Westpac Capital Notes II
Westpac Banking Corporation is getting ready for only the third ASX-listed debt issue for 2014. The bank is hoping to raise at least A$750 million of Additional Tier 1 capital through instruments to be known as Capital Notes 2.The announcement was flagged before Easter but wasn't expected any sooner than Monday, when Westpac announced its interim results. It comes in the same week that Suncorp Group's CPS3 begin deferred settlement trading on the ASX. Suncorp's CPS3 was the second listed debt issue for the year, and raised $360 million. The issue followed ANZ's Capital Notes 2 issue, which raised $1.61 billion. 2014 will see $4.4 billion of listed debt securities reaching early redemption or maturity dates. Included in that is $908 million of Westpac's SPS II (WBCPB), which the new Capital Notes 2 are intended to replace. The SPS II have an early redemption date of 30 September 2014.Holders of the SPS II notes are being offered priority to roll-over into the Capital Notes 2. However unlike the SPS II, the Capital Notes II are fully Basel III compliant and therefore come with the now standard Common Equity Capital and Non-viability triggers that would see the Capital Notes 2 convert into Westpac shares, if pulled, or written-off.On top of that, the coupon to be paid on the Capital Notes 2 will not be as attractive as that paid on the SPS II notes, which pay a coupon of 380 basis points over the 90 day bank bill rate, fully franked, while the Capital Notes 2 are being marketed with a coupon of 305 bps to 320 bps over the 90 day bank bill rate plus franking.The pricing of the new Capital Notes 2 confirms a trend of reducing credit margins and a lengthening of terms to the early redemption date. For this issue, investors will have to wait until September 2022 (more than eight years) before they will see their capital returned, if it is not converted to equity on that date or before.ANZ's Capital Notes 2 priced at a spread of 325 bps over 180 bank bills, with early redemption possible after eight years. National Australia Bank's $1.7 billion of CPS II sold in December last year, came with a credit spread of 325 bps over the 90 day bank bill rate, and early redemption after eight years.The credit spread to be paid on Westpac's Capital Notes 2 will be determined in a bookbuild scheduled for next Wednesday, if not before. No doubt the credit spread will be set at the low end of the range, as has invariably been the result to date.Based on the 90 day bank bill rate yesterday, such pricing would result in a yield of 5.73 per cent until the next rollover date. Adjusting for franking, this results in a cash return of just 4.01 per cent plus the franking credits.Westpac shares are currently yielding 5.3 per cent plus franking credits and come with the upside attached to equity. Additional Tier 1 capital comes