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Following the announcement of the redemption of Westpac’s TPS units (ASX code: WCTPA), the bank has announced the issue of Westpac Capital Notes 4 (ASX code: WBCPG), with the intention to raise $750 million and the ability to raise a greater or lesser amount subject to demand. The new issue is in line with Westpac’s policy of replacing non-Basel III compliant securities. The new capital notes will qualify as Additional Tier 1 (AT1) capital under the Basel III bank regulatory framework. With the prevailing level of interest rates, they will pay around 6.90% inclusive of franking credits.
The new capital notes have an indicative margin to BBSW of 490bps to 510 bps, with the final margin to be determined by a book build, which is a tender process managed by investment banks on behalf of Westpac. The first call date, the date at which Westpac can exchange the securities is on 20 December, 2021 and, by convention, securities are typically redeemed on this date. Exchange, in the context of listed hybrids, can mean redeem, resell to a third party or convert into ordinary shares. The scheduled maturity date is on 20 December 2023.
The chart below shows the history of issue margins of hybrid securities over the last eight years, including the GFC period in 2008/2009. The new capital notes are shown at both the lower end of the indicative margin (490bps) and the upper end (510bps). Although the new Westpac hybrids do not have the highest issue margin above BBSW, it is clear they rate fairly well even if the margin is set at the lower end.
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