National Australia Bank is marketing a retail subordinated debt issue that will improve its total capital ratio. Like other well-known bank and corporate borrowers making use of this form of funding this year, the bank may counting on investors being drawn by the name of the borrower rather than the interest premium on offer.NAB's subordinated debt mirrors that sold by ANZ in mid-February. ANZ's subordinated notes stood out as being relatively simple and clean when compared with the hybrid issues that were being launched at the time by Tabcorp, Westpac and Commonwealth Bank (through its subsidiary, Colonial).The NAB note is a simple 10-year bond that the bank cannot redeem within the first five years. The bank must pay coupons, subject to solvency. The notes qualify as lower tier 2 capital. What this means for investors is that the bonds will mature in June 2022, but can be called by the bank (with the Australian Prudential Regulation Authority's agreement) in June 2017 and at every coupon payment date thereafter.The bank will have some incentive to call the bonds on the earliest call date because, while there is no coupon step-up (something that is no longer allowed by APRA), the capital treatment allowed will diminish on a straight line basis to final maturity. Domestic banks have a long track record of calling subordinated debt as expected.The coupons on the bonds are not deferrable and must be paid when due. The coupons will also be paid in cash (with no franking credits).Similarly, when NAB redeems the bonds, or they mature, the bank will return investors' capital in cash. There is no conversion into ordinary shares or trigger that converts the notes into equity capital that could come into effect in the meantime. NAB is seeking to raise A$500 million or more and is marketing the bonds with a coupon range of 275 to 285 basis points over 90-day bank bills. Three months ago, ANZ came to the market with an indicative coupon range of 275 to 300 bps over 90-day bank bills and priced the issue at the tight end of the range. While the ANZ subordinated notes have traded in to a slightly tighter margin since then, the movement has not been significant. This suggests that investors would like to see the NAB subordinated notes priced at the wide end of its indicative range.Moreover, global financial markets are in a very fragile state once again. The notes might offer a safe haven in comparison to equities, but when credit spreads are moving wider on the senior debt of the banks then a wider spread on subordinated debt is warranted. The book build for the notes will take place on Friday and the offer will open next Monday, when the margin is announced. The offer will close to the public and NAB security-holders on June 8, with trading, on a deferred settlement basis, commencing on June 19.