Macquarie Group has launched a new issue of hybrid securities, offering the best margin investors have seen in the sector in over a year.
Macquarie Group Capital Notes 3 is being sold at a margin of 4 per cent over the bank bill rate. With the 90-day bank bill currently 1.95 percent, investors are looking at an initial yield of 5.95 per cent, adjusted for franking credits.
Distributions are expected to be franked at the same rate as dividends on Macquarie Group shares, which is currently 45 per cent. The broker firm offers opens on May 15 and is expected to close on June 1.
Macquarie provides the following example of how the distributions will be adjusted for franking credits: with a bank bill rate of 2.02 per cent, a margin of 4 per cent and a franking rate of 45 per cent, the adjusted distribution rate would be 5.05 percent.
The margin Macquarie is offering is well ahead of other recent hybrid issues. Westpac raised more than $1 billion of new capital in February with a hybrid issue priced at 3.2 per cent over the bank bill rate.
And in April, Commonwealth Bank issued PERLS X, a $1.36 billion issue of hybrids with a margin of 3.4 per cent.
Morningstar has recommended the Macquarie issue, saying the margin is “compelling”.
“We recommend investors subscribe to the offer. The near-term outlook for hybrid pricing remains mixed. While tight supply levels on the horizon should provide pricing support, increased market volatility will prevent sustained periods of outperformance,” Morningstar says.
Some hybrid investors hit the panic button in March, after learning that Labor’s dividend franking policy would affect the sector, and sold their holdings. The result was a blowout in hybrid trading margins of as much as 50 basis points.
The big Westpac and NAB issues also had an impact on margins.
Morningstar says: “In recent weeks we have seen volumes and interest return to the market, inevitably reflective of a perception of value.
“As risk is repriced in the face of increasing global benchmark yields, additional Tier 1 securities domestically have done the same. Westpac’s recent issue may well signal a near-term low for issue margins.”
Macquarie Group Capital Notes 3 meet the regulatory requirement to qualify as additional Tier 1 regulatory capital. They are subordinated, non-cumulative, unsecured convertible notes. Distribution payments are discretionary.
Macquarie may redeem the notes or exchange them for ordinary shares in December 2024, June 2025 or December 2025. Otherwise, the notes are scheduled to be exchanged into ordinary shares in December 2027.