Woolworths announced their half-yearly result and, as expected, it was a shocker. A $973 million first-half loss after writing off its disastrous Masters investment. Dividends were slashed from 67 cents to 44 cents.
While that is a bad result for equity holders, of particular interest in the results announcement was the effect on fixed income investors. Woolworths have $700 million of hybrid securities (ASX Code: WOWHC) that have a step-up date on 24 November 2016. A step-up date means that the company can redeem the securities at their face value of $100 or pay a penalty interest of 1.00% on top of the 90 day BBSW rate + 3.25% distribution. Step-up securities have fallen out of favour but were originally designed to motivate the issuing company to redeem the securities on the first call date.
The company said in its results announcement that the maturing debt has been ‘pre-funded’ by additional undrawn bank facilities that were established in November 2015. Pursuant to a “replacement capital covenant, the Notes may be refinanced by a hybrid containing similar characteristics (50% S&P equity credit) or a combination of debt and equity in equal proportions.”
In other words, the hybrids are likely to be rolled over when they mature in November if market conditions and pricing are right. If not, the company has the bank lines to cover the redemption.