INVESTMENT OPPORTUNITY; ANZ Capital Note

ANZ

ANZ is the latest bank to issue a BASEL III compliant Tier 1 Hybrid Security to raise approx $750m. The structure is a clone of the recent issues from Westpac and NAB however this security is priced with a slightly higher rate of return (3.4% to 3.6% over the 180 day bank bill) – making it marginally more appealing than the existing issues.

To participate in the book build process, have your BIDs in ASAP & at the very latest, Monday 8th July – however please be aware that the offer may close early (and without warning) ***

Our VIEW… We’re recommending the security for investors looking for stable income, that have a moderate tolerance for risk. It’s also important to consider the way in which these securities trade compared to underlying equity.

ANZ has included an interesting chart to highlight this…which shows the performance of ANZ shares, v other listed ANZ debt securities. With a debt like security, you certainly don’t get the potential upside that the equity can have, but the downside is shown to be less. When combined with equities in a portfolio, these securities can mitigate some of the volatility in returns, whilst still providing a stable income stream.

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In SHORT….

* Convertible to underlying shares at conversion date
* Distributions are discretionary and non cumulative
* Pays 3.4% to 3.6% over 180 day BBSW – currently stands at 6.21% to 6.41% – franked, subject to gross up for non-franked portion
* Distributions paid bi-annually
* Compares favourably with existing issues such as the latest Westpac Capital Note, NAB CPS & Macquarie Capital Note – but has a different structure to the recent Suncorp Subordinated Notwe

More DETAIL

There’s been some changes in the Hybrid space in recent times with the introduction of new legislation around the classification of Tier 1 capital.

As of January 1st this year, all capital raised through Hybrids, must be deemed permanent for it to be considered as Tier 1 Capital.

In essence, this means that the securities will be classified as perpetual (no maturity date) but will have a conversion date where the Hybrids are converted into underlying shares of the issuer. So whatever happens, the capital will stay with the issuer rather than be repaid to the lender (you), as a more traditional bond or even some subordinated notes do.

In the case of ANZ, you’ll receive $101 of ANZ shares per Hybrid security on the 1st September 2021, or there are some circumstance where they’ll pay back your $100 investment – That said, these will be listed on the ASX and liquidity permitting, can be sold at any time.

Getting back to the new regulations, its worth noting that all Basel III compliant hybrids going forward will not only require the capital to be permanent, they’ll also have conversion clauses or terms that include a Non-Viability event and a Capital event.

For instance, if the common equity ratio of the issuing bank falls below the specified ratio (capital event) as per APRA’s requirement ( 5.125% in the case of a capital event), Basel III compliant Tier 1 securities will be forced to convert to ordinary shares. APRA may also determine that ANZ is ‘non viable’ as a business and request the conversion of outstanding securities.

In any case, ANZ is an extremely well capitalised and regulated financial institution, and although these conditions do constitute a risk, it seems small relative to other listed debt securities.

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DISTRIBUTIONS

Another important consideration is that dividends are discretionary and non cumulative – meaning management can stop paying dividends at their discretion.

That in itself is not hugely uncommon given that management would then be required to suspend dividends on the underlying stock- which generally provides enough of a disincentive. Although this is highly unlikely, it’s a risk non-the-less.

As always, it’s a question of whether the yield compensates for the risks. In this case, I think the yield compensates for the complexities of the hybrid and the risks associated with the issuer (ANZ) – hence our positive recommendation on this Note.

SUBORDINATION

In the event of a wind up, these notes rank above common equity in the capital structure, but below other senior debt.

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Key DATES

Bookbuild – 9th July
Announcement of Margin & Allocations – 10th July
Payment required – 2nd August
Issue Date – 7th August
Trading on ASX – 8th August

To participate, CLICK HERE and include ANZ HYBRID in the comments section.

James Gerrish is a Senior Portfolio Manager with Novus Capital & main contributor to My Market View. My Market View is a free resource designed to inform & educate investors.

This article contains general investment advice only (under AFSL 238168). It is not specific advice for any particular investor. Before making any decision about the information provided, you must consider the appropriateness of the information in this website, having regard to your objectives, financial situation and needs and consult your adviser.

For Professional Portfolio Management for Private Clients – CLICK HERE or call James Gerrish directly on (02) 9375 0117

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