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New Issue: PERLS VIII – Do Not Subscribe
On the 16th of February 2016 the Commonwealth Bank of Australia (CBA) announced a new transaction, PERLS VIII (Prospective ASX Code: CBAPE). The purpose of this transaction is to provide funding for the group but more specifically it will be treated as additional Tier 1 capital for regulatory purposes. The indicative size of the offer is $1.25 billion but may change based upon demand.
These securities are structured as perpetual, unsecured, convertible, transferable, redeemable, subordinated notes. Distributions are discretionary, fully franked, floating rate, non-cumulative and subject to payment conditions. They will be paid on a quarterly basis based on a calculation equal to 90-Day BBSW plus a margin multiplied by (1 – Current Company Tax Rate). The margin will be set at book build with the current guidance range being [5.20 to 5.35%].
This security has no fixed maturity date but is scheduled for mandatory exchange into CBA ordinary shares on the 15 of October 2023 (or later) subject to conversion conditions being satisfied. At the issuer’s discretion, and subject to approval by APRA, the notes may be redeemed or resold on the 15 October of 2021. As this security meets the new capital instrument eligibility criteria under Basel III it also contains the loss absorbing terms and conditions known in the documentation as Capital and Non-Viability Trigger Events. Upon the occurrence of these events this security will be converted into ordinary shares without the protection of conversion conditions. In this circumstance the holder will receive the lesser of the exchange number and maximum exchange number as outlined in section 2.3 of the prospectus. If a situation arises where conversion is not possible for any reason, holder’s rights will be terminated and the notes will lose all value.
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* Size is subject to change but we expect a final size of $1.25 billion
** Based on prospective issue margin of 5.20 – 5.35.% and 90-Day BBSW of 2.15%. Actual margin to be set at bookbuild.
*** Based on prospective issue margin of 4.00% and interpolated swap rate to the call of 2.38%. Actual margin to be set at bookbuild.
**** Actual cash amount not including franking value and based on $100 face value.
PERLS III Options
On the 16th of February 2016, The Commonwealth Bank of Australia announced that it will redeem PERLS III and offer investors a rollover into PERLS VIII.
The options for investors holding PERLS III (ASX code: PCAPA) 2016 are:
- Exchange PERLS III for the new PERLS VIII issue;
- Redeem PERLS III ($200 face value plus last dividend ) for cash;
- Reinvest proceeds in existing secondary market hybrids at higher yields/margins than being offered by the new PERLS VIII.
Our recommendation is either 2 or 3.
We recommend against option 1 – we believe fair value for this new issue is a margin +5.80% (not 5.20 – 5.35% offered) and investors may be hurt in the secondary market upon listing. For those looking to re-invest in similar Bank Tier 1 issues, the secondary market offers better value with shorter ‘first call’ dates:
- NAB Convertible Preference Shares II (ASX Code: NABPB) Dec 2020 call – margin 6.05% p.a. (8.38% yield incl. franking credits)
- Westpac Capital Notes (ASX Code: WBCPD) Mar 2019 call – margin 6.11% p.a. (8.37% yield incl. franking credits)
- ANZ Capital Notes (ASX Code: ANZPD) Sep 2021 call – margin 5.81% p.a. (8.19% yield incl. franking credits)