May 2015

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Returns for May
A negative month mainly from the performance of the hybrids(-0.31%), whereas bonds (senior and sub notes) returned +0.14%. These performances have been typical since July 2014 as shown in the chart, showing hybrid underperformance and greater volatility. Prior to July 2014, performances were similar month to month.hybrids

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BOQ Wholesale Capital Notes
BOQ launched an additional Tier 1 notes issue to wholesale investors, BOQ Wholesale Capital Notes, The notes are fully paid, perpetual, unsecured, subordinated debt obligations of BOQ. BOQ raised $150m with the notes. Distributions are discretionary, semi-annual and based on a floating rate, 6m BBSW + margin adjusted to reflect franking credits attached to each distribution subject to availability. The mandatorily convert after seven years, subject to certain conditions being met. BOQ may elect to Convert, Redeem or Resell in five years or earlier if particular events occur, subject to receiving APRA’s prior written approval. The notes contains non-viability triggers.

hybrid-may20145The BOQ Wholesale Capital Notes were not offered to retail investors and the margin was determined by the bookbuild as 435bps over 6m BBSW. BOQ the Capital Notes to qualify as additional Tier 1 capital. At the time of the announcement the market was suggesting pricing of 6m BBSW +435bps including franking and this proved to be accurate. Evans & Partner said, “Bendigo hybrids are a good comparison given the same credit rating of the banks (S&P, A-) and similar maturity of listed hybrids. The chart shows the similar BENPD (April 2017) and BOQPDs (Dec 2016). The average spread difference for the past 12 months is 0.15%, BENPD being tighter. BENPE (Nov 2020) is trading at a spread of 4.18%. Given the 0.15% trading premium of BOQPD over BENPD (despite the five month shorter BENPDs) and the superior credit metrics and management history of Bendigo bank, we feel at least 0.15% should be added to the BENPE margin for a new BOQ issue margin. This gives a margin of 4.33%, close to the indicated new BOQ margin. This is for a listed issue.”

ANZ sub notes
ANZ issued $200m 4.75% fixed rate subordinated notes due 13 May 2027 as part of its US$60bn euro medium term note programme. The Subordinated Notes convert into fully paid ordinary shares of the Issuer where APRA determines this to be necessary on the grounds that the Issuer would otherwise become non-viable.

NAB’s equity raising and the effect on hybrids
NAB’s large rights issue and UK exit have major positive implications from a credit perspective. The impact is a sharp increase in CET1 capital with NAB regaining a domestic focus and asset quality showing the benefits of the transition.  NAB hopes to raise $5.5bn through a 2:25 fully underwritten renounceable rights issue. The net impact of these transactions is a pro-forma CET1 level of close to 10%, providing a sound buffer to the 8.75-9.25% CET1 target of the group.

Hybrid drought predicted
During the month Elstree Funds Management commented, ‘Late in the month Bendigo Bank announced a new hybrid to replace a maturing security. Demand was strong with the book build closed early. There’s not much more supply this year WBC notwithstanding; WBC is the only major that needs more hybrid capital and we hear that’s coming in July.’

ASX LISTED HYBRIDS

COMPANYCODEHYBRID TYPEMATURITY OR STEP-UP DATEMARGIN INC FRANKTRADING MARGIN∆ MonthMONTH CLOSEYTM Est**S&P CREDIT RATING COMP/HYBRID
ANZ Banking GroupANZPAMCPS I16/12/20163.10%2.67%0.26%100.354.82%AA-/BBB
ANZ Banking GroupANZPCMCPS II28/09/20173.10%3.55%0.53%100.35.80%AA-/BBB+
ANZ Banking GroupANZPDMCPS II1/09/20213.40%3.88%0.19%98.96.13%AA-/BBB+
ANZ Banking GroupANZPECapital Note24/03/20223.25%3.90%0.23%97.46.15%AA-/
Bendigo BankBENHBPerpetual30/09/20541.00%2.44%0.23%76.54.59%A-/BBB
Bendigo BankBENPBStep Up15/06/20151.50%0.84%-4.03%99.82.99%A-/BBB
Bendigo BankBENPDMCPS II13/12/20175.00%3.23%-0.40%103.85.48%A-/BBB-
Bendigo BankBENPEMCPS II30/11/20203.20%4.13%0.32%95.76.38%n/a
Bank Of QueenslandBOQPDMCPS II15/04/20185.10%3.52%-0.18%104.985.77%BBB+/BB+
CBA PERLS 3PCAPAStep Up6/04/20161.05%2.82%0.03%197.94.97%AA-/BBB
CBA PERLS 6CBAPCMCPS II15/12/20183.80%3.17%0.09%103.25.32%AA-/BBB-
CBA PERLS 7CBAPDMCPS II15/12/20222.80%3.81%0.09%95.045.96%AA-/BBB-
ChallengerCGFPACapital Note25/05/20203.40%4.14%0.12%96.936.29%n/a
EldersELDPAPerp'l Pref30/06/2051n/a0.00%0.00%74.260.00%n/a
IAGIAGPCMCPS II1/05/20174.00%3.41%0.19%101.55.66%A+/A-
IAG RESIANGReset pref16/12/20194.00%3.35%0.15%103.85.50%A+/BBB+
Macquarie BankMBLHBIncome SecPerpetual1.70%3.37%0.18%76.45.52%A/BB+
MacquarieMBLPACapital Note24/03/20213.30%3.62%0.21%99.45.87%n/a
MacquarieMQGPACapital Note7/06/20194.00%3.48%-0.08%101.35.73%A-/BBB-
Multiplex SITESMXUPAPerp'l PrefPerpetual3.90%4.98%0.21%87.77.13%BB+/BB
Nat Aust BankNABHAIncome SecPerpetual1.25%2.82%0.11%75.84.97%AA-/BBB
Nat Aust BankNABPAMCPS II20/03/20193.20%3.85%0.26%98.86.00%AA-/BBB-
Nat Aust BankNABPBMCPS II17/12/20203.25%3.66%-0.07%97.85.81%AA-/BBB-
NufarmNFNGStep UpPerpetual3.90%5.11%0.01%86.417.36%BB /B+
PaperlinxPXUPAPerp'l Pref30/06/2052n/a8.80%0.00%911.05%n/a
Ramsay Health CareRHCPAPerp'l PrefPerpetual4.85%4.49%0.06%105.256.74%BBB/BB+
Suncorp-MetwaySBKHBIncome SecPerpetual0.75%2.17%0.03%764.32%A+/A-
SuncorpSUNPCMCPS II17/12/20174.65%3.70%0.39%103.565.85%A /BBB+
SuncorpSUNPEMCPS II17/06/20203.40%3.63%0.06%98.75.78%A /BBB+
Seven Network TELYS 4SVWPAPerp'l Pref2/12/20544.75%6.30%0.11%83.658.55%BB+/BB-
WestpacWBCPCMCPS II31/03/20183.25%3.38%0.31%100.525.63%AA-/BBB-
WestpacWBCPDMCPS II8/03/20193.20%3.74%0.24%98.015.89%AA-/BBB-
WestpacWBCPEMCPS II22/09/20223.05%3.75%0.20%96.95.90%AA-/BBB+
WestpacWCTPAStep Up30/06/20161.00%2.73%-0.27%98.654.88%AA-/BBB

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