Summary: Macquarie Group to issue new hybrid security, MQGPG; likely issue margin of 2.65%; expected to initially pay around 7.00% (annualised, including franking credits); first call date in December 2031; trading expected to begin on 17 September 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 Macquarie Group Ltd (“Macquarie”) is in keeping with this tradition as Its Macquarie Capital Notes 3 (MQGPC) hybrids are callable in December. Additionally, margins of existing hybrids are close to their historical lows on average and present conditions probably represent an opportune time to raise capital in this market.
Macquarie plans to raise $1 billion via an issue of Capital Notes 7 (code: MQGPG), 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”.
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 Macquarie 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 Macquarie find itself in this position.
The capital notes will have a distribution rate equivalent to 3-month BBSW plus a margin which lies in a range from 265bps to 285bps. The final margin will be determined by a “book build” and the result will be announced on 23 August 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 twelve years or so.
Distributions will be non-cumulative, at the discretion of directors and paid quarterly in arrears. However, should a distribution not be paid, Macquarie 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 7.00%* (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 2031. This is the first date at which Macquarie 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 December 2034. Exchange, in the context of listed hybrids, may mean redeem, resale 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. The chart below shows the margins of non-major bank hybrid securities which trade on the ASX at the close of business on 19 August.
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” offer. There will also be a “securityholder” offer to Macquarie Capital Notes 3 (MQGPC) holders but no offer to the general public.
Trading on the ASX is expected to begin on 17 September 2024.