ANZ yesterday announced that, "following strong investor demand" for its offer of ANZ Capital Notes 2, it will lift the amount allocated to the bookbuild process from A$1.0 billion to $1.3 billion. The annual margin for the proposed issue was set at 3.25 per cent over the 180 day bank bill rate, the low end of the 3.25 to 3.40 per cent indicative range for this margin. The notes will constitute Basel III compliant Additional Tier 1 Capital under the Australian Prudential Regulation Authority's current capital adequacy standards. As indicated previously by ANZ, in addition to allocating the majority of paper to brokers and institutional investors, some of the allocation will be used for what the bank calls "the CPS1 reinvestment offer" along with an "ANZ security holder offer" and a "general offer". All offers open today. Eligible CPS1 holders will be sent a personalised reinvestment offer application form and a copy of the replacement prospectus. The issue is expected to see a large percentage of investors holding ANZ's 2008 convertible preference shares (CPS1) convert their holdings into the new securities, which will pay an increased margin of 75 bps, although have different credit implications for investors. The difference in rates is partly a reflection of the extra costs the bank has incurred in developing a Basel III compliant instrument, including the requirement to hold extra capital conservation buffers. It also reflects any additional risk that investors face in taking up the notes, which have a longer term to run until mandatory conversion and different trigger events. CPS1 has mandatory conversion to ANZ shares after 6 years; the new securities can run for ten years. A replacement prospectus will be lodged with the Australian Securities and Investments Commission today and will include the margin and the revised amount proposed to be raised by ANZ. In an echo of last year's issue, at the equivalent stage last July, ANZ's Capital Notes 1 issue had been upsized from $750 million at launch to $1.12 billion at bookbuild, and the 3.4 per cent margin over 180-day BBSW paid for the previous Notes was also at the lower end of the indicative range.