NAB delays Clydesdale float by a day after ratings inquiry

National Australia Bank has delayed the listing of Clydesdale Bank by 24 hours to allow institutional investors to digest the impact of a potential downgrade to one of Clydesdale's "deposit ratings". But NAB said the demerger is proceeding as planned this week.

Clydesdale was scheduled to list on the London Stock Exchange on Tuesday at £1.80 a share, a price investors describe as attractive given the potential for management to strip costs from the bank to boost profits. Australian investors were expecting to start trading CHESS depository interests (CDIs) in Clydesdale on Wednesday on the ASX.

UK-exposed stocks including CYBG manage to recoup losses but still fell for a third day.
UK-exposed stocks including CYBG manage to recoup losses but still fell for a third day. Photo: Bloomberg

However, in an announcement to the ASX after the market closed on Tuesday, NAB said one of the rating agencies – which it did not name –had requested financial information relating to its assessment of Clydesdale's "deposit rating", which affects the cost of secured funding programs.

NAB said the review could lead to a downgrade in that rating, but said Clydesdale "does not anticipate any such downgrade to have any material impact on its ability to raise funding, the overall cost of funding or the financial outlook for Clydesdale … This ratings development may not occur and, should it occur, is not considered material to the financial position and outlook of Clydesdale."

NAB said its IPO was "multiple times covered" at £1.80 but final pricing will now be announced on Wednesday. The revised pricing range was flagged by The Australian Financial Review's Street Talk column on Monday.

With Clydesdale now set to begin trading in London at 8am (GMT) on Wednesday, and the ASX CDIs expected to hit the boards at 11am on Thursday, investors have another day to consider the outlook for Clydesdale.


Matthew Davison, a senior research analyst at Martin Currie Australia, said before the ratings announcement that "while the overhang from the demerger may cloud the near term, the opportunity to substantially reduce the cost-to-income ratio suggests it's worth seeing if the underlying value can be realised. With a willing seller, difficult market conditions and the offer price reduced, the valuation appears fairly attractive."

Patience required

Clydesdale's cost-to-income ratio is 74 per cent, compared with a sector average of 60 per cent.

Yet investors warned patience would be required. "This is a turnaround story, but the catch is, it is not going to happen quickly, because Clydesdale needs to reinvest in itself, which means costs get worse initially, as it looks to grow out of its problems," said Andrew Martin, a fund manager at Alphinity Investment Management. "What you are buying is the turnaround story. And there is always risk in turnaround."

One factor likely to support the price in the aftermarket is the existence of a "greenshoe" arrangement between NAB and its brokers Macquarie, Morgan Stanley, Bank of America Merrill Lynch and JP Morgan.

Under this deal, the brokers have sold some Clydesdale stock short, and will enter the market and buy it back if the price falls, in order to make profits, underpinning the post-IPO price. If the shares rise, Clydesdale will provide the brokers with additional stock to cover their positions.

Despite the "greenshoe", other investors expect Clydesdale shares to be put under pressure in coming months.

"I think the stock will have an overhang for a year, as Australian investors are trickled information and have limited access to UK management," said John Abernethy, the chief investment officer at Clime Asset Management.

"Investors will come to a decision to cash out quickly, or over a year. The management team will be re-invigorated, but what that is worth, and how quickly that value is returned to shareholders, I don't know."