Summary: Westpac to issue new hybrid security; upcoming call on existing hybrid in December; first call date in September 2029; expected to initially pay around 2.95% (annualised, including franking credits); issue margin at low end of trading margin band.
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. Westpac’s latest hybrid security offer is in keeping with this tradition as Westpac Capital Notes 4 (code: WBCPG) is approaching its December 2021 call date.
Westpac plans to raise $1 billion via an issue of Capital Notes 8 securities (code: WBCPK), 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 to refinance Westpac’s existing Capital Notes 4 (code: WBCPG) and “for general corporate purposes”.
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. The notes will qualify as Additional Tier 1 (AT1) capital under the Basel III bank regulatory framework, which means they have the now-standard “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 Westpac 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 capital notes will have an indicative distribution rate equivalent to 3 month BBSW plus a margin which lies in a range of 290bps to 310bps. The final margin will be determined by a “book build” and the result will be announced on 24 August 2021. 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.
The chart above shows the history of issue margins of hybrid securities over the last decade or so, including the GFC period in 2008/2009.