As the optional exchange date of any hybrid listed on the ASX approaches, speculation typically turns to the likelihood of some sort of replacement security. Experience over the years suggests hybrids are usually redeemed or “resold” and not converted into ordinary equity. In order to maintain balance sheet ratios, additional equity capital must be raised. In recent years, most companies in this situation have chosen to issue another hybrid. Macquarie Group has several hybrid securities currently listed on the ASX and one of them, Macquarie Group Capital Notes (ASX code: MQGPA) is fast approaching its first optional exchange date in mid-June.
Macquarie has just announced it will issue another hybrid security. Macquarie plans to raise $600 million worth of Capital Notes 3 (ASX code: MQGPC), with the ability to raise more or less than this amount. The new securities will be perpetual, convertible, subordinated, unsecured notes and the proceeds will be used for what Macquarie refers to as “general corporate purposes”. Macquarie intends to redeem its series 1 notes and it specifically states this latest series will replace those notes.
The new notes have some features in common with equities and some features in common with 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 “trigger events” 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 Macquarie is wound up (and APRA has not already forced a write-off), its hybrids would rank above ordinary shares but below ordinary debt securities and other liabilities.