New AMP notes: tighter times

AMP’s new issue shows the high returns available during the GFC are gone.

Summary: AMP’s issue will be the first of many such refinancings to come over the next 12 months. But the returns on offer may make investors think back wistfully to the days when the GFC was at its worst.
Key take-out: The AMP notes 2 are offering a cumulative coupon of just 2.65% to 2.85% over the 90-day bank bill rate, compared with a spread of 4.75% from its first issue in 2009.
Key beneficiaries: General investors. Category: Fixed interest.

It is hard to imagine becoming misty eyed when thinking back to the days when the GFC was at its worst, unless of course you are thinking of how much you lost on your investments at the time.

However, if you had money to invest then, you may soon think back wistfully to the returns that were on offer to the lucky few.

It wasn’t necessarily a great time to be buying shares, as the recovery of the domestic stockmarket has been rocky since then, to say the least. But, for those that sought opportunities to buy ASX-listed interest rate securities, it was a great time.

The credit spreads on offer then have not been repeated since. And unfortunately, they are soon going to disappear entirely.

There is almost $5 billion of ASX-listed interest rate securities that will either mature or reach their first call date in 2014. And, for those that are reaching their first call date, it is a virtual certainty that they will be called, because the debt can now be refinanced with much lower credit spreads.

The $210 million of AMP subordinated notes, issued in April 2009, are a case in point. The notes paid a spread of 4.75% over the 90-day bank bill rate and will step-up to 7.13% over, if not called on May 15, 2014.

Unfortunately, AMP has every intention of calling the notes and has just announced its Subordinated Notes 2 issue to ensure it has the funds to do so. Only APRA can intervene to save the day for the original notes investors, but APRA will only intervene if it thinks AMP needs the additional capital and this would not be good news in relation to the credit risk posed by AMP.  

AMP is seeking to raise $200 million from the notes 2 issue and may accept more or less depending on the response received. The notes 2 are being offered to existing subordinated note holders on the basis that they will rollover at the face value of $100, when the notes 2 are issued in December.

Accrued interest will be paid separately to note holders in cash. 

With the notes 2 offering a cumulative coupon of just 2.65% to 2.85% over the 90-day bank bill rate (the actual margin will be determined in the bookbuild due to be held on Wednesday) investors might want to think about whether they are ready to accept lower rates of return or whether they would prefer to try their luck come next May.

The notes 2 also comply with the new rules for Tier 2 capital. Thus, there is the loathed non-viability trigger that will cause the notes to convert to AMP ordinary equity or be written-off in full, if and when APRA deems AMP to be non-viable.

Just what conversion into equity may mean for the capital value of a note holder’s investment, in terms of the maximum conversion number, is spelt-out on page 38 of the prospectus. This is the first time your correspondent has seen this information so clearly presented.

As has become the practice with the new Tier 2 capital issues, investors are offered a sale facility if they cannot or do not wish to receive AMP shares upon a mandatory conversion.

The notes have a 10-year term to maturity but can be called after five years, if APRA consents.

The offer closes on December 9.

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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