CBA Perls 8 - CBAPE
CBA has just announced the launch of a new income offer:
CommBank Perls 8 Capital Notes. The first round of access is through a broker firm
allocation, prior to shareholder offer and listing in March. Note: There is no Customer or
General Offer
The Notes will pay a quarterly coupon of 5.2%-5.35% (rate determined by the bookbuild)
over the 90 day bank bill swap rate (BBSW), which was 2.29% as of 16th February, with an
initial indicative rate of 7.49%-7.64%pa. (The first pricing is due to be set on date of issue)
The Notes are expected to redeem on the 15th October 2021** and will be tradable on the
ASX.
CBA Perls 8 Offer Details
Issuer
Security Name
First Call Date
Mandatory Conversion Date
Commonwealth Bank of Australia
CommBank Perls 8 Capital Notes (CBAPE)
15th October 2021
15th October 2023 (unless redeemed earlier)
Margin
90 day BBSW + 5.2%-5.35%
(rate to be determined by bookbuild)
$1.25 Billion +
$5,000 (Wealth Focus minimum is $10,000)
Size
Minimum Parcel
Source: CommBank Perls 8 prospectus
** It is expected that the issue will be repaid at the
first opportunity in October 2021 with a scheduled
conversion in 2023 (subject to mandatory conditions
not being breached).
Our analysis
There is now an established secondary market for
the newer style bank hybrids from the Big 4
banks, and investors could be forgiven for
focusing on the historically high yield being
offered by CBA. At a margin of 5.2% over the
Bank Bill Swap Rate (BBSW), currently 2.29%pa,
that is considerably higher than the next highest
issue margin from Westpac in 2015 at 4% over
BBSW.
We view ANZ Capital Notes (ANZPD), NAB CPS II
(NABPB), and Westpac Capital Notes 2 (WBCPE)
as the closest comparables, maturing in Dec 2020
– March 2022.
CBAPC, CBAPD, CBABE, NABPA, NABPB, WBCP,
WBCPE & WBCPF structures offer a margin over
Issue
ANZ CPS3
(ANZPC)
ANZ Capital Notes
(ANZPD)
ANZ Capital Notes
2 (ANZPE)
ANZ Capital Notes
3 (ANZPF)
CBA Perls VI
(CBAPC)
CBA Perls VII
(CBAPD)
CBA Perls VIII
(CBAPE)
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)
Issue
Trading
Margin
Margin ASX Listing Price Accrued
over BBSW over BBSW
Date
16/02/16 dividend
3.10%
4.19%
29/08/2011 $ 98.50 $ 0.08
3.40%
5.64%
8/08/2013 $ 93.00 $ 2.77
3.25%
5.67%
11/04/2014 $ 90.90 $ 2.34
3.60%
5.62%
6/03/2015 $ 91.75 $ 2.49
3.80%
4.98%
17/10/2012 $ 98.24 $ 1.26
2.80%
5.65%
2/10/2014 $ 85.60 $ 1.06
5.20%*
-
3.20%
5.05%
21/03/2013 $ 96.05 $ 1.16
3.25%
5.82%
17/12/2013 $ 91.00 $ 1.20
3.50%
5.56%
23/03/2015 $ 93.90 $ 1.08
3.25%
5.61%
26/03/2012 $97.80
3.20%
5.66%
12/03/2013 $ 94.60 $ 1.25
3.05%
5.89%
23/06/2014 $ 86.61 $ 0.99
4.00%
5.46%
9/09/2015 $ 95.05 $ 1.19
31/03/2016 $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 wit
hout taking into account the investment objectives, financial situation and particular needs of any particular person. Wealth Focu
s 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. 16/02/16
-
$ 2.27
the 90 day BBSW, ANZPC, ANZPD, ANZPE, and WBCPD offer a
margin over the 180 day BBSW.
An anomaly currently exists within the market, with hybrids
seemingly trading in line with the running yields, rather than the Yield To Maturity (YTM).
This indicates that the market’s expectation is either that the banks are unlikely to repay
their debt at the anticipated call/repayment date or that it is unable to correctly assess the
margin to maturity (running yield + capital gain when repaid at face value).
Running Yield of (newer style) Big 4 Bank Hybrids vs the Bank Bill Swap Rate
IRS10Y
4.925
6%
6%
corrected for dcf receiving a higher rate today
CBAPE
1.51%
5%
5%
4%
3%
3%
2%
2%
1%
1%
0
1
22
33
44
55
66
77
88
99
10
10
Years
Yield to Maturity of (newer style) Big 4 Bank Hybrids vs the Bank Bill Swap Rate
IRS10Y
4.925
6%
corrected for dcf receiving a higher rate today
1.51%
5%
CBAPE
4%
3%
2%
1%
0
1
2
3
4
5
6
7
8
9
10
Years
www.fundsfocus.com.au. This information has been prepared for distribution over the internet on a general advice basis and wit
hout taking into account the investment objectives, financial situation and particular needs of any particular person. Wealth Focu
s 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. 16/02/16
It is our view that the secondary market is inefficient, presenting
an opportunity for savy investors who are able to correctly assess
the additional benefit of a potential capital gain when held to
maturity. The banks’ overall reliance on debt markets provides a strong impetus for them to
repay at the first opportunity and we view the risks of not repaying as relatively low.
Investors should feel re-assured by CBA opting to call Perls III in April by issuing a
replacement when spreads in the hybrid market have blown out to such a wide margin. By
replacing CBA Perls III (PCAPA), at 1.05% over BBSW (step up to 2.05% post April), with a
new issue costing CBA 5.2% over BBSW, the increase in cost of funding is 3.15%pa and
demonstrates “the stick” of reputational risk, ensuring banks repay at the first opportunity
to avoid increased cost of further borrowing.
Non-viability Clause, Capital Trigger Event and Inability Event
Investors who are familiar with the new style hybrids we have seen over the last couple of years will
be very aware of these clauses.
It is perhaps useful to understand that these clauses are as a result of APRA requiring further
reassurance that in another GFC event, if required , hybrids would convert to ordinary equity, thereby
reducing the bank’s debt costs and protecting deposit holders.
Now that banks have to hold a higher level of capital and a better quality loan book, it seems unlikely
that any of these conditions would be breached, however, investors would do well to consider the
increased disclosure and warnings within each prospectus over the last couple of years.
For those unfamiliar with the conditions, new hybrids now contain non-viability and capital trigger
clauses that should the bank’s Tier 1 Capital Ratio fall below 5.125%, or APRA views the bank as nonviable without an injection of capital, the hybrids would automatically convert to ordinary shares.
We have also seen a gradual introduction of an Inability Event Clause added which states that in the
event that the issuer is unable to issue further ordinary shares, ie the company has ceased trading, a
Capital Trigger Event or Non-Viability Event, hybrid note holders lose their investment.
This is extremely unlikely, but investors would do well to remember the increase in yield offered
carries additional risk.
Our View on CBA Perls 8
As per our previous reviews, we maintain our concerns over the non-viability clauses within
new style hybrids, but investors looking to switch equity allocation into a more stable
alternative would do well to consider these newer style hybrids. (We do not consider hybrids
a suitable alternative for fixed income/cash)
Term deposit yields have continued to fall over the last year and we anticipate the RBA is
likely to cut them further again this year. This leaves investors with the dilemma of reducing
capital or switching to higher risk assets to support their income needs.
The last 9 months has only served to demonstrate why investors need to look for
alternatives to equities.
www.fundsfocus.com.au. This information has been prepared for distribution over the internet on a general advice basis and wit
hout taking into account the investment objectives, financial situation and particular needs of any particular person. Wealth Focu
s 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. 16/02/16
Our view is that relative to alternatives such as NABPB, investors
should demand a premium of close to 5.9% over the BBSW and
looks expensive if issued at a margin of 5.2%-5.35% (approx 3%
overpriced). However, we note that the secondary market seems to more readily trade on
the Running Yield, suggesting that CBA Perls VIII should trade at $108.
In short, we feel that at a margin of 5.2%-5.35% over BBSW, CBAPE is overpriced relative to
the current yields available in the secondary market. By contrast, it would not surprise us to
see this list and trade at a premium of 2-3%.
Other existing alternatives clearly offer better value but our gut feel is that it is likely to trade
above the $100 issue price from day one and offer less volatility than the other hybrid
alternatives.
Investors should also be aware that the primary role of Perls 8 is to refinance $1.1 Billion of
Perls 3 and priority tends to be given to Perls 3 holders looking to roll their existing
investments.
As a result, we expect that a considerable portion of the $1.25 Billion of CBAPA will roll into
the new issue, leaving very little on the table for new investors.
Contact us if you would like an allocation to CBA Perls 8 or have an existing
investment in CBA Perls 5 you would like to roll into the new issue.
Key features
•
•
•
•
•
Indicative floating yield of 7.49-7.64%pa - based on current 90 BBSW of 2.29% and
bookbuild margin range of 5.2-5.35%.
Option to redeem at year 5 with scheduled conversion at year 7 - CBA has the
option to convert in October 2021 or on any subsequent dividend payment date.
Ordinary dividend restrictions - applies on the non payment of CBAPE dividends
Automatic conversion under the Capital Trigger Event and Non-Viability
Redemption highly likely in 5.5 years - although CBAPE has a 7.5 year maturity, its
likely CBA will redeem/convert at the first call date in October 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: CBA Perls 8 will be listed on the ASX and as such the price of the Note’s will be subject
to market movements. Investors 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 wit
hout taking into account the investment objectives, financial situation and particular needs of any particular person. Wealth Focu
s 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. 16/02/16