Hybrid debt has become the new battleground for Australian banks with ANZ yesterday launching a pre-emptive strike against Westpac.
Aimed squarely at retail investors, the ANZ offer is clearly designed to tap into the insatiable desire for yield that has driven investor sentiment for most of the past year.
But it would be a mistake for small investors to focus solely on the headline rates to compare the issues. For the securities themselves are likely to be very different animals, occupying dissimilar positions in the capital hierarchy.
ANZ’s $750 million offering – which could be increased depending on demand – has an attractive yield of between 340 and 360 basis points above the bank bill yield.
But it sits further down the security chain, closer to equity than debt. And in the event that ANZ performs poorly, investors are likely to be repaid in equity rather than through a return of capital. If that is the case, they will receive that equity at a low point in the cycle or in the bank’s performance (see Philip Bayley's ANZ sets worrying precedent).
Given the tight regulation that governs the Australian banking system – a factor that contributed to the sector sailing through the global financial crisis in rude good health – retail investors are likely to ignore or at least downplay such risks.
Institutional investors, on the other hand, will be more inclined to give more weight to the risk-reward ratio.
Westpac, due to release its capital raising plans on Monday, is likely to issue a security much higher up the food chain, probably classed as subordinated debt.
With less risk, its issue is likely to carry a yield of between 200 and 250 basis points above the bank bill rate. But in terms of risk and reward, that may be more attractive to institutional investors.
NAB, meanwhile, already has an issue in the market, priced at 370 basis points above the bank bill rate. While the issue has a similar risk profile to ANZ, it matures in three years, as opposed to the ANZ’s eight years, thereby delivering a higher yield over a shorter period.