Westpac Capital Notes 3 - WBCPF
Westpac has just announced the launch of their latest income hybrid: Westpac Capital Notes
3. The first round of access is through a broker firm allocation, prior to shareholder offer and
listing in September. There will not be a General Offer for this issue.
The Notes will pay a quarterly coupon of 4.0%-4.2% (rate determined by the bookbuild) over
the 90 day bank bill swap rate (BBSW), which was 2.14% as of the 27 July, with an initial
indicative rate of 6.14%-6.34%pa. (The first pricing is due to be set on date of issue) The
Notes are expected to redeem on the 22nd March 2021* and will be tradable on the ASX.
Westpac Capital Notes 3 Offer Details
Issuer
Security Name
First Call Date
Scheduled Conversion
Date
Westpac Banking Corporation
Westpac Capital Notes 3 (WBCPF)
22nd March 2021
22nd March 2023 (unless redeemed earlier)
Margin
90 day BBSW + 4.0%-4.2%
(rate to be determined by bookbuild)
$750m+
$5,000 (Wealth Focus minimum is $10,000)
Size
Minimum Parcel
Source: Westpac Capital Notes 3 prospectus
* It is expected that the issue will be repaid at the first opportunity in March 2021 with a scheduled
conversion in 2023 (subject to mandatory conditions not being breached).
How does this compare?
Westpac’s closest comparables are NABPB
and ANZPD currently trading at $97.50 (inc.
$0.89 accrued dividend) and $99.60 (inc.
$2.49 accrued dividend) respectively, with an
effective margin to expected maturity of
3.99% and 3.86%.
Westpac Capital Notes 1 (WBCPD) and
Capital Notes 2 (WBCPE) are also currently
listed, allowing a further comparison against
existing issues which trade at margins of
4.07% and 4.03% respectively.
A quick analysis
Westpac’s latest issue, WBCPF which has yet
to list, will likely issue at a margin of 4.0%pa
over the BBSW. Whilst, in line with the
current hybrids on market, this holds the
added benefit of a higher running yield which
is likely to prove attractive to investors.
Issue
Trading
Margin
Margin ASX Listing Price Accrued Payment
over BBSW over BBSW
Issue
Date
27/07/15 dividend Frequency
ANZ CPS3
half
3.10%
3.89% 29/08/2011 $100.69 $ 2.46 yearly
(ANZPC)
ANZ Capital Notes
half
(ANZPD)
3.40%
3.86%
8/08/2013 $ 99.60 $ 2.49 yearly
half
ANZ Capital Notes
2 (ANZPE)
3.25%
3.84% 11/04/2014 $ 98.28 $ 2.09 yearly
ANZ Capital Notes
half
3 (ANZPF)
3.60%
4.03%
6/03/2015 $ 99.10 $ 2.22 yearly
CBA Perls VI
(CBAPC)
3.80%
3.91% 17/10/2012 $100.56 $ 0.88 quarterly
CBA Perls VII
3.92%
2/10/2014 $ 93.50 $ 0.73 quarterly
(CBAPD)
2.80%
NAB CPS (NABPA)
NAB CPS II
(NABPB)
NAB Capital
Notes (NABPC)
Westpac CPS
(WBCPC)
Westpac Capital
Notes (WBCPD)
Westpac Capital
Notes II (WBCPE)
Westpac Capital
Notes III (WBCPF)
3.20%
4.05%
21/03/2013 $ 98.03 $ 0.81 quarterly
3.25%
3.99%
17/12/2013 $ 97.50 $ 0.89 quarterly
3.50%
4.13%
3.25%
3.95%
23/03/2015 $ 98.20 $ 0.71 quarterly
half
26/03/2012 $100.00 $ 1.95 yearly
3.20%
4.07%
12/03/2013 $ 98.08 $ 0.89 quarterly
3.05%
4.03%
23/06/2014 $ 95.00 $ 0.66 quarterly
4.00%*
-
9/09/2015 $100.00
* Anticipated Margin/Not yet listed on ASX
www.fundsfocus.com.au. This information has been prepared for distribution over the internet on a general advice basis and
without taking into account the investment objectives, financial situation and particular needs of any particular person. Wealth
Focus Pty Ltd makes no recommendations as to the merits of any investment opportunity referred to in this website. All
indications of performance returns are historical and cannot be relied upon as an indicator for future performance. Please read
our Financial Services Guide and Disclaimer for full details of our services and level of advice provided. 28/07/15
-
quarterly
BBSW Yield Curve and the latest Big 4 hybrid issues
5%
5%
4%
PCAPA
NABPC
WBCPD
WBCPC
CBAPC
ANZPC
NABPB ANZPD
NABPA
WBCPE
ANZPE
ANZPF
CBAPD
WBCPF
indicative
3%
2%
1%
0
1
2
3
4
5
6
7
8
9
The yields reflected are notional yields to maturity 28/07/15
An anomaly has existed in the hybrid market over the last 9 months with the yield curve
flattening. Regardless of maturity date, hybrids are offering a similar margin to investors. The
only real difference in rates 9 months ago is the spread/margin that is now being offered is
4% versus the 3.5% in October last year.
We have previously reminded investors that a longer investment term should be rewarded
with a higher premium. Using the Bank Bill Swap Rate (BBSW) (the rate that banks lend
money to each other at) as a yardstick of how institutional investors expect to be rewarded,
you can see the effects of this anomaly when comparing the current bank hybrids listed on
market.
Depending on your view, this either means that longer dated hybrids are expensive, or
shorter dated hybrids are cheap.
Non-viability Clause, Capital Trigger Event and Inability Event
Investors should familiarise themselves with these clauses as we see these as some of the
key risks of investing in newer style hybrids. These clauses are now well established within
the market and have become accepted as a requirement in order to issue capital that
conforms with APRA requirements.
In layman’s terms, should the bank fall on hard times, the hybrids convert to ordinary shares,
likely leading to a loss in capital value and in some instances, if the issuer is unable to issue
further ordinary shares at time of conversion, hybrid note holders lose their investment.
Clearly this is extremely unlikely and in this type of scenario, you are likely to have bigger
things to worry about than just the value of your hybrids, but it reflects the increased risk
that note holders have come to accept as the norm with hybrid investment and it would be
foolish to think of hybrids as term deposits.
www.fundsfocus.com.au. This information has been prepared for distribution over the internet on a general advice basis and
without taking into account the investment objectives, financial situation and particular needs of any particular person. Wealth
Focus Pty Ltd makes no recommendations as to the merits of any investment opportunity referred to in this website. All
indications of performance returns are historical and cannot be relied upon as an indicator for future performance. Please read
our Financial Services Guide and Disclaimer for full details of our services and level of advice provided. 28/07/15
10
Our View
A margin of 4% is exceptionally high for a big 4 bank. The spreads are back close to GFC
levels yet the spreads offered on senior debt has contracted reflecting the greater security
and contractions in the overall debt markets.
Our view is a margin of 4% over the BBSW is not likely to be around for long and a flat yield
curve in this environment is a function of retail mispricing rather than an indication that we
are likely to see spreads widen further.
Investors tend to be attracted to a higher running yield, taking the view that they need the
ongoing income to live on rather than the overall return to maturity, and as a result we
would expect this to trade on a tighter margin than its peers.
Unlike our review of NAB Capital Notes in February where we thought longer dated issues
like WBCPE, CBAPD and ANZPF were not adequately rewarding investors for the risk, our
feeling is that shorter dated issues are relatively cheap.
With further rights issues anticipated and higher capital ratios required by APRA, the hybrids
look to be offering more value than a year or so ago.
There is no general offer (other than an offer to shareholders), stock is going to be hard to
find. This will no doubt this will be issued at the bottom end of the range at 4% over the
BBSW for an indicative pay rate of 6.14%pa
www.fundsfocus.com.au. This information has been prepared for distribution over the internet on a general advice basis and
without taking into account the investment objectives, financial situation and particular needs of any particular person. Wealth
Focus Pty Ltd makes no recommendations as to the merits of any investment opportunity referred to in this website. All
indications of performance returns are historical and cannot be relied upon as an indicator for future performance. Please read
our Financial Services Guide and Disclaimer for full details of our services and level of advice provided. 28/07/15
Key features
•
Indicative floating yield of 6.14%-6.34%pa - based on
current 90 BBSW of 2.14% and bookbuild margin range of 4.0-4.2%. First payment
due on 22nd December 2015.
•
Option to redeem at year 5.5 with scheduled conversion at year 7.5 - Westpac has
the option to convert in March 2021 or on any subsequent distribution payment
date.
•
Ordinary dividend restrictions - applies on the non payment of WBCPF dividends
•
Automatic conversion under the Capital Trigger Event and Non-Viability
•
Redemption highly likely in 5.5 years - although WBCPF has a 7.5 year Scheduled
Conversion, we think Westpac will redeem/convert at the first call date in March
2021. Major incentives for redemption/conversion include the potential for
reputational damage and risk of credit rating downgrade, leading to an increased cost
of funding on future debt issues.
Note: Westpac Capital Notes 3 will be listed on the ASX and as such the price of the Notes will
be subject to market movements. Investor’s selling on market may receive a price lower (or
higher) than the issue price.
Investors looking for an allocation can contact us on 1300 559 869
We encourage you to view our online presentation An Introduction to Fixed Income
www.fundsfocus.com.au. This information has been prepared for distribution over the internet on a general advice basis and
without taking into account the investment objectives, financial situation and particular needs of any particular person. Wealth
Focus Pty Ltd makes no recommendations as to the merits of any investment opportunity referred to in this website. All
indications of performance returns are historical and cannot be relied upon as an indicator for future performance. Please read
our Financial Services Guide and Disclaimer for full details of our services and level of advice provided. 28/07/15