Older style bank sub notes (ANZHA, NABHB, WBCHA) have rallied in past weeks, trading around the 1.65 per cent level. In contrast WBCHB (the newer style Basel III compliant sub note) is trading around a 2.25 per cent margin. The chart shows the trading margins and differential of the two listed WBC sub notes. WBC issued a newer the style sub note with a 2019 call into the wholesale market last month. It is trading around a margin of 2.05 per cent. WBCHB has an August 2017 call date.
CBL Corporation Limited, a NZ based insurance and reinsurance company, has launched an initial bond offer to raise up to $55m from wholesale investors. The offer closed oversubscribed one day after it opened. The bond pays a fixed rate of 8.25 per cent and has a final maturity of five years but can be called by the issuer after three or four years at $103.00 and $101.50 respectively. There is also an investor put at $101.00 in the event of a change of control. The new bond is expected to settle and commence trading in the secondary market around 17 April. FIIG is the Sole Lead Arranger and the bonds are available to wholesale investors only in minimum subscription amounts of $50,000. However, once trading commences the bonds can be transacted in $10,000 face value minimum parcels. CCL will use the proceeds to repay existing bank debt, improve capitalisation of CBL and the balance will be used for future growth opportunities.
Suncorp Bank announced on a new hybrid debt security aimed at retail investors. The $250m hybrid will be used by the company to fund its capital requirements. The Suncorp Convertible Preference Shares (CPS3) offering is expected to be priced at a margin of 3.4 per cent to 3.6 per cent over 3m BBSW, to be determined under the book build. Coupons are discretionary, non-cumulative, floating rate and intended to be fully franked. The convertible preference shares partially replace the $500m CPS2, a hybrid issued in November 2012, then offered at 4.65 per cent above BBSW. Suncorp Group has a credit rating of A+. The note includes an optional exchange date at June 2020 and mandatory conversion June 2022. There is only one trigger for mandatory write-off or conversion of the CPS3 into ordinary equity of Suncorp, this being a Non-viability trigger. Non-viability would be determined by APRA, if it saw fit. There is no common equity capital trigger that would be pulled when the common equity capital ratio falls below a pre-set level. The notes will be listed on the ASX. The book build for the CPS3 will take place on 7 April and the offer will open on 8 April. The offer is set to close at the end of the month and deferred settlement trading on the ASX will commence on 9 May.
ANZ has completed its offer of Tier 1 issue securities on April 1, upsized to $1.61bn from $1.3bn, after initially being launched at $1bn. ANZ Capital Notes 2 set its margin at 325bps over BBSW. The bank issued 16.1 million notes at $100 each, with a scale back applied to applicants under the broker firm offer and the institutional offer. The notes have a first distribution rate of 4.186 per cent, being a margin of 3.25 per cent above the 180 day bank bill rate, multiplied by 1 minus the 30 per cent tax rate. The distribution rate for the notes will be reset half yearly in future.
PaperlinX will close its offer to holders of its hybrids in frustration at the actions of hybrid holders that sought to block the loss making paper merchant’s scheme at the Takeovers Panel. PaperlinX told the media, “The hybrids are a sideshow and I’m frustrated by it because it takes away valuable management time and resources.” PaperlinX last month offered hybrid holders a 55 per cent stake in the company in return for cancelling the securities and their first right to dividends. Under the company’s plan existing ordinary shareholders will have a 45 per cent equity stake in PaperlinX. By cancelling the hybrids PaperlinX hopes to clear up its capital structure that has held back a restructuring after $356.9m in losses over the last two financial years. The losses mean the value of the hybrids have fallen more than 80 per cent since 2007.
A zero coupon bond does not pay coupon payments but instead pays one lump sum at maturity equal to the initial investment plus the imputed interest.
Investors buy zero coupon bonds at a significant discount from their face value. For example a zero coupon bond with a face value of $100,000 and a maturity of 10 years might be bought for $50,000. At maturity the investor receives the face value.
Because of the size of the price discount to purchase the bond, an investor can put up a small amount of money today in order that they can watch the value of their investment grow over the years and reap the rewards in the future.
Zero coupon bonds often have long maturities – which means that an investor can plan to plan for a long-range goals like paying for a child’s university education or some other predictable large expense.
Whether or not a zero coupon bond makes sense for different investors depends on their own objectives as well as a range of metrics including things like the rate of inflation and the opportunity of cost of not investing in other types of interest rate securities.
ASIC has accepted an enforceable undertaking from UBS in relation to potential misconduct involving BBSW. UBS will also make a voluntary contribution of $1m to fund independent financial literacy projects in Australia. In July 2012, UBS reported to ASIC that it had found evidence of conduct seeking to influence its BBSW submissions, based on how the submissions may benefit UBS derivatives positions. In February 2013, UBS withdrew from the BBSW submissions panel. The enforceable undertaking requires UBS to ensure its participation in relation to the setting of Australian interest rate benchmarks upholds the integrity and reliability of those benchmarks and are in accordance with its obligations under the Commodity Futures Trading Commission Orders.
YieldReport readers may remember our recent coverage of the ongoing dispute between PaperlinX and a group of holders of PaperlinX hybrids (PXUPA). PaperlinX wanted to make a conditional off-market scrip offer for its hybrid securities but a group of PXUPA unitholders requested that a general meeting be held to consider a special resolution to amend the constitution of the PaperlinX SPS Trust. On 4 November the Trust received a second request to make a change to the constitution that would vary the rights attaching to both the PaperlinX step-up preference securities and the ordinary unit in the Trust. Such a change would have to be approved as a special resolution at three different meetings held in early- to mid-December 2013.
Two days later PaperlinX responded to the proposal stating, “This series of proposed amendments from a minority group of hybrid unit holders continues to incur costs for, and disruption to, the trust and the company. Furthermore, these proposed amendments do not offer constructive solutions to the issues facing the trust and the company and demonstrates the complexity and lack of understanding surrounding the relationship between the hybrids and PaperlinX. The company’s offer to hybrid unit holders seeks to address this complexity, whereas the New Resolution creates further confusion for all PaperlinX stakeholders.”
There appears to be no immediate prospect of an amicable solution to the differences between the company and hybrid holders.
On 27 September 2013, AFMA migrated to a new calculation methodology for BBSW. On a daily basis AFMA extracts all bids and offers from the broker and electronic trading platforms and calculates a ‘national best bid offer rate’ (NBBO) for Prime Bank Paper. Commencing 18 October 2013 Yieldbroker will participate in the BBSW benchmark rate set process as an Approved Venue, having met all relevant criteria and approved by the Market Governance Committee. Yieldbroker is a co-operative venture with ownership shared equally between leading banking participants in the Australian and New Zealand debt markets.
Last week saw Westpac sell a new $400m 10-year covered bond – but what is a covered bond?
A covered bond is much like a normal bond – except that covered bonds are backed by the issuer as well as by a specific pool of assets, generally a pool of loans, which is known as the ‘cover pool’. In practice covered bonds generally have a tenor of between two and 10 years.
Because the assets backing the bonds are ring-fenced, easily identifiable and stay on the issuer’s balance sheet, the bonds tend to have a higher credit rating than bonds that are not covered, depending on the quality of the pool of loans backing the bond.
From an investor perspective, such bonds can be attractive because they are high-quality instruments that offer attractive yields. Covered bonds are viewed as defensive in nature and as a result, in a narrowing market, covered bonds might be expected to underperform senior debt.
From an issuer perspective, such bonds can be a low-cost way to expand the business in preference to issuing unsecured debt instruments.
In Australia in recent years, covered bonds have lost some of their popularity as the market has seen an increase in the issue of RMBS. So far this year, the five domestic banks have issued $14.2bn in covered bonds. RMBS differ from covered bonds in that while they are backed by a pool of mortgages, they are not backed by the mortgage provider.