Summary: Insurance Australia Group to issue new hybrid security, IAGPF; issue margin of 3.20%; expected to initially pay around 7.55% (annualised, including franking credits); 0.75% above current median sector margin; first call date in December 2030; trading expected to begin on 27 March 2024.
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.
The latest hybrid security offer by Insurance Australia Group Ltd (“IAG”) is not in this tradition. IAG will be raising funds to increase its capital base, albeit on a temporary basis until 2029. This new issue comes hot on the heels of capital note issues by Bendigo Bank and ANZ Bank.
IAG plans to raise $300 million via an issue of Capital Notes 3 (code: IAGPF), 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 for general corporate purposes.
(* IAG announced it had accepted $350 million in offers on 5 March. The margin was set at 3.20%.)
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. In the event IAG were wound up, its hybrids would rank above ordinary shares but below ordinary debt securities and other liabilities. However, the existence of a “write-off” clause implies the hybrids would likely no longer exist should IAG find itself in this position.
The capital notes will have a distribution rate equivalent to 3-month BBSW plus a margin of 320bps. The margin was determined by a “book build” on 5 March 2024. A book build is a tender process managed by investment banks on behalf of the issuer in which investment institutions place bids for a set volume at a price/yield.
The chart above shows the history of issue margins of non-major bank hybrid securities over the last fifteen years or so, including the GFC period in 2008/2009
Distributions will be non-cumulative, at the discretion of directors and paid quarterly in arrears. Additionally, should a distribution not be paid, IAG cannot determine to pay or pay dividends on its ordinary shares until the next distribution payment date. It would also not be allowed to undertake any buy-back or capital reduction of its ordinary shares.
At the prevailing level of interest rates the new notes will initially pay around 7.55%* (annualised) inclusive of franking credits. *As interest rates change, specifically the bank bill swap rate, quarterly payments will also change.
The first call date is 15 December 2030. This is the first date at which IAG can exchange all or some of the securities in the absence of a “Non-Viability Trigger Event” or some other “event” as stated in the product disclosure statement.
The scheduled mandatory exchange date is 15 September 2033. Exchange, in the context of listed hybrids, may mean redeem, resell to a third party or convert into ordinary shares.
Issue margins are generally set close to the margins of comparable hybrids already trading on the ASX. IAG issue margin is around the midpoint of the band which captures the majority of median margin readings from 2011.
From late-2015 through to early 2017, hybrid margins blew out as doubts emerged over the sturdiness of a hybrid structure in an economic downturn. They gradually fell back over the following three years, drifting down to below the long-term channel (see above) just before the March 2020 spike. The median margin of hybrids currently listed on the ASX at the close of business on 4 March was 2.44%.
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 margins will have changed. The chart below shows the margins of non-major bank hybrid securities which trade on the ASX as at the close of business on 4 March 2024.
YieldReport has explained the meaning of “margin” in previous articles so for those readers who are not familiar with the term or who just want a refresher explanation, click here.
There will be an institutional offer and an offer to clients of syndicate brokers to the issue who may apply via a “broker firm” offer1,2. There will be no “securityholder” offer nor an offer to the general public.
Trading on the ASX is expected to begin on 27 March 2024.
1 Must be an Australian resident. Must not be a resident in the United States or acting as a nominee for a person in the United States. Must not be a resident of a member state of the European Union.
2 Must be a “wholesale” investor or an investor who has received personal financial product advice from a licensed professional adviser to acquire IAG Capital Notes 3. Applications must be made through a syndicate broker.