No sizzle in Westpac Offer

Co-founder of the Switzer Report
Print This Post A A A

Westpac is raising $750 million through the issue of Westpac Subordinated Notes II. These will be listed on the ASX and trade under ASX stock code WBCHB. They will qualify as Tier 2 capital for Westpac, being fully compliant under the new Basel III standards.

They are “no frills” because unlike some of the other hybrid issues, they are structured more like a debt issue rather than an equity issue. They have a fixed maturity date, distribution payments are not discretionary, and barring one residual right for APRA, don’t convert into ordinary shares.

With the 90-day bank bill rate currently around 2.76%, this suggests a likely interest rate of 5.06% per annum for the first quarter, if the margin is set at 2.30%, or 5.21% per annum if set at 2.45%. Interest payments are, of course, unfranked.

There is also one “nasty” that sets these notes apart from earlier issues of subordinated notes, such as the WBCHA issue last year – APRA has required Westpac to include a ‘non-viability’ trigger.  In extreme circumstances, APRA can require Westpac to convert these notes into ordinary shares.

Ranking

These securities rank ahead of tier 1 capital hybrid securities, such as the recent Westpac Capital Notes (WBCPD), but behind other tier 2 capital hybrid securities (such as the Westpac Subordinated Notes 1 issue WBCHA). The following diagram shows the ranking of these securities:

Pricing

The major banks’ subordinated note issues were trading this morning on the ASX at a margin of around 2.25% (ANZHA at 2.23%, NABHA at 2.30% and WBCHA at 2.24%). These notes are now shorter in term, with approximately four years to the call date rather than five years. So on paper, the indicated margin for the Westpac notes at 2.30% is around the money.

However, these older style notes don’t contain the APRA ‘non-viability’ trigger as a condition.

Maybe it is my long memory – however I can recall 1992 and Westpac’s share price touching $2. It got into some difficulties and sailed pretty close to the wind. While I think all our major banks are now in the “too big to fail” category, it doesn’t mean that as a first line of response, the regulator (APRA) wouldn’t use its power to order a bank undergoing difficulties to recapitalise and convert these new style hybrid issues into ordinary shares.

Working on the “too big to fail” approach, when it comes to the major banks, I would rather go for the hybrid issues that have a little more risk – and higher return, such as WBCPD. I don’t think a margin of 2.30% is sufficient compensation for an issue that has an equity-style feature – particularly when government guaranteed term deposits are available at margins of around 1.40% (UBank is offering 4.21% ME Bank 4.20%). Too skinny – avoid.

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.

Also in the Switzer Super Report:

Also from this edition

View More Articles