- ANZ is issuing ANZ Capital Notes 3, the third in a series.
- The issue will have a fixed margin of 3.6% over the 180-day bank bill rate.
- ANZ Capital Notes 1, were trading on Friday at an effective spread of 3.76% (price of $100.80), while the second series ANZPE, were trading at an effective spread of 3.69% (price of $99.94).
Although I am a fan of the hybrid securities market, I can’t get that excited about ANZ’s new issue of capital notes. The third in the series, ANZ Capital Notes 3 has been priced at a fixed margin of 3.60% over the 180-day bank bill rate.
The secondary market for hybrid securities is still suffering from the bloodbath in September/October and better rates are available on the ASX. Although you will need to pay brokerage, ANZ Capital Notes 1, which trade under the ASX Code of ANZPD and pay a fixed margin of 3.40% over the 180 day bank bill, were trading on Friday at an effective spread of 3.76% (price of $100.80), while the second series ANZPE, which pay a fixed margin of 3.25%, were trading at an effective spread of 3.69% (price of $99.94). The recently issued PERLS VII from the Commonwealth Bank (ASX Code CBAPD), which pay a fixed spread of 2.80% over the 90-day bank bill, were trading at a price of $96.00 or a spread of 3.59%.
The other reason to be a little wary is that there are still two major uncertainties that could affect this market. Firstly, there has to be some chance that ASIC may feel pressured to follow the lead of the UK’s financial services watchdog, the Financial Conduct Authority. The FCA has placed a 12-month ban on financial services firms distributing hybrid securities that qualify as capital (called “contingent convertibles” in the UK) to the mass retail market. While the UK banks aren’t in as strong a shape as the Australian banks and the ban doesn’t apply to high net worth investors (anyone with income over approximately $200,000 or investible assets of more than $500,000), where one regulator goes, others tend to follow.
Given the recommendations of the Murray Inquiry, it is also inevitable that the Government, through the Australian Prudential Regulatory Authority (APRA), will eventually require the banks to hold more capital. These hybrid securities qualify as additional tier 1 capital for the banks, and while they will only be part of the story in meeting any new requirements, banks will utilize this market and issue more securities if investor demand spikes. So, this won’t be the last issue – not by a long shot.
If you are interested in investing in this issue, my suggestion is to keep some powder dry. There is no rush. We have detailed below the key features of the ANZ Capital Notes, however as always, please review the Product Disclosure Statement before investing.
ANZ Capital Notes 3
These securities will pay a semi-annual floating rate distribution, which is expected to be fully franked. The distribution is set every six months at a fixed margin of 3.60% over the 180-day bank bill rate, and then adjusted for the company tax rate (to take into account the franking credit benefits).
With the 180-day bank bill rate around 2.39%, this implies a gross distribution rate of 5.99% per annum for the first six months (2.39% plus 3.60%). The actual distribution in cash, which is fully franked, would then be 4.19% (5.99% x 0.70 = 4.19%).
Distributions are discretionary and subject to no ‘payment condition’ existing. If a distribution is not paid, it doesn’t accrue and won’t subsequently be paid. To protect note holders from this discretion being miss-applied, if a distribution is not paid, ANZ is then restricted from paying a dividend on its ordinary shares.
Conversion into ANZ shares
ANZ Capital Notes are perpetual and have no term. However, ANZ must (subject to a test) convert the notes into ordinary shares on 24 March, 2025 (in about 10 years). If conversion occurs, holders are issued ANZ ordinary shares at a 1% discount to the then weighted average market price. The test for the conversion is the price of ANZ ordinary shares at the time – provided they are higher than approximately $19.60, conversion occurs – otherwise, it is retested on the next and subsequent distribution date(s) until the test is met.
To qualify as Additional Tier 1 capital, there are two further mandatory conversion events – a ‘common equity capital trigger event’ and a ‘non-viability trigger event’. Under these tests, APRA can require ANZ to immediately convert the capital notes into ordinary shares if ANZ’s common equity capital ratio falls below 5.125% (the ratio was 8.8% as at 30 September 2014), or if it believes ANZ needs an injection of capital to remain viable. In these distressed circumstances, conversion would most likely result in a holder receiving considerably less than $100 of ANZ ordinary shares as there is a cap on the maximum number of ordinary shares that can be issued.
ANZ also has a “once” only call option on 24 March 2023 (in about eight years), when it can elect to redeem the capital notes by paying holders the face value of $100, or converting the notes into ANZ ordinary shares.
Details of the issue are as follows:
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
