CBA today announced that the margin for its latest hybrid issue will be set at BBSW + 5.20%. The initial yield on the PERLS VIII’s will therefore be around 7.50% (including franking).
The pricing is seen as a very good result for the bank and its bevy of 10 brokers which were chosen to sell the issue. At the announcement of the issue the market talk was the indicated margin range of BBSW + 5.20% to 5.35% was on the skinny side and better value could be had with existing issues from similarly rated bank hybrids trading in the secondary market.
What happened next bucked the trend of recent hybrid issues. Previously, new hybrid issues would mostly be at a premium to existing hybrids as an enticement to invest. On the announcement of a new hybrid issue, prices of existing hybrids would weaken as investors sold to make room for the new issue. With the new PERLS VIII announcement, at a margin below existing hybrids, investors recognised the higher yields available on other hybrids were more attractive and started buying them, pushing yields lower.
It should be noted that this occurred on relatively small volumes and that institutions and large buyers seeking substantial amounts can realistically only deal in the primary market.
The PERLS VIII result means selling brokers have been vindicated in their pricing strategy with the final margin set in the bookbuild at the low end of the indicated pricing range and with CBA allocating $910 million on a ‘firm’ basis to institutions, brokers and PERLS III hybrid holders who have chosen to ‘roll’ their investment into the new hybrid. Additional securities will only be allocated to CBA security holders as there is no general offer.
In a nod to the previous PERLS VII issue where CBA filled nearly every bidder who applied and issued a total of $3 billion worth of securities, the bank and brokers to the PERLS VIII issue had agreed “new money” bids would be capped at $650 million. This resulted in a significant number of bids made through the Broker Firm Offer being scaled back. The $260 million of “old money” was CBA security holders taking up the new offer through their brokers.
The huge volume of PERLS VII’s issued in 2014 was blamed for consigning it to a very poor secondary market performance – it has always traded at a discount to its $100 face value – and affected the pricing of hybrids for many months afterwards as investors struggled to digest the huge issue.
It is expected that the size of the new PERLS VIII issue will be fixed at around $1.25 billion.