No hybrid bargains as new issues flood market

Co-founder of the Switzer Report
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The flood of hybrid income securities continues with $3.8 billion of issues awaiting ‘end’ investors. AGL is set to raise a further $650 million, and secondary market prices for existing hybrids have quickly fallen to adjust to this glut of supply. I mentioned at the beginning of the month that the hybrids market was looking overpriced at the time (you can re-cap on that story here). There is no need to rush and, in most cases, you should be able to invest in these issues post listing at cheaper prices.

Firstly, a quick review of the new issues.


  • Structure: Subordinated, unsecured notes; however, ranking ahead of ANZ CPS1, CPS2 and CPS3 issues.
  • Term: 10.25 years, maturing 20 June 2022. ANZ can redeem early from 20 June 2017 subject to obtaining approval from the Australian Prudential Regulation Authority (APRA).
  • Interest: Quarterly, at a margin of 2.75% over 90-day bank bill rate.
  • Size: $1,500 million
  • Payment Deferral: Only if solvency breached or will be breached.


  • Structure: Subordinated, unsecured notes.
  • Term: 25 years (maturing 31 March 2037). Colonial may elect to redeem from 31 March 2017, or any later interest payment date.
  • Interest: Quarterly, at margin of 3.25% over 90-day bank bill rate.
  • Size: $1,000 million to $1,100 million.
  • Payment Deferral: Colonial can defer at its sole discretion any interest payment. Deferred interest is cumulative and must be paid after five years.
  • Step-up: None.


  • Structure: Subordinated, unsecured notes
  • Term: 25 years (maturing 22 March 2037). Tabcorp may elect to redeem from 22 March 2017, or any later interest payment date.
  • Interest: Quarterly, at a margin of 4% over the 90-day bank bill rate.
  • Size: $200 million.
  • Payment Deferral: Tabcorp may defer in certain defined circumstances. Deferred interest payments are cumulative.
  • Step-up: 0.25% margin (if not redeemed on 22 March 2017).


  • Structure: Unsecured, perpetual convertible preference shares.
  • Term: Perpetual, although scheduled conversion date is 31 March 2020. Westpac may optionally convert or redeem (with APRA approval) from 31 March 2018.
  • Dividends: Semi-annually, effective margin of 3.25% which includes value of franking credits.
  • Size: $1,000 million.
  • Payment Deferral: Dividends subject to ‘distributable profits’ test – non-cumulative if not paid.

How they compare

ANZ has the cleanest structure, and with a fixed term of 10.25 years offers relative certainty. However, the fixed margin of 2.75% over the 90-day bank bill rate is 60 to 75 basis points shy of that available on their existing CPS (Convertible Preference Share) issues (ASX codes: ANZPA, ANZPB and ANZPC). Further, by trebling the supply of notes in the book-build from $500 million to $1,500 million, they have killed any latent demand. This issue will trade at a discount on listing – avoid.

As an integral member of the Commonwealth Bank Group, Colonial is in the ‘too big to fail’ category. That said, banks by law cannot guarantee, either explicitly or implicitly, their subsidiaries and investors should assess the investment on its own merits. With the issue being used to refinance existing debt, Colonial will be moderately geared at about 29.9% and interest cover is 6.6-times. However, there are a couple of nasties in the issue: interest can be deferred at the sole discretion of the issuer, and there is no step-up margin (an effective penalty interest rate that an issuer pays if it doesn’t redeem the notes at the first opportunity). While redemption at five years is not off the cards, investors should assume that this is a 25-year security. At 3.25%, it is too keenly priced.

The pick of the new issues is Tabcorp for rate, industry credit risk diversification and explicit tests about interest deferral. However, at only $200 million, the issue was reportedly 10-times oversubscribed in the book-build, so getting stock might be difficult. Existing Tabcorp shareholders can get access to a priority issue; Tabcorp has said that it will try to make $5,000 available to each existing shareholder who applies.

Finally, Westpac is issuing convertible preference shares, which are scheduled to convert to ordinary shares (or more likely be redeemed in cash) in March 2020 – eight years away. The fully franked dividend is payable half yearly (rather than quarterly), and at an effective margin of 3.25%, this looks a touch on the light side compared with the secondary market issues such as the ANZ issues discussed above or Commonwealth Bank’s existing PERLS V (CBAPA).

Bottom line

It’s a pass on ANZ, Colonial and Westpac and wait till they list. Buy Tabcorp Notes (if you can) for rate and industry diversification.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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