Hybrid margins widen

John Kavanagh

Commonwealth Bank has launched an issue of hybrid securities, targeting a capital raising of A$750 million or more with an expected margin of 300 to 320 basis points over the bank bill swap rate.
 
CommBank PERLS XVI Capital Notes, which have a first call date of June 2030, will qualify as tier 1 capital. They are unsecured, subordinated debt obligations.
 
CBA will pay a higher margin than ANZ, which issued ANZ Capital Notes 8 in February. ANZ raised $1.5 billion at a margin of 275 bps over the three-month bank bill swap rate.
 
Margins on banks securities, including hybrids, widened in March, following the failures of Silicon Valley Bank and Credit Suisse, whose hybrid securities were written off.
 
However, the market recovered much of that ground last month, with fixed income research house BondAdviser reporting that its BA AUD AT1 Index, which tracks the performance of bank and financial institution instruments issued in Australian dollars, rose 1.17 per cent in April.
 
Another factor creating uncertainty in the hybrid market was APRA’s statement last November that it has the final say as to whether a capital instrument can be called, and warning that its approval should not be taken as a given.
 
APRA wrote to ADIs, general insurers and life insurers saying they must take care to meet prudential requirements when calling capital instruments in an environment of higher credit spreads.
 
It said that with credit spreads widening, “uneconomic calls” may create an expectation that the issuer will exercise a call option on other outstanding additional tier 1 capital and tier 2 capital instruments with call options.
 
CBA last issued in the hybrid market in October last year, when it raised $1.77 billon at a margin of 285 bps.