Westpac’s hybrid will be well supported

Co-founder of the Switzer Report
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Key points

  • Westpac Capital Notes 3 will pay a quarterly distribution, expected to be fully franked.
  • The distribution is set every three months at a fixed margin of 4.0% over the 90-day bank bill rate, and then adjusted for the company tax rate (to take into account the franking credit benefits).
  • Westpac shareholders and security holders can apply for Westpac Capital Notes ($100 per security, minimum application $5,000) directly from Westpac when the offer opens next Monday. If applying through a broker firm offer, remember that your adviser, or their firm, is being paid a placement fee of 1.0% of your investment.

Margins on bank hybrid securities have hit record highs, with Westpac launching a new issue that is offering to pay a margin of 4.0% over the 90-day bank bill. Effectively, this means an initial return of 6.15% per annum for the first 90 days.

Westpac has launched the third series of its Capital Notes. To be listed on the ASX under stock code WBCPF, the offer is due to open next Monday. Westpac is seeking to raise at least $750 million, which it will classify as ‘Additional Tier 1 Capital’.

Hybrid securities have had a pretty rough trot over the last few months, as buyers remained on the sidelines and effective yields moved out in response to higher yields on bank ordinary shares. Towards the end of June, the effective yield on the benchmark PERLS VII issue from the CBA (CBAPD) traded as low as $90.50, an effective yield of over 4.5% (it was originally issued at a fixed margin of 2.8%). This has now moved higher in price, and at $93.50, is trading at an effective margin of just a fraction over 4.0%.

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