Investing in CBA PERLS VI
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Nicholas Grove: Banking giant CBA recently said it's looking to raise about $750 million through an issue of some hybrids to be known as Perpetual Exchangeable Resalable Securities or PERLS VI. Here to give us a rundown on what these securities can offer investors, I'm joined again by Morningstar Credit Analyst, Ravi Reddy.
Ravi, thanks very much for joining us.
Ravi Reddy: Thanks, Nick.
Grove: First of all Ravi, can you give us a brief idea about the structure of these hybrids, and how they differ from other interest rate security issues we've seen on the market lately? Also, how do they differ from other CBA hybrid issues?
Reddy: PERLS VI are mandatory converting hybrids, so in December 2020 they convert into CBA ordinary shares, but thatï¿½s subject to conversion conditions or unless they were redeemed or converted earlier, or if CBA exercise an option to call them two years early. They pay franked distributions, they are paid quarterly and itï¿½s based on the margin above the 90 day BBSW rate. Their distributions are non-cumulative and discretionary.
The recent Subordinated Note issues that we've had were pure debt securities and they donï¿½t convert into ordinary equity. PERLS VI are like true hybrids, so they have debt and equity like characteristics. They are similar to PERLS IV and PERLS V but the terms are much stricter, so they are more equity like.
Grove: Ravi, who is eligible to invest in these hybrids?
Reddy: The offer is open to anyone. PERLS VI are replacing PERLS IV, so there is a reinvestment offer for PERLS IV investors. So, PERLS IV investors can reinvest in this offer, they can sell on market or hold on to be redeemed for cash at the end of October.
Grove: Where do you expect the margin on these hybrids to come in at?
Reddy: CBA havenï¿½t given an indicative margin range. We expect the margin to come in above our fair margin estimate of 3.15%. Similar hybrids are trading at around 3.8%, so we would prefer the margin to be at least 3.8% or above.
Grove: Ravi, what are the main aspects of this issue that you find most appealing?
Reddy: PERLS VI potentially offer attractive distributions. They are backed by a quality issuer, CBA which is one of the four major banks. That's the attraction.
Grove: Finally Ravi, what are the main risks investors should be mindful of when it comes to investing in these hybrids?
Reddy: PERLS VI are unsecured subordinated security, so they are riskier than bank deposits. PERLS VI also have the strictest terms of any major bank hybrid on issue. These terms have been imposed by the prudential regulator, APRA. So, in our view it makes them the most equity like of any major bank hybrid on issue.
Also distributions are discretionary, say CBA doesnï¿½t have to make-up missed distributions, but there is a dividend stopper so it stops them paying dividends on the ordinary shares. We also recommend investors seek professional investment advice before making an investment decision.
Grove: Ravi, thank you very much for joining us.
Reddy: Thanks, Nick.
Grove: To read Morningstarï¿½s full report on CBA PERLS VI, morningstar.com.au premium subscribers can go to the Hybrids tab and click on the link below.
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