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2 top hybrid prospects

Christine St Anne  |  05 Aug 2015Text size  Decrease  Increase  |  

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Christine St Anne is Morningstar's online editor. Follow her on Twitter @MstarChristine

 

It has been a quiet year for new hybrid products. Increased volatility, driven by events in China and Greece, and increasing global bond yields have tempered hybrid volumes.

The relatively low hybrid issuance, however, has more to do with market volatility than investor demand.

"High market volatility is generally met with lower levels of issuance so it is no surprise that we have seen a particularly quiet June quarter, where Bendigo and Adelaide Bank (BEN) was the only hybrid issuer into the retail market," Morningstar head of credit research John Likos says.

There are still quality hybrids on offer despite market gyrations. In a detailed 12-page report, Likos examines five hybrid securities "that should be on every investor's radar". Below, a closer look is taken two of these hybrids.

1) CBA PERLS VI (CBAPC)

Commonwealth Bank of Australia (CBA) raised $2 billion in October 2012 in new Tier-1 capital through the issuance of perpetual exchangeable resaleable securities VI, or PERLS VI (CBAPC). This was the first Basel III compliant hybrid in Australia, designed to support the ongoing regulatory capital requirements of the bank.

These securities offer discretionary non-cumulative franked dividends of 90-day Bank Bill Swap (BBSW) rate plus 3.80 per cent. Commonwealth Bank has the cash option to redeem the securities on 15 December 2018 with mandatory conversion on 15 December 2020, subject to conversion conditions.

Distributions are paid each quarter. These securities replaced the PERLS IV securities, which were redeemed on 31 October 2012 as part of the security holder offer. As these notes are Basel III compliant Tier-1 capital, they include both a capital trigger and a non-viability trigger. Morningstar considers CBAPC to be a medium investment risk.

2) Woolworths Notes II WOWHC

WOWHC pay quarterly interest of 3.25 per cent above the 90-day BBSW rate.

On the step-up date of 24 November 2016, at its discretion, Woolworths (WOW) can redeem the notes at face value of $100, or let the margin increase 1 per cent.

The notes mature in November 2036. Woolworths' balance sheet remains sound, supported by debt metrics that are well within covenant requirements and Morningstar considers WOWHC to be low investment risk.