Eureka Correspondence

Analysing CBA's hybrid issue, behind Tiger Resource's acquisition, whether to sell out of ToxFree and the closure of Abernethy's portfolios.

I conclude from Table 1 in Rosemary Steinfort’s article (August, 25, 2014) the PERLS VII offer is broadly on a par (yield to maturity, determined in the market) with other big four banks hybrids. This tells me that the CBA is offering the current market rate for this type of instrument. Presumably the Rosemary’s recommendation would apply to the purchase of most of these instruments?

My reading of the margin over the bill rate is that it has been decreasing for some years now. In fact some margins have been as low as 1% if you go back far enough. Is there any reason to believe that future hybrids will not be offered at lower margins?

You mention that the terms do not meet the risk-return expectations of wholesale investors. Could you elaborate? What have been the recent trends in margins and risk terms available to wholesale investors? How does one access these offers?

Let me also comment on your risk perspective and comment in regard to CBA shares. Today CBA is around $80, yet your target price is around $70. If you are right, an investor risks the loss of around $10 per share. Yet a decline in share price of this magnitude is unlikely to provoke a similar percentage decline in value of the PERLS VII. At the other extreme, should CBA be unable to make the payment on the hybrid, it would be precluded from paying a dividend. Imagine where your purchase of an $80 share would be in these circumstances!

My advice is that the strong demand may yet have the PERLS VII trading at a premium due to relative scarcity. I am advised that an unusually high percentage of holders of PERLS V will roll over, and bids for further script may well be scaled back by around 40%.

Douglas Taylor

Rosemary Steinfort’s response: Thanks for your questions, which I have endeavoured to address below:

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