Macquarie withdraws hybrid offer
Macquarie Bank has joined National Australia Bank in withdrawing hybrid security offers, with both citing market volatility and its likely impact on the price of the notes once they listed.Macquarie withdrew its A$500 million offer of Macquarie Capital Notes 2, which it had launched on February 11, saying it made the decision "in light of significantly changed market conditions in recent weeks".NAB launched a hybrid offer, NAB Capital Notes 4, on February 25, seeking $1.9 billion of capital.In its statement, NAB said market conditions "have changed substantially since the offer was launched and that the ongoing market volatility would be likely to impact on the trading value of the [notes]".Both banks will refund all the money raised. Both banks also said they would repay investors in old capital note issues that had reached their call dates. And both banks emphasised that their capital positions were strong.Macquarie Group said it had surplus capital of $5.8 billion at 31 December. Macquarie Bank's common equity tier 1 capital ratio was 14.2 per cent on a harmonised basis and 11.4 per cent on an APRA basis.NAB said that at 31 December it has common equity tier 1 capital of 10.8 per cent.Hybrid securities have been popular with retail investors in recent years because they are issued by banks, in the main, and offer relatively high yields. The withdrawal of these offers may prompt investors to reconsider the risks involved in such investments.NAB was offering a margin of 2.95 per cent above the bank bill rate on its capital notes. Macquarie was offering a margin of 2.9 per cent over bills on its issue.APRA imposes conditions on the issue of hybrids if banks want to count them as part of their regulatory capital. Distributions on capital note are discretionary and they typically have a perpetual term rather than a fixed maturity.They can be converted into equity by the issuer, investor or regulator if certain trigger events occur. These events include a fall in a bank's level of regulatory capital or where a bank encounters severe financial difficulty. These conditions are sometimes referred to as "bail-in" provisions.When such events occur, hybrid holders are likely to receive shares that are worth significantly less than the face value of the hybrids they have bought.Most of the capital notes listed on the ASX are now trading below their $100 face value - some of them well below.Commonwealth Bank has six interest rate securities currently listed on the ASX. They are trading between $88 and $99 - all below their $100 issue price. It's much the same story for other issuers.Back in 2016 Kevin Davis delivered a paper at an Actuaries Institute conference in which he said: "We face problems with these instruments. We haven't got a clue."Davis said bail-in conversion may or may not expose security holders to a loss on the face value of their hybrids, depending on the issuer's stock price at the time, and conversion may be partial or full."Appropriate pricing requires the ability to model