All four major banks have now either recently issued hybrid securities or are in the process of issuing hybrids. ANZ is one that has announced it too will be issuing a hybrid security however, unlike the other major banks, ANZ will be making the issue offshore and in USD.
This is the first time for many years that a foreign currency hybrid will be issued will be issued by an Australian bank and comes as a result of an Australian Tax Office ruling that will allow distributions not to be franked. For some time, there have been rules in place to stop companies ‘streaming’ dividends – for example paying an unfranked dividend to an offshore share holder and paying franked dividends to a domestic shareholder – and as YieldReport understands it, the Private Binding Ruling allows the banks to now pay unfranked distributions on hybrid securities to offshore holders. Evans & Partners say the ATO’s requirement to frank such issues has been waived and this is of great significance for hybrid issuers. “The implications for the Australian market, wholesale and listed, are that the banks can now satisfy their AT1 (Additional Tier 1 capital) requirements in two markets rather than mainly the ASX…Going forward the banks will issue in all open hybrid markets in a regular fashion rather than be subject to roll-over risk and potentially a poor market at that time.”
Some of the benefits of issuing offshore, especially in USD are obvious; US markets are deeper and more liquid so funds can be raised more quickly and without moving prices in the market. Other incentives for issuers include being able to diversify one’s funding base and potentially lower transaction charges. In a further twist, the contingent convertible securities, otherwise known as CoCos, will be issued out of ANZ’s London branch. The term contingent convertible refers to the clauses which force conversion into common equity. These clauses are comparable to common-equity ratio clauses which are characteristic of Basel III compliant bank hybrids issued in Australia. As such, the new hybrids will qualify as AT1 capital. They will also qualify as having intermediate equity content according to Standard & Poor’s which is important for the company’s credit rating debt requirement.
ANZ said the hybrids are the part of a process to replace $2 billion worth of ANZ’s CPS 2 (ASX code: ANZPA) which are due for conversion in December. The bank is said to be looking to raise between USD$750 million and USD$1 billion with the proposed transaction, which is expected to be 550 bps over the benchmark rate. In addition, an AUD-denominated capital notes offer is to be considered before the end of September and the two capital raisings would presumably complete the replacement of the CPS 2.