ANZ's hybrid issue not well received

As predicted in Banking Day last week, investors in bank hybrid notes did not respond well to the announcement of ANZ's Capital Notes 3 issue. The investors most exposed are those holding CBA's PERLS VII notes.



At the close of business on Tuesday (after the Australia Day holiday on Monday) the price of the PERLS VII notes had fallen by 1.3 per cent from Friday's closing price to A$95.89. This price gives a trading margin of 367 basis points, according to Morgan's rate sheet.



At this level the market is clearly signalling that a margin of 360 bps for the Capital Notes 3 will be insufficient. When the bookbuild takes place on Wednesday, setting a margin of 380 bps, at the wide end of the 360 bps to 380 bps range, appears a certainty. 



There is also the question of how much demand is there for more bank hybrid notes.



ANZ has set a target of $750 million for the Capital Notes 3 issue. But this is a new issue, it is not replacing any maturing hybrid notes, so there is no automatic demand to rollover funds from one investment to the next.



NAB's issue, expected to be announced on Thursday, will be the same.



To date, banks have assumed that there is limitless demand among retail investors for their hybrid notes. And with the withdrawal of the banks from the listed market for their subordinated debt issues from the start of 2014, there is more demand for hybrid notes than there otherwise would be.



However, the listed market is becoming very unbalanced and investors will become wary of holding concentrated investment portfolios. Opportunities for diversification will be increasingly sought.



The glory year for the listed interest rate securities market was 2012. Issuance that year totalled $13 billion and comprised issues from both financial institutions and non-financial institutions.



However, in 2013 issuance totalled only $8.7 billion, with just $305 million of notes being issued by a non-financial institution. All of last year's $7.4 billion of issuance came from financial institutions.      



Issues by financial institutions (almost all of which are banks) account for 87 per cent of all interest rate securities listed on the ASX. The face value of these securities totals almost $32 billion.



The face value of issues from non-financial institutions is less than $5 billion. And of the $32 billion of issuance from financial institutions, 75 per cent is in the form of hybrid notes.



With the listed interest rate securities market being comprised predominantly of private investors, banks may soon face the prospect of having to find an alternative market for hybrid note issues.