The first quarter of 2017 has started with a flurry of hybrid offerings. First there was Commonwealth Bank’s PERLS 9 (ASX code: CBAPF), then came Challenger (ASX code: CGFPB) and now Suncorp has announced it will issue another hybrid in addition to the two hybrids and one note already trading on the ASX. The insurance and banking conglomerate has announced it intends to issue $250 million worth of Suncorp Capital Notes (ASX code: SUNPF), with the ability to raise more or less than this amount.
These capital notes are perpetual, convertible, subordinated, unsecured notes and the proceeds will be used for ongoing funding and other general purposes. They 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 5.9% (annualised) inclusive of franking credits. As interest rates change, specifically the bank bill swap rate, quarterly payments will also change.
These new capital notes have an indicative distribution of BBSW plus a margin of 410bps to 430bps. The final margin will be determined by a book build, which is a tender process managed by investment banks on behalf of Suncorp. If recent history is any guide, the margin is likely to be set at the lower end. Distributions are to be non-cumulative, at the discretion of Suncorp directors and paid quarterly in arrears.
The first call date, the date on which Suncorp can redeem or resell the securities is on 22 June, 2022 and, by convention, securities are typically redeemed on this date. If redemption does not occur, exchange for ordinary shares will occur on 22 June, 2024, subject to the mandatory exchange conditions. If the mandatory exchange conditions are not initially met in June 2024, the conditions will be tested on each distribution date thereafter until exchange takes place.
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 (410bps) and the upper end (430bps). Issue margins spiked in early 2016 as trading margins on listed hybrids rose sharply. Since then, trading margins have fallen and issue margins have come down with them. Even so, readers can see recent issue margins are still fairly high from a historical point of view and still above the top end of the 300bps-400bps range which existed from 2011 to mid-2015.
Issue margins are set with an eye to current market conditions and margins of comparable hybrids already trading. 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 second chart below shows the trading margins of comparable securities which trade on the ASX as at the close of business 24 March 2017, as well as the new hybrids at both the lower and upper ends of the indicative margin range.