Macquarie Bank Capital Notes (MBLPA) - we prefer the MBLHB

The now familiar terms forcing conversion to equity or, if unsuccessful, a write off after a Capital Trigger Event or a Non-Viability Event increases the risk to investors.  We don’t believe Investors are being paid enough to undertake these risks.   

We prefer the currently listed MBLHB which have a worst case of conversion to a preference share with no write off or conversion to equity triggers.  While the yield is lower, the risks are lower.  There is also a chance for capital gain should the MBLHB be redeemed once their usefulness as capital diminishes.  They are not eligible Tier 1 capital under Basel 3 and while priced as a perpetual they are callable now.  They pay an unfranked coupon as well.  The MBLHB will still be volatile in a crisis but not to the same extent as the recent Alternative Tier 1 issues.

All banks are in much better shape than pre 2007 having reduced offshore wholesale debt levels, and on the asset side Macquarie Bank has done exceptionally well with its funds management business a stand out alongside its other steady income producing businesses.  Macquarie Bank, as opposed to Macquarie Group, is issuing the MBLPA which is a positive.  The Bank has a better credit quality than the Group, the holding company for the Bank and other more risky businesses, although the Group is still a good quality issuer.  It is worth noting any conversion will be from a Bank issued hybrid to the Group’s equity, which increases the risk to some degree.  The MBLHB are also issued by the Bank.

The indicative range for the coupon on this new issue is BBSW 3.10 to 3.30% p.a fully franked.  This is higher than the margin on offer from recent major bank hybrids, as it should be given the better credit quality of the majors.  Nonetheless all of the Basel 3 compliant Alternative Tier 1 recent issues offer coupons 1% below what we think is fair compensation for the risks of the notes.  The MBLHB offer better relative value.