A year of excess for ASX listed notes

2015 was not a great year for the ASX-listed bond market.

Total issuance for the year came in at just under A$5.6 billion, the lowest annual total yet since the record $13 billion of issuance in 2012. Annual issuance volumes have been in steady decline since then.

Moreover, investors holding notes from the start of the year to the end would have seen the value of many of those holdings progressively decline. Widening credit spreads (increasing risk aversion), massive supply of discounted equity issues from the major banks, and the poor performance of recent new issues, all added to negative sentiment among investors.

The rot set in with the $3.0 billion PERLS VII  issue in October 2014. That issue set records for being the largest yet undertaken and having the tightest credit margin for hybrid notes issued by a major bank.

The margin was set at 280 basis points over the 90 day bank bill rate.

In secondary market trading , the price of the PERLS VII notes quickly fell below face value and by October last year had fallen below $87. The price has only recovered marginally since but the notes are currently offering a trading margin of more than five percentage points.

In the meantime, ANZ sold $970 million of hybrid notes in March 2015, and while offering a credit margin of 370 bps are now trading at a little over $93. NAB followed later in the same month with a $1.3 billion issue  offering a credit spread of 350 bps for a call date that is three years closer.

These notes are now trading at less than $96.

Westpac completed the major bank hybrid issuance for the year, also with a $1.3 billion issue in September. These notes offer a 400 bps credit margin with a call date six months later than that of the NAB notes.

The notes are currently marked under $99.

However, issues that came later in the year have fared better.

Macquarie Group sold $530 million of hybrid notes in December 2015.  The notes have a credit margin of 515 bps and are trading at around face value.

AMP issued $268 million of hybrid notes in December with a credit margin of 510 bps. These notes are actually trading at $3 above face value because of the perceived superior credit quality of AMP over Macquarie Group.

Lastly, Australian Unity returned to the market, also in December, with a new $250 million issue of senior ranking notes. With a 280 bps credit margin and a five year term to maturity, the notes are trading above face value.

Greater diversity of issuers and wider credit margins will still attract investors.

So what are the prospects for this year?

There is more than $5.6 billion of listed notes maturing this year. Some will not be replaced by their issuers.

Indeed, CBA had $570 million of senior notes mature on Christmas Eve. They were simply redeemed.

Interestingly, there may have been some strategy in this, as CBA is first up with $1.16 billion of PERLS III hybrid notes reaching their call date in early April this year.  Assuming that CBA will call the notes and replace them with a new issue, it might be hoping that some of its former senior note holders will line-up to buy the new hybrids, thereby creating some additional demand.

Nevertheless, based on the very disappointing experience of the investors who bought the PERLS VII hybrids, CBA will have to make the pricing of the next issue very attractive.

Later in April, Australian Unity's first senior note issue will mature but these have already being replaced by the most recent series of notes.

Westpac has $760 million of hybrids due to be called in June. While Westpac completed its last issue in September, the additional capital requirements being imposed on the major banks may encourage a new issue.

ANZ may also opt to replace the $2.0 billion of hybrids (ANZPA) that are due to be called in December, for the same reason.

That just leaves $700 million and $900 million of subordinated notes due to be called by Woolworths and Origin Energy in November and December, respectively.

Woolworth Notes II as they are known, receive 50 per cent equity credit from credit rating agencies. In the case of Standard & Poor's, that equity credit will expire with the call date on the notes.

The outlook for Origin Energy subordinated notes is much less certain.

When Origin Energy raised $2.5 billion in fresh equity late last year, it indicated that the notes would be redeemed on the call date. The price of the notes subsequently rallied after having fallen on fears that the notes would not be called while Origin appeared to be capital constrained.

Those fears have re-emerged as the price of oil continues to fall.

Last week, Origin's share price fell to about 15 per cent below where the equity raising was priced, on concerns that it may be about to breach banking covenants. Origin rebuffed those concerns, saying that there was no danger of a breach.

The share price subsequently rebounded.

But Origin's 'BBB-' rating from Standard & Poor's is looking increasingly fragile as rating agencies continue to revise downwards their oil price assumptions. S&P announced on Friday that Origin's rating was secure following the latest revisions but then announced it had downgraded Santos and revised the outlook on Woodside's credit rating to negative.