NAB heads hybrids pack
Summary: NAB is launching a new preference share issue to raise at least $750 million in additional capital, which will likely be one of the last such issues to be squeezed in this year. The CPS II hybrid securities stand to yield investors 4.1% fully franked post-tax yield, compared with the bank’s current 5.5% fully franked post-tax yield on its ordinary shares. |
Key take-out: NAB has the option of an early conversion of its capital notes into ordinary shares rather than redeeming the hybrids. If the conversion option is exercised, investors are entitled to recoup the face value of their original investment in ordinary shares. |
Key beneficiaries: General investors. Category: Fixed interest. |
The anticipated rush of new interest rate securities to be listed on the ASX is on. As noted in my article on Monday, there is $5 billion of such securities that will reach their call dates or maturity in 2014.
There is also additional capital that the banks need to raise. This is especially true for the four major banks, as APRA moves to implement its D-SIB (Domestic Systemically Important Banks) capital initiative.
AMP announced on Monday that it has upsized its Subordinated Notes 2 issue by 50% to $300 million and has set the credit margin to be paid on the coupon at the low end of the indicated range of 2.65% to 2.85%. Such was the enthusiasm for the new issue.
Yesterday, NAB announced is second convertible preference share issue for the year – CPS II. NAB wants to sell at least $750 million of the Additional Tier 1 hybrid securities, offering 3.25% to 3.45% over the 90-day bank bill rate (note: the dividends should be fully franked).
With the CPS II scheduled to commence trading on the ASX on a deferred settlement basis on December 18, the time frame for the issue is short. The bookbuild is due next Tuesday and the offer should the following day (Wednesday November 20) and close on December 9.
This is what happens when a capital raising needs to be squeezed in between the fiscal 2013 results announcement and the end of the calendar year. These timing constraints also mean that any further issuance is unlikely this year, but watch out for an early start in January.
NAB’s CPS II are the fourth issue of fully compliant Basel III, Additional Tier 1 capital, to be undertaken this year.
Westpac sold almost $1.4 billion of capital notes in March and NAB raised $1.5 billion from its first CPS issue in the same month. ANZ raised just over $1.2 billion from the sale of capital notes in August.
Not surprisingly, the terms and conditions attaching to all of these issues have become fairly standard. All are perpetual securities that pay non-cumulative, fully franked (if sufficient franking credits are available) dividends.
However, the ANZ capital notes pay only semi-annual dividends, while the others are or will be paid quarterly.
All the hybrid securities are also subject to APRA’s imposition of a common equity trigger and non-viability trigger. Activation of either trigger could result in the hybrids being converted into the ordinary shares of the issuer at a value that is less than the face value of the hybrids, or the hybrids being written-off entirely if conversion is not possible.
Differences arise between the issues in the areas of optional redemption/conversion of the hybrids, and the timing of this event and the subsequent mandatory conversion event.
In the case of Westpac’s capital notes and NAB’s CPS, the timing of the optional redemption date is six years after the date of issue and the mandatory conversion date comes eight years after the issue date. In the expected course of events, investors should get their money back after six years.
However, investors in ANZ’s capital notes have to wait eight years before the optional redemption date is reached and the mandatory conversion date is another two years after that. Investors in NAB’s CPS II will have to wait a year longer in each case than those holding NAB CPS, in other words seven and nine years, respectively.
But there is also a further twist.
ANZ has the option of an early conversion of its capital notes into ordinary shares rather than redeeming the hybrids. NAB also has this option with the CPS and the CPS II.
This is a twist on the traditional convertible note structure, where it is the note holder who has the option to convert into ordinary shares. Under the ANZ capital notes and the two NAB CPS hybrids, the issuer has the option and security holders get no say.
If the conversion option is exercised, investors are entitled to recoup the face value of their original investment in ordinary shares, even if the ordinary shares have fallen in value by up to 80% from the time the hybrid notes were issued. But if the value of the issuer’s ordinary shares has fallen by more than 80% over that time, then investors will suffer a capital loss.
Then again, if the share price has fallen to that extent and the common equity and/or non-viability triggers have not already been pulled, they soon will be. And, in the case of Westpac’s capital notes, early redemption is unlikely to be permitted by APRA.
Do the CPS II offer good relative value? Yes.
Even though the credit margin to be paid will inevitably be set at 3.25%, ANZ’s capital notes are now trading at 2.78% over bank bills and Westpac’s capital notes and NAB’s CPS are trading at 2.54% and 2.72% over, respectively.
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.