Suncorp brings new hybrid to market

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Suncorp has launched a new $500 million hybrid securities issue. Qualifying as Tier 2 capital for the group, this hybrid uses a structure that makes it more like a “debt” instrument – 10.5 year term, callable after 5.5 years, no discretion around the payment of interest – rather than an “equity” instrument.

The Suncorp Notes will pay interest quarterly at a margin of between 2.85% and 3.10% over the 90-day bank bill rate. With the bank bill rate around 3.05%, and assuming a margin of 2.85%, this is equivalent to 5.90% per annum for the first quarter.

While the notes mature in 10.5 years on 22 November 2023, with the approval of APRA, Suncorp may elect to redeem the notes in 5.5 years time (from 22 November 2018), and then on every interest date thereafter by repaying the outstanding principal and interest.

The notes are subordinated and unsecured. They rank behind all secured creditors, bonds, and general creditors, and ahead of preference shares such as Suncorp CPS2 (ASX Code SUNPC) and Suncorp ordinary shares. Interest payments cannot be deferred and are not discretionary, however interest will not be paid if Suncorp is not solvent.

There is also the standard ‘non-viability’ trigger – which essentially allows APRA to determine that Suncorp is in serious financial trouble and that the Notes are to be immediately converted into ordinary shares. Interestingly, APRA  has not provided any guidance as to how it would determine that a financial institution is “non-viable”.

Details of the issue are:

The institutional book build scheduled for next Wednesday will set the final margin.

Pricing

This issue is almost identical to issues last year by the ANZ, NAB and Westpac (ASX stock codes ANZHA, NABHB and WBCHA respectively). These were all issued at a margin of 2.75% over the 90-day bank bill, and as at the COB Wednesday, were trading in the secondary market on the ASX at the following effective margins (assuming redemption on the call date):

ANZHA        1.89%
NABHB        2.08%
WBCHA        1.95%

Suncorp is rated one to two notches below the major banks, and this issue may not have the same liquidity as the issues above. While it is likely that the prices of the major bank issues will weaken in the days ahead, as investors make room for the new issue (which will of course increase the trading margin), at more than 75 basis points over the majors, this Suncorp issue  looks like a reasonable bet. Expect this issue to be well bid, particularly if demand continues to be strong out of Japan and Asia for Australian “high yielders”.

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.

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