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Major Bank Tier 1 Hybrids Continue to Rally

With the AFR’s Street Talk yesterday reporting that Westpac Banking Corporation is on the verge of announcing the second new Tier 1 Hybrid issue of 2016, presumably to replace the $762.7 million Westpac Trust Preferred Security (TPS) (ASX Code: WCTPA), this is an opportune time to revisit how this segment of the ASX-listed hybrid universe has fared since the first issue of the year was announced on the 15th of February.

Figure 1 clearly shows that whilst hybrids have experienced trading margin compression, i.e. their respective trading margins are lower than they were on the 15th of February, the rally has been uneven, with hybrids that have had an expected call date prior to December 2020 generally experiencing a greater fall in the trading margin than those with an expected call date beyond December 2020.

Figure 1 – Major Bank Tier 1, Then & Now, Trading Margins Have Compressed Since Last New Issuance

Source: BondAdviser, as at 11 May 2016

Figure 2 shows that the Westpac Capital Notes (ASX Code: WBCPD) & the Westpac Convertible Preference Shares (ASX Code: WBCPC) had the largest falls in trading margin (2.40% & 2.31% respectively).

Figure 2 – Quantifying the Compression in Trading Margins

Source: BondAdviser, as at 11 May 2016

Figure 3 shows how the theoretical Tier 1 hybrid credit curve has shifted over the same time-frame. As all Tier 1 hybrids have experienced trading margin compression, it is no surprise that the curve has shifted lower since mid-February. It is also no real surprise that the curve has steepened as both short & mid dated hybrids have generally outperformed longer dated ones.

Figure 3 – Tier 1 Hybrid Credit Curve Has Shifted Down & Steepened

Source: BondAdviser, as at 11 May 2016

Providing trading margins do not move too much between now and when the next Tier 1 hybrid transaction is announced, the Tier 1 credit curve (as at 11 May 2016) serves as an indication of where we might expect a new potential hybrid to price relative to the term of said security.