UDPATE 1-CBA's US$2.5 bln extendable issue may start a trend

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SYDNEY, Jan 4 (Reuters) - The early and quick sale of
US$2.5 billion of extendable notes by Commonwealth Bank of
Australia (CBA.AX) announced on Friday may open the door to
similar offers as investors look for high quality short-term
assets.

Extendable notes allow borrowers to tap U.S. money funds,
which with over US$3 trillion of assets represent one of the
world's largest investor segments.

Assets in U.S. money market mutual funds surpassed the US$3
trillion mark for the first time in November as investors
sought out less risky assets amid contagion caused by losses
from U.S. subprime mortgages.

Australian banks have large annual funding requirements but
have struggled to raise long-term money since credit markets
stalled in August as spooked investors shunned debt issues.

With an average of between A$20 billion and A$30 billion of
funding needed each, the country's top banks will have to
accept debt issues that are smaller, pricier and less regular.

Extendable notes, a type of debt that has also suffered
from the credit meltdown, have been rare with only a trickle of
new issues, including one from a unit of oil company BP Plc
(BP.L) (BP.N) in December.

Extendables are a form of short-term debt sold for an
initial period, usually 13 months, and can be further rolled
over until final maturity, typically five-years. Holders have
an incentive to extend the maturity with a coupon that steps up
annually.

Friday's offer may indicate some investors are ready to buy
highly rated assets again.

"The deal was unexpected as the extendable note market has
gone through turbulence and investors have not been rolling
over the notes. Investors seem to be actively looking for
strong financial institutions with strong credit ratings," said
Jeff Sheehan, general manager capital markets at St George Bank
SGB.AX.

"In current market conditions, issuers have to look at
different structures that satisfy investors' requirements," he
added.

The initial margin of CBA's extendable issue is
considerably less than what the bank would have had to pay on a
floating rate term issue, even though the issue cost much more
than it would have before the credit crunch.

"A floating rate note would require a significant premium,
and it's not a few basis points," said a market source who did
not want to be identified.

The initial margin of CBA's extendable note is 20 basis
points over Libor, up from 3 basis points under Libor which it
paid for a deal in 2005.

Details of CBA's offer are as follows:

Issuer: Commonwealth Bank of Australia

Facility: 144a extendable non-callable notes

Amount issued: US$2.5 billion

Initial maturity: Feb. 3, 2009

Final maturity: Jan. 3, 2013

Set date: Jan. 10

First pay: April 3

Coupon: floats, pays and resets annually

YEAR 1: 3-MO LIBOR +20 BPS

YEAR 2: 3-MO LIBOR +22 BPS

YEAR 3: 3-MO LIBOR +24 BPS

YEAR 4: 3-MO LIBOR +26 BPS

YEAR 5: 3-MO LIBOR +27 BPS

Issue price: 100

Lead(s): HSBC

Issuer rating: AA (S&P), Aa1 (Moody's), AA (Fitch)
($1=A$1.14)
(Reporting by Cecile Lefort)