Commonwealth Bank (CBA) has six hybrid securities currently listed on the ASX. None of them are approaching their respective first call dates, typically a time when the issuer will seek to replace them with another security.
CBA has just announced it will issue another hybrid security to add to the above-mentioned six. It plans to raise $750 million worth via the issue of PERLS 12 Capital Notes (ASX code: CBAPI), with the ability to raise more or less than this amount. The new securities will be perpetual, convertible, subordinated, unsecured notes and, according to CBA, the proceeds will be used to “satisfy CBA’s regulatory capital requirements and maintain the diversity of CBA’s sources and types of funding.”
The four major Australian banks were notified by APRA late last year of the regulator’s requirement for them to increase their respective total capital by 4%-5% of risk-weighted assets. In July 2019, this requirement was modified such that these banks would need to increase total capital by an additional 3% of risk-weighted assets by the start of 2024. Issuing “Additional Tier 1” securities and “Tier 2” securities will help satisfy this requirement.
Securities of this type have some features in common with equities and some features in common with 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. The notes will qualify as Additional Tier 1 (AT1) capital under the Basel III bank regulatory framework, which means they have the now-standard “trigger event” clauses which may lead to early conversion into ordinary shares or a write-off of the capital notes should APRA require it. In the event CBA were wound up (and APRA had not already forced a write-off), its hybrids would rank above ordinary shares but below ordinary debt securities and other liabilities.
The new PERLS have an indicative distribution rate equivalent to 3 month BBSW plus a margin of 300bps to 320bps. The final margin will be determined by a “book build” on 16 October 2019. A book build is a tender process managed by investment banks on behalf of the issuer 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.