As it has been almost 3 weeks since the CBA launched their PERLS VIII hybrid issue, now is an opportune time to have a look at how the existing Tier 1 hybrids have fared. The green arrows on Chart 1 highlights hybrids that have rallied over the last three weeks and their trading margins narrowed since the PERLS VIII issue announcement on the 15th March. The main observations from the first chart are:
- Generally those hybrid securities with an expected call date of less than three years have performed well;
- NAB hybrids have done particularly well as they were trading wider (cheaper) than the other major banks possibly due to poorer investor sentiment surrounding the demerger of the Clydesdale Bank;
- The longer dated hybrids (with the exception of the NABPB’s) have barely moved.
Source: BondAdviser as at 3rd March 2016 Another way of looking at how trading margins have moved over the last three weeks is shown in Chart 2 where a credit curve has been drawn for the 12th February (the business day prior to the PERLS VIII announcement) and for the 3rd March (almost three weeks later) that shows how the credit curve has effectively steepened as the short and mid dated hybrids have outperformed the longer dated issues. Source: BondAdviser as at 3rd March 2016 Clearly investors are showing a preference for shorter and mid dated hybrids over the longer dated issues. Perhaps one reason for this is the expectation that other major banks will be looking to issue replacement hybrids shortly. WCTPA & ANZPA’s are due to be called later this year that will add to supply at the longer end of the curve. Other issuers may also decide to come to the market if trading margins continue to narrow. Longer dated hybrids have also underperformed the broader S&P/ASX 200 All Ordinaries index (+6.63% from 12th Feb to 3rd March) as well as the more focussed S&P/ASX 200 Banks Index (+7.54%, that includes regionals as well as the big 4).