Following the success of the recent NAB issue, and a general tightening in margins, Westpac has launched a new hybrid issue. Reflecting investors’ preferences for simpler hybrid structures, this is as straightforward as a hybrid gets.
It’s a 10-year floating rate note callable after five years, paying interest quarterly at a margin of between 2.75% and 2.95% over the 90-day bank bill rate. With the bank bill rate around 3.54%, this is equivalent to 6.29% per annum for the first quarter.
The notes are subordinated and unsecured. They rank behind all deposits, bonds and unsecured creditors, and ahead of other Westpac hybrid Issues (WCTPA, WBCPA, WBCPB and WBCPC) and Westpac ordinary shares. Interest payments cannot be deferred and are not discretionary, however interest will not be paid if Westpac is not solvent.
The Notes will qualify as Tier 2 capital. With the approval of APRA, Westpac may elect to redeem the Notes five years out (from 23 August 2017 and then on every interest date thereafter), by repaying the outstanding principal and interest.
Details of the issue are:
The institutional book build on Friday evening will set the final margin. At the lower end of 2.75%, this implies an interest rate of around 6.29% for the first quarter – at the higher end of 2.95% the rate would be 6.49%.
The Westpac issue is almost identical to the recent NABHB and ANZHA issues – with the former launched in May and maturing on 18 June 2022, and the latter in March and maturing on 20 June 2022. Both pay interest at bank bill plus 2.75%, and are trading on the ASX at small premiums to their issue price (NABHB closed Wednesday at $100.89, which includes $0.60 in accrued interest; ANZHA quoted at $100.90, which includes $0.57 in accrued interest). On an expected five-year term, ANZHA is trading at a margin of bank bill plus 2.67%.
At a likely margin of 2.75%, this issue is fairly priced and marginally better value than available on the secondary market.
For those seeking diversification away from financial stocks and willing to accept more complex hybrid structures, have a look at ORGHA and AGKHA – the Origin issue trading at a margin of around 3.75% and the AGL issue at 3.85%.
There is some misguided comment in the press about the state of the hybrid market because borrowers like Westpac are opportunistic – that is, they only issue paper when it is more favourable than accessing the wholesale markets. There is nothing wrong with this – this is just being commercial. With an ASX issue like this, they face issue costs of around 1.5% to 2.0% of gross proceeds, plus ongoing registry costs, plus issue risk – so it is not surprising that there is a reasonable spread between “wholesale” and “retail” rates. Our challenge as non-institutional investors is that it is very hard to access the wholesale market.
Wholesale rates have come down a touch, and investors have demonstrated a preference for simpler structures. Unless there is a raft of new issues, our view is that this issue will be well supported at the 2.75% margin.
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