Summary: Bendigo to issue hybrid security to fund redemption of CPS 2; first call date in 2027; initially to pay around 3.90% (annualised, including franking credits), “basically the same deal” as recent BoQ offer.
In recent years, when an existing Australian hybrid approaches its first call date, sometimes referred to as the first optional exchange date, speculation turns to the likelihood of a replacement 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. Bendigo and Adelaide Bank’s (“Bendigo”) latest hybrid security offer is in keeping with this “tradition” as its one of its current hybrids is approaching its November 2020 call date.
Bendigo plans to raise $350 million via an issue of Capital Notes (ASX code: BENPH) securities, 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 fund the redemption of Bendigo’s CPS2 (ASX code: BENPE) as well as 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 Bendigo 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 capital notes have an indicative distribution rate equivalent to 3 month BBSW plus a margin in a range of 380bps to 400bps. The final margin will be determined by a “book build” which will be announced on 4 November 2020. 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 history is any guide, then the margin is likely to be set at the lower end.
“Being locked in at 380bps above BBSW for seven years is not a bad deal and the trading margin will likely fall over time. In any case, it’s a small amount on offer and a lot of it will be taken up by people rolling over from the CPS 2,” according to one stockbroking source. He said it was basically the same deal as Bank of Queensland’s offer which was announced on Monday.
