It has been a tough year in the hybrid securities market, with issues on the secondary market under pressure due to the rise in yields on bank ordinary shares. While banks strengthening their balance sheets and raising ordinary share capital is actually good for hybrid issues, the market has been a little more fickle.
AMP launched a capital note issue the other week to raise $230m at a margin of 5.1% over the 90-day bank bill rate, and to complete the year, Macquarie has today launched a $400m issue of Macquarie Capital Notes, which will count as Additional Tier 1 capital.
Macquarie Capital Notes 2
Macquarie Capital Notes 2 will pay a semi-annual distribution. The distribution is set every six months at a fixed margin of between 5.15% and 5.35% over the 180-day bank bill rate, and then adjusted for an expected distribution-franking rate of 40%.
With the 180-day bank bill rate currently around 2.36%, this implies a gross distribution rate of 7.51% pa for the first six months (2.36% plus 5.15%). As the actual distribution is also expected to carry a franking credit of 40%, the actual distribution in cash would then be 6.411% (7.51% x 0.70 /0.82 = 6.411%).
Distributions are discretionary and subject to distribution payment conditions. If a distribution is not paid, it doesn’t accrue and won’t subsequently be paid.
To protect Note holders from this discretion being misapplied, if a distribution is not paid, Macquarie is then restricted from paying a dividend on its ordinary shares.
Exchange into Macquarie Shares
Macquarie Capital Notes 2 are perpetual and have no term. However, Macquarie must (subject to a test) exchange the Notes into ordinary shares on 18 March 2024 (in about 8.25 years). If exchange occurs, holders are issued Macquarie ordinary shares at a 1% discount to the then weighted average market price. The test for the exchange is the price of Macquarie ordinary shares at the time – provided they are higher than approximately $46.50, exchange 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 further mandatory exchange events, which are defined as ‘non viability events’. Broadly, this means that if the regulator APRA believes that Macquarie Group is in danger of becoming non-viable or needs an injection of capital to remain viable, it can require that the Capital Notes be immediately exchanged into ordinary shares. In these distressed circumstances, exchange would most likely result in a holder receiving considerably less than $100 of Macquarie ordinary shares, as there is a cap on the maximum number of ordinary shares that can be issued.
Macquarie also has a call option to redeem or exchange the Notes in approximately five years’ time. Unusually, there are three call dates – on 17 March 2021, 17 September 2021 and 17 March 2022 when it can elect to redeem or resell the Capital Notes by paying holders the face value of $100, or exchange the Notes into $101 of Macquarie ordinary shares.
Details of the issue are as follows:
An institutional bookbuild on Friday will determine the final margin.
In addition to a broker firm offer, Macquarie expects to conduct a security holder offer (to Macquarie shareholders and existing note holders), and an offer to the public. Brokers involved in the deal include Bell, Morgans, Macquarie, JB Were and Ord Minnett.
Our View
Given that the recent AMP issue was supported at a margin of 5.1% (quarterly), we expect that this bigger issue from Macquarie at 5.15% (half yearly) will also be well supported. Macquarie is appropriately capitalized with a Common Equity Tier 1 ratio of 11.6% at 30 September, and a leverage ratio of 6.0%. Both these ratios are above its major bank peers.
Although there is still some indigestion in the hybrid market, yield investors will be attracted by the headline margin of 5.15% for a name like Macquarie. While this issue is probably the last one before February next year, expect more issues next year – so a little patience and diversification remain important investing attributes.
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.
