Finding rarity value in Macquarie’s hybrid

Will the bank’s new issue trigger investor interest?

Summary: Macquarie Group launched a much-anticipated hybrid capital notes issue on Monday, offering a coupon based on the 180-day bank bill rate plus a margin of 4% to 4.2% per annum, less any franking credits that may be paid. The margin is close to existing issues by Bendigo and Adelaide Bank and Bank of Queensland, with the earliest call date June 2018.
Key take-out: Unlike other notes in the market, Macquarie’s has no Common Equity Trigger in addition to a Non-Viability Trigger as APRA is yet to finalise its capital standards for financial groups that operate through a non-operating holding company.
Key beneficiaries: General investors. Category: Fixed interest.

Is there rarity value in a hybrid note issued by Australia’s only listed investment bank?

Well, there is no equity upside here. Remember, with debt investing the best one can expect is to have coupons paid as scheduled and principal returned at maturity.

Moreover, Macquarie Group is not offering much in the way of a new issue premium if any, for its capital note issue launched on Monday. The only rarity value here is in the form of portfolio diversification, if you are still looking to increase your exposure to Additional Tier 1 capital issues by Australian financial institutions.

The Macquarie Group capital notes are offering a coupon based on the 180-day bank bill rate plus a margin of 4% to 4.2% per annum, less any franking credits that may be paid. Leaving aside franking, the margin is positioned almost midway between the 3.92% and the 4.31% margins currently being achieved in the secondary market on the hybrid notes issued by Bendigo and Adelaide Bank (BEN) in November, and Bank of Queensland (BOQ) in December.

The period to the first call date is also similar on each of the hybrid note issues. The notes issued by BEN can be called in December 2017, and the BOQ notes in April 2018.

The earliest call date on the Macquarie Group capital notes is in June 2018. See more on this below.

Macquarie is indicating that a 40% franking credit may be paid initially on the coupons, in line with that currently being paid on its ordinary dividends. The franking credit may subsequently vary between zero and 100%.  

The only other difference between the new Macquarie Group capital notes and the other hybrid notes recently issued by other financial institutions is that there is no Common Equity Trigger in addition to a Non-Viability Trigger.

For other banks the Common Equity Trigger comes into effect should the common equity of the bank fall below 5.125% of risk-weighted assets. This trigger should be activated before the Non-Viability Trigger and provides some chance of there being only a partial conversion of the hybrid notes into ordinary equity.

There is no Common Equity Trigger attached to the capital notes being offered by Macquarie because APRA is yet to finalise its capital standards for financial groups that operate through a non-operating holding company. Until the standards have been finalised, APRA may feel obliged to call non-viability earlier than it otherwise might have.

If APRA does call non-viability, a full conversion of the hybrid notes into ordinary equity would be required. This would likely result in a substantial, if not full, capital loss for noteholders.  

In the meantime, the capital notes will receive transitional treatment from APRA that will run from January 1, 2014 to June 19, 2018 – the earliest call date on the capital notes. This will provide a good incentive for Macquarie to call the notes on the earliest date.

The notes can run another three years before mandatory conversion occurs.

Lastly, there is a little sweetener in the rollover offer being made to holders of Macquarie’s 2008 convertible preference shares (CPS).

Those that opt to roll over all or part of their CPS into the capital notes will be paid $105.1371 for each. This represents the capital value of $100 plus the accrued coupon up to June 18.

Paid in this form, the accrued coupon should be treated as a capital gain or loss on the original capital investment rather than as income, for tax purposes.

The bookbuild for the capital notes will take place over the next week and the offer will open on May 22. The closing date is June 11, and deferred settlement trading will begin on the ASX on June 20, under the ticker MQGPA.


Philip Bayley is a former director of Standard & Poor’s and now works as an independent consultant to debt capital market participants. He also writes on matters concerning debt capital markets and banking for various publications and is associated with Australia Ratings.

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