ANZ kicks off hybrids ball game

The top-tier bank is aiming to raise at least $1 billion via its capital refinancing.

Summary: ANZ Bank has become the first major bank to announce a capital refinancing this year, with the proceeds to be used to redeem its ANZ CPS 1 hybrid notes, which are scheduled to be redeemed, or converted into ANZ shares, in June.
Key take-out: ANZ is offering a credit spread of 3.25% to 3.40% over the 180-day bank bill rate on the capital notes, with the bookbuild for the issue scheduled to take place tomorrow (February 18).
Key beneficiaries: General investors. Category: Fixed interest.

With almost $4.4 billion of transitional Tier 1 capital due to be called this year, ANZ became the first to act last week when it announced its Capital Notes 2 issue.

ANZ is hoping to raise $1 billion or more from the sale of the Capital Notes 2.

The proceeds from the issue will be used, at least in part, to redeem ANZ’s CPS 1, which are scheduled to be redeemed, or converted into ANZ ordinary shares, on June 14. The bank is offering the holders of CPS 1 notes priority to roll over into the Capital Notes 2.

With $1.08 billion of CPS 1 notes on issue, and ANZ offering a credit spread of 3.25% to 3.40% over the 180-day bank bill rate for the coupon to be paid on the Capital Notes 2, compared with a credit spread of only 2.5% on the CPS1, most CPS 1 holders probably will opt to roll over.

If allowance is then made for any new demand that may appear for the Capital Notes 2, it seems likely that the final issue size could be $1.5 billion, or even $2 billion.

NAB raised $1.7 billion from its comparable CPS II offer in December, which pays a coupon of 3.25% over 180-day bank bills.

Other banks in the queue

Based on the timing of call dates for existing transitional Tier 1 capital, Westpac is likely to be the next to approach the market with a new Additional Tier 1 capital issue. Westpac has $1.2 billion of SPS II notes due to be called in September.

Then, in October, Commonwealth Bank has $2 billion of PERLS V due to be called, and Bendigo and Adelaide Bank has $100 million of SPS due.

Westpac and Bendigo and Adelaide Bank could well replace their called notes with even larger issues of new Additional Tier 1 capital, but it is hard to imagine that CBA could write a new issue even larger than the $2 billion of PERLS V being called.

Hybrids hunger?

Of course, increased issue sizes assumes investor appetite for hybrid securities issued by the banks is yet to be sated. Certainly the evidence to date says this is a safe assumption.

And, if that is the case, the reference to ASIC’s guidance for retail investors on page three of ANZ’s Capital Notes II prospectus is unlikely to be read.

Over-exposure

But there is another matter that investors may become increasingly concerned about, especially those investing through self-managed superannuation funds.

SMSFs are heavily exposed to equities, and that inevitably means large holdings of the shares of the four major banks. And, to the extent that SMSFs hold interest rate securities listed on the ASX, subordinated debt and hybrid securities issued by the four major banks will again feature prominently.

If term deposits with any of the four major banks are also held within those self-managed funds, then the beneficiaries of the funds are exposed to the entire liability and capital structure of the banks. This is a heavily concentrated risk!

ANZ issue details

For those who remain unperturbed, the model for Basel III, Additional Tier 1 Capital was firmly established last year. Consistent with that model, the ANZ Capital Notes 2 are perpetual and will pay coupons that are discretionary on the part of the bank and non-cumulative.

The coupons should be fully franked.

The notes are also mandatorily convertible into ANZ ordinary shares, should ANZ’s Common Equity Capital ratio fall below 5.125% or should APRA in its absolute discretion, decide that the bank is about to become non-viable. ANZ discloses that its Common Equity Capital ratio stood at 7.5% on a level 1 basis and 7.9% at level 2, at the end of 2013.

From January 1, 2016, ANZ intends to maintain its Common Equity Capital ratio above 8%, which should exceed APRA’s 5.125% requirement plus the additional 1% capital conservation buffer that will be imposed from that date. The additional capital conservation buffer complies with the Basel III requirements for domestic systemically important banks.

Mandatory conversion of the Capital Notes 2 upon the pulling of the Common Equity Capital or Non-viability triggers will almost certainly result in capital losses for noteholders. Conversion into ordinary equity will also occur upon a change of control event, a tax event or a failure to repurchase the notes by March 2024.

A soft call date for the repurchase of the notes in March 2022, also applies.

The bookbuild for the issue is scheduled to take place tomorrow (February 18) to determine the coupon and issue size. The offer closes on March 20 (broker firm, March 28) and deferred settlement trading on the ASX will take place from April 1.