Weighing up Westpac Capital Notes 2
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Key Points
- Westpac Capital Notes 2 are a replica of Westpac Capital Notes
- Main difference is the new notes have a much longer ‘term’
- Interesting choice for Westpac hybrid investors
Westpac is due to replace an old hybrid issue (Westpac SPS 2 – ASX Code: WBCPB) and right now, as we explained in Issue Date VWAP. Table 1 shows how the two Westpac offers and the recent ANZ Capital Notes 2 (another similar offer) stack up.
| Westpac Capital Notes 2 (WBCPE) | Westpac Capital Notes (WBCPD) | ANZ Capital Notes 2 (ANZPE) | |
|---|---|---|---|
| Price ($) | 100.00 | 102.20 | 102.00 |
| Official ranking | Perpetual note | Perpetual note | Perpetual note |
| Risk characteristics | Equity-like | Equity-like | Equity-like |
| Distribution rate | 3mth BBR 3.05% | 3mth BBR 3.2% | 6mth BBR 3.25% |
| Distribution type | Cash franking credits | Cash franking credits | Cash franking credits |
| Compulsory distributions | No | No | No |
| Cumulative | No | No | No |
| Dividend stopper? | Yes | Yes | Yes |
| Principal repayment | WBC shares or cash | WBC shares or cash | ANZ shares or cash |
| Mandatory conversion date (1) | 23-Sep-24 | 8-Mar-21 | 24-Mar-24 |
| Optional early exchange date (2) | 23-Sep-22 | 8-Mar-19 | 24-Mar-22 |
| Capital trigger Event (3) | Tier 1 capital < 5.125% | Tier 1 capital < 5.125% | Tier 1 capital < 5.125% |
| Non-viability trigger event (3) | Yes | Yes | Yes |
| Relevant fraction - mandatory conversion (4) | 50% | 50% | 50% |
| Relevant fraction - other conversions (4) | 20% | 20% | 20% |
| % Discount on conversion | 1% | 1% | 1% |
| Issue date VWAP (5) | 34.48 | 29.89 | 32.30 |
| Issuer ordinary share price | 34.48 | 34.48 | 33.20 |
| Ordinary share price exceeds issue date VWAP by?(6) | 0% | 15% | 3% |
| Yield to Maturity (YTM) (on current price) | 3mth BBR 3.05% | 3mth BBR 2.9% | 6mth BBR 3.1% |
| (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 (compared to Issue Date VWAP) at which investors will suffer a capital loss on conversion. | |||
| (5) Issue date VWAP is roughly the ordinary share price when the hybrids were issued and is used to calculate the Maximum Conversion Number (above). Where hybrid not yet issued, equals current ordinary share price. | |||
| (6) The more the current share price exceeds issue date VWAP, the less risk that the hybrid won't convert or the Maximum Conversion Number will cause a capital loss on conversion (all other things being equal). | |||
| (7) Prices as at 15 May. | |||
In No NAB or AMP hybrids for this model portfolio we explained why hybrids didn’t find a place in our Conservative Portfolio. The same reasoning applies here. The returns aren’t exciting and the Common Equity Capital and Non-viability Trigger Events, or the risk of being stuck holding a note with voluntary interest in perpetuity, are a little too scary for a security that’s not even paying us 6% return (over a likely term of eight and a quarter years).
Interesting proposition for Westpac Capital Note investors
The interesting thing about Westpac Capital Notes 2 is that it’s being offered at a higher margin (3.05%) to where Westpac Capital Notes are currently trading (around 2.9%), so there’s a chance for investors in the old notes to sell on-market and earning a higher margin on the new notes.
However, the trade-off is a much longer likely term and a greater risk of Westpac’s ordinary share price falling to a level where the Conversion Conditions aren’t satisfied (since these are based on the Issue Date VWAP). Both of these mean more risk.
So that’s your choice; higher return but a higher risk. If we were investing in hybrids our general approach would be to go for safety over return and would therefore tend to stick with the older versions (including, in this case, Westpac Capital Notes). But we acknowledge the choice isn’t clear-cut between the two options and you may prefer the higher return and higher risk.
On the whole, though, as our model portfolios indicate, we prefer steering clear of hybrids full stop.
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