ANZ has launched an issue of capital notes, Capital Notes 5, seeking up to $1 billion of capital.
The hybrids will qualify as Additional Tier 1 Capital for regulatory capital requirements.
ANZ will use the capital to refinance an outstanding note issue, CPS3, and for general corporate purposes.
The notes are perpetual, unless redeemed, converted or resold. They convert to ordinary shares in March 2027 or following a capital or non-viability trigger event, or change of control.
In the event of a winding-up, the notes rank ahead of ordinary shares, rank equally with equal-ranking capital securities such as Capital Notes 4, behind senior creditors and behind secured debt and bank deposits.
ANZ has the option of exchanging the notes in March 2025.
Distributions, which are discretionary and non-cumulative, will be paid quarterly. The floating-rate distributions will be based on a margin over the 90-day bank bill rate.
ANZ has indicated that the margin will be between 3.8 per cent and 4 per cent. The 90-day bank bill rate is currently 1.69 per cent. Distributions may be franked.
A yield between 5.49 per cent and 5.69 per cent compares with a rate of 2.8 per cent on a five-year ANZ term deposit and a grossed-up yield of 8 per cent on ANZ ordinary shares.
It is likely that most of the issue will be absorbed by the reinvestment offer to CPS3 noteholders but the bank has included the option of a broker firm new money offer.
Morningstar has recommended that investors subscribe to the offer, saying: “Against the backdrop of a continued low domestic cash rate, hybrid securities have continued their strong performance in 2017.”
Morningstar has assigned the notes a ‘medium’ risk rating, which is the same as the other major bank hybrids in its coverage list.
“The terms and conditions, such as non-viability and capital conversion triggers in the latest breed of hybrid securities make them more equity-like and, consequently, riskier than old-style issues. Nevertheless, for investors with a medium to high risk appetite, hybrid securities can represent an attractive yield investment,” the researcher says.
Since mid-2016 hybrids have performed strongly in the secondary market, supporting their capital values.
“However, the technical factors supporting hybrid pricing can easily reverse, so we caution investors against becoming too exuberant with their expectations,” Morningstar says.
The DCM Review says the margin being offered on the notes “is not particularly attractive.” It says there are comparable notes trading in the secondary market with similar or better margins and shorter terms to their optional redemption dates.
“For instance, ANZPG notes have an optional redemption date of March 2024 and a trading margin of 385 basis points and the CBAPF notes are due to be redeemed in March 2022 and trade at a margin of 376 basis points,” it says.
