A couple of weeks ago ANZ flagged it was considering a buy-back of its CPS 3 hybrid securities listed on the ASX, in conjunction with an offer of a new ASX-listed capital note, subject to regulatory approval from APRA. ANZ has since received approval and it has announced both the buy-back and the new issue.
ANZ intends to issue $1 billion worth of Capital Notes 5 (ASX code: ANZPH), with the ability to raise more or less than this amount. The proceeds of the offer will be used to refinance ANZ’s CPS 3 (ASX code: ANZPC) hybrids which were issued in September 2011, as well as for general corporate purposes.
It worth remembering the new securities are hybrids after all and, as such, they have some features in common with equities and some features in common with debt securities. The new capital notes will qualify as Additional Tier 1 (AT1) capital under the Basel III bank regulatory framework, which means they have the now-standard “trigger events” which may lead to early conversion into ordinary shares or a write-off of the capital notes. In the event ANZ is wound up, ANZ’s various hybrids, including the new notes, would rank above ordinary shares but below ordinary debt securities.
These capital notes have an indicative distribution rate equivalent to BBSW plus a margin of 380bps to 400bps. The final margin will be determined by a book build, which is a tender process managed by investment banks on behalf of ANZ. If recent history is any guide, then the margin is likely to be set at the lower end. Distributions are to be non-cumulative, at the discretion of ANZ directors and paid quarterly in arrears. At the prevailing level of interest rates and if the margin is at the lower end of the range, the new notes will pay around 5.5% (annualised) inclusive of franking credits. As interest rates change, specifically the bank bill swap rate, quarterly payments will also change.
The first call date, or what ANZ refers to as the “optional exchange date”, is on 20 March, 2025 and by convention, securities are typically redeemed on this date. This the date at which ANZ can first exchange the securities in the absence of a “Trigger Event”, “Change of Control Event” or a “Tax Event”. Exchange, in the context of listed hybrids, can mean redeem, resell to a third party or convert into ordinary shares. The scheduled mandatory exchange date is 20 March 2027.