Westpac preps hybrid issue
There was talk in the market last week of a new hybrid note issue about to be launched. In fact the issue could be launched this week, although the rumoured issuer, Westpac, may opt to wait until next week to get past the Australia Day shortened week.National Australia Bank was also rumoured to be an issuer, which means we may see two new hybrid notes issues from major banks in quick succession. The issues can be expected to be fully Basel III compliant to qualify as additional tier one capital.This means the note issues will have both common equity tier one capital and non-viability triggers, which if activated will see the notes convert to common equity. The maximum conversion ratio will be calculated on 20 per cent of the issuer's share price at the time the notes are issued.The ANZ's CPS3 notes, issued in September 2011, and Westpac's CPS, issued in March 2012, have common equity tier one capital triggers but neither has a non-viability trigger. Moreover, the maximum conversion ratio is based on just 50 per cent of the issuer's share price at the time of issuing the hybrid notes.This latter point was the subject of an announcement made by ANZ to the ASX during the week. The ANZ has amended the terms of the CPS3 such that the maximum conversion ratio will be calculated on 20 per cent of the ANZ's share price at the time the CPS3 were issued.This move is a benefit to holders of the CPS3 and Westpac can be expected to make a similar amendment to its CPS before too long. Westpac has A$1.04 billion of hybrid notes due to be redeemed in September this year and A$910 million of hybrid notes due to be redeemed in September 2014. NAB has no hybrid notes listed on the ASX but does have A$2.0 billion of perpetual income securities that it sold in 1999.Transitional arrangements will allow NAB to count 90 per cent of the face value of the income securities as additional tier one capital in 2013 but this will decrease by 10 per cent each year, on a straight line basis. So NAB will need to raise new additional tier one capital at some point. In the meantime, investors anticipating the redemption of the income securities may still have some time to wait.NAB's only obligation is to pay a coupon of 125 basis points over the 90-day bank bill rate. Thus even if viewed as senior debt, the funds are relatively cheap considering the debt never has to be repaid.