ANZ Cap Notes 2: Attack of the clones
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(Note: This article originally appeared on Intelligent Investor Super Advisor.)
ANZ needs to replace an old hybrid issue (ANZ CPS 1), so they’re back at the trough with ANZ Capital Notes 2. In Little to like in latest hybrids we said ANZ Capital Notes were a replica of Westpac Capital Notes. ANZ Capital Notes 2 is a clone of a clone.
The only material changes between ANZ Capital Notes Parts 1 and 2 are the mandatory and early conversion dates, the margin and the ANZ ordinary share price.
The issue margin is slightly lower (3.25% vs 3.4%) and the conversion dates are March 2022 (early conversion) and March 2024 (mandatory conversion). Based on the early conversion date, the ‘term’ is 8 years – the same as ANZ Capital Notes’ original term.
Key Points
- ANZ Capital Notes 2 are a replica of ANZ Capital Notes
- Higher ANZ ordinary share price means they're a bit riskier
- Older hybrids are generally better than new
Key details for ANZ Capital Notes (1 and 2), the Westpac Capital Notes, and the earlier ANZ CPS 3, are shown in Table 1.
| ANZ Capital Notes2 (ANZPE) | ANZ Capital Notes (ANZPD) | Westpac Capital Notes (WBCPD) | ANZ CPS3 (ANZPC) | |
|---|---|---|---|---|
| Price ($) (@19 Feb) | 100.00 | 101.35 | 101.36 | 100.44 |
| Official ranking | Perpetual note | Perpetual note | Perpetual note | Preference share |
| Risk characteristics | Equity-like | Equity-like | Equity-like | Equity-like |
| Distribution rate | 6mth BBR 3.25% | 6mth BBR 3.4% | 3mth BBR 3.2% | 6mth BBR 3.1% |
| Distribution type | Cash franking credits | Cash franking credits | Cash franking credits | Cash franking credits |
| Compulsory distributions | No | No | No | No |
| Cumulative | No | No | No | No |
| Dividend stopper? | Yes | Yes | Yes | Yes |
| Principal repayment | ANZ shares or cash | ANZ shares or cash | WBC shares or cash | ANZ shares |
| Mandatory conversion date (1) | 24-Mar-24 | 1-Sep-23 | 8-Mar-21 | 1-Sep-19 |
| Optional early exchange date (2) | 24-Mar-22 | 1-Sep-21 | 8-Mar-19 | 1-Sep-17 |
| Capital trigger Event (3) | Tier 1 capital < 5.125% | Tier 1 capital < 5.125% | Tier 1 capital < 5.125% | Tier 1 capital < 5.125% |
| Non-viability trigger event (3) | Yes | Yes | Yes | No |
| Relevant fraction - mandatory conversion (4) | 50% | 50% | 50% | 50% |
| Relevant fraction - other conversions (4) | 20% | 20% | 20% | 50% |
| % Discount on conversion | 1% | 1% | 1% | 1.0% |
| Yield to Maturity (YTM) (on current price) | 6mth BBR 3.25% | 6mth BBR 3.1% | 3mth BBR 3.1% | 6mth BBR 3.0% |
| Notes: | ||||
| (1) Date on which mandatory conversion to ordinary shares is expected to take place (subject to conversion conditions being satisfied). | ||||
| (2) Date on which issuer has the right to elect to redeem, arrange sale or convert early. | ||||
| (3) Both Capital Trigger Event and Non-viability Trigger Event cause an immediate conversion into ordinary shares without the 'conversion conditions' (which aim to prevent capital losses) that govern mandatory and early conversions. | ||||
| (4) Used to calculate Mandatory Conversion Number (cap on number of ordinary shares into which hybrid can convert). Relevant Fraction is a rough proxy for share price level at which investors will suffer a capital loss on conversion. | ||||
In No NAB or AMP hybrids for this model portfolio we explained why hybrids didn’t find a place in Super Advisor's Conservative Portfolio. The same reasoning applies here. The returns aren’t exciting and the Common Equity Capital and Non-viability Trigger Events are a little too scary for a security that’s not even paying us 6% return.
Old versus new
We said in our report on ANZ Capital Notes that older hybrids are generally a more attractive risk/reward proposition than these newer versions. That comment applies not only to earlier income securities like Westpac TPS and CBA PERLS III but also the earlier dated versions of these mandatorily convertible hybrids like ANZ CPS 3, or CBA PERLS VI.
The reason is that rising bank share prices (since the hybrids were originally issued) have made it less likely the older hybrids won’t ‘mature’ (technically, convert to ordinary shares). It also reduces the risk of capital loss on an early conversion arising from one of the early ‘trigger events’.
For instance, CBA PERLS VI has a Maximum Conversion Number (MCN) calculation similar to ANZ Capital Notes 2. But its MCN was calculated based on a share price that’s a third lower than it is today (see Table 2). This means CBA’s share price needs to fall further than ANZ’s before hybrid investors would suffer a capital loss on a forced early conversion or get stuck holding the hybrid at 'maturity'.
| Ordinary share price at hybrid issue date (1) | Current ordinary share price (2) | % above issue date share price | |
|---|---|---|---|
| ANZ CPS2 | 17.35 | 31.80 | 83.3% |
| ANZ CPS3 | 19.53 | 31.80 | 62.8% |
| ANZ Capital Notes | 29.16 | 31.80 | 9.1% |
| ANZ Capital Notes 2 (3) | 31.80 | 31.80 | 0.0% |
| Westpac CPS | 20.83 | 33.17 | 59.2% |
| Westpac Capital Notes | 29.89 | 33.17 | 11.0% |
| CBA PERLS VI | 56.08 | 75.00 | 33.7% |
| NAB CPS | 30.64 | 35.24 | 15.0% |
| NAB CPS 2 | 33.86 | 35.24 | 4.1% |
| Notes: | |||
| (1) Issue date share price is VWAP (volume weighted average price) during period immediately preceding issue date. | |||
| (2) Closing share price as of 19 Feb. | |||
| (3) Assuming VWAP during period prior to issue date equals today's share price. | |||
Where does that leave us? From an investor’s perspective, there’s really no point in getting involved in ANZ Capital Notes 2. If you’ve got cash you can buy any one of the hybrids listed in Table 2 (or any of the other hybrids listed on the ASX). Even if you’re an investor in ANZ CPS1, in which case you’ve been offered the opportunity to sell and reinvest in ANZ Capital Notes 2, you can sell them through your share trading account, or wait for them to be repurchased, and buy something else.
Verdict
We’ll stick with our sensibly diversified Conservative Portfolio. We reckon we’ll do better in the long run than investing in a bunch of hybrids. But if you are going to dabble, go with the older versions and avoid this latest offer.
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