July 28 (Bloomberg) -- National Australia Bank Ltd., the nation's biggest bank by assets, said most investors in its A$850 million ($812 million) bond sale pulled out after the company last week raised provisions for mortgage-related losses.

About 70 percent of investors who initially supported the Melbourne-based bank's bond offering, the biggest by an Australian company in a month, have withdrawn, National Australia spokeswoman Felicity Glennie-Holmes said in an interview today.

National Australia's shares on July 25 plunged the most since the October 1987 stock market crash after the company set aside an additional A$830 million for collateralized debt obligations, and said the move may cut full-year profit. Investors opting not to take part in the bond sale may derail demand for Australian bank debt, which helped take the nation's corporate bonds sales to a record in the first half.

``As an investor, you would get a bit of a bad taste in your mouth,'' said Kumar Palghat, who manages A$350 million of fixed-income securities as founder of Kapstream Capital in Sydney and didn't take part in the initial sale. ``If you had bought the security and the bank knew about the provisions prior to the sale, they should have disclosed it.''

National Australia sold A$650 million of fixed-rate debt and A$200 million of floating-rate bonds on July 22 to increase the securities due June 2011 to A$3.085 billion, Bloomberg data show. The credit was priced to yield 90 basis points more than swap rates. A basis point is 0.01 percentage point.

``They were told on Friday they could tear up their tickets if they wished,'' Glennie-Holmes said. ``Thirty percent have chosen not to do so.'' National Australia's shares fell 2.9 percent to A$25.80 at the close in Sydney today.

`Pandora's Box'

Australia's five biggest banks have lost a combined A$29.1 billion of market value in the past two days and Treasurer Wayne Swan said today the nation's economy isn't immune from turmoil in global financial markets.

Australia & New Zealand Banking Group Ltd. today forecast the biggest full-year profit drop since 1992 as bad loans swell, sending the stock to its steepest slump in 21 years.

National Australia's raising was the biggest sale of corporate bonds in the country since Commonwealth Bank of Australia, the nation's biggest mortgage lender, raised A$1.75 billion selling three-year debt at 80 basis points more than swap rates on June 18.

``The NAB precedent now means that debt investors have a reason to push back on issuers where subsequent news turns less favorable for investors,'' said Craig Saalmann, credit sector specialist at JPMorgan Chase & Co. in Sydney. ``It opens a Pandora's box for issuers and investors alike and raises execution risk.''

Slowing Bond Sales

Australian corporate bond sales rose to a record in the first half as the nation's banks lured local investors with higher yield margins after the U.S. housing collapse cut demand in global markets. Sales almost tripled to A$37.6 billion in the first six months from A$11.3 billion in the second half of 2007, according to data compiled by Bloomberg.

Australian banks, which did 80 percent of their funding offshore before the credit crunch, have paid the higher yields to help refinance around A$4 billion of maturing bonds in the six months to June 30, National Australia figures show. The firms, led by National Australia, have another A$5 billion to refinance in the second half.

Standard & Poor's last week cut its credit rating outlook on National Australia to negative from stable and said the bank may suffer more credit losses and higher funding costs.

Companies have sold A$1.69 billion of corporate bonds in July, compared with the record average of A$6.261 billion per month in the first half of the year.

To contact the reporter for this story: Laura Cochrane in Melbourne lcochrane3@bloomberg.netStuart Kelly in Sydney skelly22@bloomberg.net

Last Updated: July 28, 2008 05:36 EDT