Westpac's latest hybrid faces an uncertain market

Word in the debt capital market last week was that Westpac would launch a new hybrid note issue today (Monday). The issue size was put at A$750 million.



The ASX-listed hybrid notes will be only the fifth issue into the listed debt market this year.
 

The success or otherwise of the Westpac issue will set the tone for the market for the remainder of the year - just as Commonwealth Bank's PERLS VII issue did last year.



CBA's mammoth $3 billion issue remains the largest undertaken in the market. And it did not take long for investors to recognise that the miserly record low margin of just 280 basis points over the bank bill rate was insufficient compensation for the risks involved.



The price of the hybrid security sank below face value upon listing on October 2 last year, reached a high of $98.30 seven days later and since then has trended downwards.

On June 30 the PERLS VII price sank to its lowest yet, reaching $90.75. This equated to a trading margin of 447 bps over swap.



Interestingly, all of the most recent hybrid issues hit low points on that day. ANZ's Capital Notes 3 fell to $99.00 to give a trading margin of 426 bps (it was issued at 360bps).

NAB's Capital Notes fell to $97.60 to give a trading margin of 424 bps (it was issued at 350bps).

Westpac's Capital Notes 2 fell to $94.51 to give a trading margin of 417 bps (it was issued at 305 bps).



The prices on these hybrid notes have recovered somewhat since then and the general view is that the June 30 slump was caused by tax-loss selling. But if that is the case, how many investors are going to front up to buy again so soon?



Is Westpac counting on short memories?



Trading margins on the hybrids noted above are now running around the 395 bps level for CBA and NAB, while ANZ is at 418 bps and Westpac at 392 bps. The differences are being driven by different call dates.

However, with the price talk on the new Westpac hybrid being at under 400 bps, it may well struggle to attract much interest at all, unless it has a call date no more than five years out.