Insurance Australia Group (IAG) has followed ANZ’s example and gone early in replacing a hybrid which is within 12 months of its call date. In August, ANZ announced a new issue of ANZ capital Notes 2 (ASX code: ANZPG) which raised $1.6 billion, with just over half used to repay ANZ CPS (ASX code: ANZPA) holders. ANZ’s CPS had a maturity date in December this year but ANZ decided conditions at the time suited them to go early.
IAG has two hybrids listed on the ASX at the moment, one being IAG CPS (ASX code: IAGPC). These securities have a first call date in May 2017 and a collective face value of just under $380 million. The general insurer has announced it intends to issue $300 million worth of Capital Notes (ASX code: IAGPD), with the ability to raise more or less than this amount. The proceeds will be used to repay CPS holders who choose to reinvest in the new securities, as well as for general purposes.
The new capital notes will qualify as Additional Tier 1 (AT1) capital under the Basel III bank regulatory framework, which means they have the now-standard “trigger events” which may lead to early conversion into ordinary shares or a write-off of the notes. At the prevailing level of interest rates, they will pay around 6.4% (annualised) inclusive of franking credits. As interest rates change, specifically the bank bill swap rate, quarterly payments will also change.
As with ANZ’s securities, these new capital notes have an indicative distribution of BBSW plus a margin of 470bps to 490bps. The final margin will be determined by a book build, which is a tender process managed by investment banks on behalf of IAG. If recent history is any guide, then the margin is likely to be set at the lower end. Distributions are to be non-cumulative, at the discretion of IAG directors and paid quarterly in arrears.
The first call date, the date at which IAG can exchange the securities, is on 15 June, 2023 and by convention, securities are typically redeemed on this date. Exchange, in the context of listed hybrids, can mean redeem, resell to a third party or convert into ordinary shares. The scheduled maturity date is 16 June 2025.
The chart below shows the history of issue margins of hybrid securities over the last eight years, including the GFC period in 2008/2009. The new capital notes are shown at both the lower end of the indicative margin (470bps) and the upper end (490bps). Issue margins are set close to the margins of comparable hybrids already trading on the ASX and, as margins of existing hybrids have fallen, the new IAG hybrids are likely to have a margin set at the same rate as ANZ Capital Notes 2 but lower than other hybrids which have been issued since October 2015. However, readers can see from the chart below they are still fairly high from a historical point of view.
Prices for securities change as soon as trading begins, whether it is on an organised market such as the ASX or an over-the-counter (OTC) market. Other securities issued at different margins may have fallen (or risen) in price, which generally means their trading margin will have changed. The chart below shows the trading margins of comparable securities which trade on the ASX as at the close of business 21 November 2016, as well as the new hybrids at both the lower and upper ends of the indicative margin range.