Westpac Trusts outshine PERLS

PORTFOLIO POINT: The wider spread on Westpac Trusts put them ahead of the Commonwealth Bank’s PERLS 3.
In the past fortnight investors have been attracted to Commonwealth Bank PERLS 3. However two weeks is a long time in financial markets and since then a similar security – the Westpac Trusts (WCTPA) – have quietly replaced the PERLS 3 as my preferred major bank hybrid.

The two securities are similar in many ways, which is not surprising considering both belong to the same vintage of hybrid issues. Both have a 2016 call date at which time they step-up by 1% from initial margins of 1.05% for the PERLS 3 and 1% for the Westpac Trusts if they are not called.

However, I would be very surprised if either bank didn’t call their hybrids at this opportunity. This is an important component of the investment strategy and a reason why I favour callable/steppable/resettable structures to the plain income securities such as NABHA (NAB Income Securities) and MBLHB (Macquarie Bank Income Securities).

The securities also have the same rating (A ) from credit ratings agency Standard & Poor’s (S&P). The main point of differentiation at the moment is the price. The PERLS 3 are currently down 31% from their $200 issue price compared with the Westpac Trusts, which have declined by more than 39% to $60.75 from their original $100 face value. The following graph outlines the current spreads available from major bank hybrids.

The Westpac Trusts now have the highest spread of the major bank hybrids by a considerable margin – 9.75% compared to 7.96% for the PERLS 3. Interestingly, the spread on the CBAPB, or PERLS 4, at 7.37%, is closing the gap on its predecessor version. Considering this latter security has a shorter duration – an October 2012 call date – it is now rivalling the PCAPA for the status of the number-one ranked Commonwealth Bank hybrid.

Jim Stening is managing director of FIIG Securities.