Morgans, the Brisbane-based wealth management form, is recommending investors buy ANZ CPS 2 (ASX code: ANZPA) as an alternative to a term deposit. Morgans’ fixed income analyst James Lawrence made the recommendation in a note to clients recently, saying the ANZ preference shares have yield to conversion of 5.39% and absolute expected return of 2.50%. ANZPAs will convert to $101.01 worth of ANZ ordinary shares in December 2016 subject to ANZ’s ordinary share price being not under $12.20 at the time. Alternatively, ANZ may elect to arrange the sale to a third party just prior to the exchange date for $100 plus accrued dividend.
While noting the ANZ preference shares were a higher risk than term deposits, he said the return was higher than four month deposit rates. “This return compares to similar duration term deposits with absolute returns of less than 1.50%.” Another attraction in his opinion is the likelihood of ANZ issuing a replacement security in December. “Additionally, holders of ANZPA may be offered the opportunity to reinvest the redemption proceeds in a new Tier 1 security ahead of the December 2016 Conversion Date. Our expectation would be that ANZ undertakes a new security issue and uses the proceeds to redeem ANZPA for $100.00 per security, a move we have seen from other financial issuers recently.” Trading margins of hybrid securities recently issued by the major banks are in the range of 4.50% to 4.90% above BBSW, which translates to a grossed-up dividend yield of 6.30% to 6.70%.