Westpac Subordinated Notes II - WBCHB
Westpac Bank has just announced the launch of a new income offer: Westpac Subordinated
Notes II. The first round of access is through a broker firm allocation, prior to shareholder
offer and listing in August.
The Notes will pay a quarterly coupon of 2.30%-2.45% (rate determined by the bookbuild)
over the 90 day bank bill swap rate (BBSW), which was 2.76% as of 12th July, with an initial
indicative rate of 5.06%-5.21%pa. (The first pricing is due to be set on date of issue) The
Notes are expected to redeem on the 22nd August 2018* and will be tradable on the ASX.
Westpac Capital Notes Offer Details
Issuer
Security Name
First Call Date
Mandatory Conversion
Date
Westpac Banking Corporation
Westpac Subordinated Notes II (WBCHB)
22nd August 2018
22nd August 2023 (unless redeemed earlier)
Margin
90 day BBSW + 2.30%-2.45%
(rate to be determined by bookbuild)
$750m+
$5,000 (Wealth Focus minimum is $10,000)
Size
Minimum Parcel
Source: Westpac Subordinated Notes II prospectus
It is expected that the issue will be repaid at the first opportunity in August 2018 with a
scheduled conversion in 2023 (subject to mandatory conditions not being breached).
We have covered the features in of fixed income hybrids on numerous occasions over the
last 2 years. We would suggest investors who are looking for a basic understanding of how
these products work, watch our online video An Introduction to Fixed Income
Comparative Securities
The structure of this issue is similar
to last year’s ANZ, NAB and
Westpac Subordinated Notes
issues.
The primary difference is this latest
Westpac issue contains a nonviability conversion clause in the
event that the companies get
themselves into trouble.
Arguably, the closest comparable is
Westpac previous Subordinated
Notes issues (WBCHA).
Issue
ANZ Sub.
Notes
(ANZHA)
NAB Sub.
Notes
(NABHB)
Westpac Sub.
Notes
(WBCHA)
Westpac Sub.
Notes ii
(WBCHB)
Issue
Trading
Margin
Margin
Price
Accrued
over BBSW over BBSW Issue Date 12/07/13 dividend
2.75%
2.14%
20/03/2012 $ 102.50 $
0.55
2.75%
2.29%
18/06/2012 $102.00
$
0.58
2.75%
2.23%
23/08/2012 $ 102.69 $
0.98
2.30%*
8/08/2013 $ 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. 02/07/13
Our analysis
For investors wondering why this issue is at a lower margin than the recent ANZ Capital
Notes - We would like to remind investors that the bank Subordinated Notes sit higher in the
debt structure than the majority of listed hybrids such as WBCPA. As such, these Notes, trade
at a lower margin, reflecting the additional security this issue has over the majority of listed
bank hybrids.
WBCHA currently trades at $102.69 including a $0.98 accrued dividend (ex. div on 9th August
2013), with an effective margin to expected maturity of 2.23%pa. Similarly ANZHA and
NABHB trade at an effective margin of 2.14%pa and 2.29%pa over the BBSW.
The main difference in considering Westpac Subordinated Notes II versus the existing issues
on market is the longer duration of this issue. Relative to the recent issues with an initial call
date in 4 years, this issue’s initial call date is 5 years. As we have highlighted in our recent
analysis of ANZ Capital Notes, investors should expect to be compensated for tying up their
capital for a longer period. Furthermore, the addition of a non-viability clause means
investors should also be compensated for this additional risk should the bank no longer be
viable.
The result is that it can be a difficult comparison for investors as relative to the trading
margin of the current issues, WBCHB offers a higher margin.
Using the same analysis as we did with the ANZ Capital Notes issue, we can consider the
Bank Bill Swap Rate (BBSW), the rate that banks’ lend money to each other at, to view what
the banks themselves consider a reasonable margin to be compensated for the longer term.
This would indicate 2.50% is a fair margin. Further factoring in that the wholesale market
yield curve is slightly flatter, and a margin of 0.3% for the non-viability clause, we would
assess a fair margin as 2.75% over the BBSW.
BBSW Yield Curve and the latest Big 4 Subordinated Notes issues
5%
4%
3%
ANZHA WBCHA
2%
WBCHB
NABHB
1%
0
1
2
3
4
5
6
7
8
9
10
We have transposed the BBSW yield curve on to last year’s Big 4 Subordinated Notes issues to asses a
fair margin on WBCHB.
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. 02/07/13
Our View on Westpac Subordinated Notes II
This month’s raising of $1 Billion for ANZ Capital Notes once again highlights how investors
are just throwing money at any of the bank hybrids.
As we highlighted in that analysis, unlike last year’s hybrids, this year’s Subordinated Notes
issues have reduced attractiveness with margin compression. Banks are now very aware of
just how hungry investors are for fixed income products which offer higher rates than term
deposits.
The new Westpac issue has little to offer investors. We expect there will be strong support
from Westpac’s in-house advisers and existing WBCPA investors who are being offered the
opportunity to roll into the new product, leaving very little on the table for new investors.
Our view is that the longer duration and the non-viability clause needs to be rewarded with
a margin in excess of 2.75% over the BBSW and with this expected to come in at 2.30% over
the BBSW, investors are not being rewarded for the additional risk of this issue. Existing
WBCPA investors should sit out and wait for the redemption in September.
By contrast there are investors with the view that the risk of an Australian bank falling on
hard times is negligible and just be happy that you are locking in a margin of 2.3% over the
BBSW for the next 5 years. If you are one of those investors and looking for an allocation, we
can get you one, but we think investors should give this issue thumbs down with both hands.
Key features
•
Indicative floating yield of 5.06-5.21%pa - based on current 90 BBSW of 2.76% and
bookbuild margin range of 2.30-2.45%.
•
Option to redeem at year 5 with scheduled conversion at year 10 - Westpac has the
option to convert in September 2018 or on any subsequent dividend payment date.
•
Ordinary dividend restrictions - applies on the non payment of WBCHB dividends
•
Automatic conversion under the Non-Viability clause
•
Redemption highly likely in 5 years - although WBCHB has a 10 year maturity, we
think Westpac will redeem/convert at the first call date in August 2018. 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 Subordinated Notes II will be listed on the ASX and as such the price of the
Note’s 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. 02/07/13