CBA dives into unfamiliar hybrid waters
Commonwealth Bank published details yesterday of its anticipated hybrid capital issue - a security that qualifies as "tier one" capital - with the release of the prospectus to the ASX. CBA is looking to sell at least A$750 million of the PERLS VI notes. It said the proceeds would be used to redeem the PERLS IV notes and to meet general corporate needs, if there is any excess.With almost A$1.5 billion of PERLS IV notes outstanding and due for repayment in seven weeks, the CBA must be expecting to significantly upsize the issue. The usual arrangements are in place for marketing the hybrid to a mainly retail investor base. Alongside CBA, there is Morgan Stanley as a joint arranger. Then there are five joint lead managers and a further five co-managers.Before investors rush in, there are some differences with the PERLS VI to note.Unlike other recent tier-one hybrid securities sold by ANZ, Westpac and CBA's subsidiary, Colonial Finance, and IAG, this will be the first one that is "Basel III compliant". As such, the key differences relate to the loss absorption capacity of PERLS VI, a factor relevant should the bank incur severe losses.The previous hybrid issues mentioned above included a mandatory equity conversion trigger. This cut in at a point that the issuer was deemed as becoming non-viable. Non-viability in these contexts was defined as the issuer's tier-one capital ratio falling to 5.125 per cent. The new PERLS VI hybrid from CBA has two triggers which have a similar effect.The first trigger is referred to as a Capital Trigger. This can be exercised at CBA's discretion or as directed by the Australian Prudential Regulation Authority, when CBA's Level 1 or Level 2 Common Equity Tier 1 capital falls to 5.125 per cent. The Level 2 ratio stood at 7.82 per cent under Basel II measurement and at 7.5 per cent under Basel III measurement at the end of June 2012. Level 1 and Level 2 refer to the CBA's group structure. Basically, Level 1 consists of the bank itself and other APRA-approved banking subsidiaries. Level 2 consists of Level 1 entities and other core subsidiaries approved by APRA. Level 2 capital ratios will, typically, be lower than Level 1.The second trigger is Non-Viability and comes into effect when APRA believes CBA is about to become non-viable, and ahead of any injection of public funds to restore the bank's viability. Upon a Capital or Non-Viability Trigger Event occurring, PERLS VI will be converted into sufficient ordinary shares to restore the minimum Common Equity Tier 1 ratio. Conversion will allow for as much as an 80 per cent fall in the CBA share price from the time of PERLS VI being issued. This is more generous than the 50 per cent allowed in the earlier tier-one capital issues. However, should the CBA be unable to issue new shares, PERLS VI will simply be cancelled, with no compensation payable. PERLS VI also differs in relation to the call and mandatory conversion provisions to the