Reports regarding a new hybrid from Bendigo and Adelaide Bank emerged a week ago and those reports have now been confirmed. Bendigo has announced it intends to issue $300 million worth of Converting Preference Shares 4 (ASX code: BENPG), with the ability to raise more or less than this amount. The proceeds of the offer will be used to refinance Bendigo’s CPS (ASX code: BENPD) hybrid securities which were issued in November 2012, as well as for general corporate purposes.
The new securities have some features in common with equities and some features in common with debt securities. 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 capital notes. In the event Bendigo Bank is wound up, Bendigo’s various hybrids, including the new notes, would rank above ordinary shares but below ordinary debt securities.
These converting preference shares have an indicative dividend rate equivalent to BBSW plus a margin of 375bps to 395bps. The final margin will be determined by a “book build” on 23 October 2017. In this case a book build is a tender process managed by investment banks on behalf of Bendigo in which investment institutions each place bids for a set volume at a price/yield. (This is the same way as the AOFM holds tenders to sell government bonds each week). If recent history is any guide, then the margin is likely to be set at the lower end. Dividends are to be non-cumulative, at the discretion of Bendigo directors and paid quarterly in arrears. At the prevailing level of interest rates and if the margin is at the lower end of the range, the new notes will pay around 5.45% (annualised) inclusive of franking credits. As interest rates change, specifically the bank bill swap rate, quarterly payments will also change.
The first call date, or what Bendigo refers to as the “optional exchange date”, is on 13 June, 2024 and by convention, securities are typically redeemed on this date. This is the date at which Bendigo can first exchange the securities in the absence of a “Trigger Event”, “Change of Control Event” or a “Tax Event”. Exchange, in the context of listed hybrids, can mean redeem, resell to a third party or convert into ordinary shares. The scheduled mandatory exchange date is 15 June 2026.
