
About A$5 billion of hybrid securities will mature in 2014,so a flurry of new issues is expected early in the year, saidPhil Bayley, a debt capital market consultant at ADCM.
AMP Bank, Australia & New Zealand Banking Group, Westpac Banking Corp, Bendigo and AdelaideBank and Commonwealth Bank of Australia havehybrids maturing in coming months, according to ThomsonReutersdata.
The hybrid's biggest drawcard for investors is its frankingcredit, a tax break mostly restricted to retail investors.
Introduced in the 1980s to encourage mums and dads to buyshares, franking credits exempt investors from paying tax ondividends if the company has already paid income tax.
Australia and New Zealand are the only two nations in thedeveloped world that offer the benefit on equity investments.
Another big attraction underpinning demand for hybridsecurities is the relatively high returns they offer.
"In a low interest rate environment, they give people anattractive yield compared with term deposit rates," said BarrySharkey, co-head of capital markets at UBS.
NAB's hybrids are expected to pay an initial annual dividendof around 5.83 percent, compared with bank term deposit rates ofabout 4 percent.
But even with such a yield, NAB paid far less for its fundsthan it would have in international wholesale markets. Forexample, UK-based Barclays Capital this month issuedUS$2 billion of Tier 1 securities at a yield of 8.25 percent.
Barclays (BARC)
