Summary: Suncorp to issue new hybrid security, SUNPJ; issue margin of 2.80%; expected to initially pay around 7.15% (annualised, including franking credits); first call date in June 2030; trading expected to begin on 15 May 2024.
In recent years, when one of a company’s existing hybrids approaches its first call date (or first optional exchange date), speculation turns to the likelihood of a replacement hybrid security. A replacement security makes sense given APRA regulations require banks and other financial institutions to maintain equity capital above certain minimum ratios of assets.
The latest hybrid security offer by Suncorp Group Ltd (“Suncorp”) is in keeping with this tradition as Suncorp Capital Notes 2 (code: SUNPG) are approaching their June 2024 call date. The offer also coincides with an overall low in hybrids’ margins from a historical perspective.
Suncorp plans to raise $300 million via an issue of Capital Notes 5 (code: SUNPJ), with the ability to raise more or less than this amount*. The new securities will be perpetual, convertible, subordinated, unsecured, redeemable notes and the proceeds will be used for general corporate purposes. However, this probably means they will be used to partially refinance the redemption of $375 million of Suncorp Capital Notes 2.
(* Suncorp announced it had already increased the offer size to $360 million on 18 April.)
The new notes have some features in common with both equities and debt securities. Distributions are at the discretion of directors but they are calculated according to a set formula with reference to the $100 face value of the securities. In the event Suncorp were wound up, its hybrids would rank above ordinary shares but below ordinary debt securities and other liabilities. However, the existence of a “write-off” clause implies the hybrids would likely no longer exist should Suncorp find itself in this position.
The capital notes will have a distribution rate equivalent to 3-month BBSW plus a margin of 280bps, with said margin determined by a “book build” on 18 April. A book build is a tender process managed by investment banks on behalf of the issuer in which investment institutions place bids for a set volume at a price/yield.
The chart above shows the history of issue margins of non-major bank hybrid securities over the last fifteen years or so, including the GFC period in 2008/2009.
Distributions will be non-cumulative, at the discretion of directors and paid quarterly in arrears. However, should a distribution not be paid, Suncorp cannot determine to pay or pay dividends on its ordinary shares until the next distribution payment date. It would also not be allowed to undertake any buy-back or capital reduction of its ordinary shares.
At the prevailing level of interest rates the new notes will initially pay around 7.15%* (annualised) inclusive of franking credits. *As interest rates change, specifically the bank bill swap rate, quarterly payments will also change.
The first call date is 17 June 2030. This is the first date at which Suncorp can exchange all or some of the securities in the absence of a “Non-Viability Trigger Event” or some other “event” as stated in the product disclosure statement.
The scheduled mandatory exchange date is 17 December 2032. Exchange, in the context of listed hybrids, may mean redeem, resale to a third party or convert into ordinary shares.
Issue margins are generally set close to the margins of comparable hybrids already trading on the ASX. The chart below shows the margins of non-major bank hybrid securities which trade on the ASX at the close of business on 16 April.
YieldReport has explained the meaning of “margin” in previous articles so for those readers who are not familiar with the term or who just want a refresher explanation, click here.
There will be an institutional offer and an offer to clients of syndicate brokers to the issue who may apply via a “broker firm” offer. There will be no “securityholder” offer nor an offer to the general public. However, there will be a reinvestment offer made to eligible Capital Notes 2 Holders via syndicate brokers.
Trading on the ASX is expected to begin on 15 May 2024.