They’re all doing it to up their Tier 1...pity all the investors...
Avoid NAB Capital Notes
BY NATHAN BELL - 24/02/2015
http://www.sharecafe.com.au/ii.asp?a=AV&ai=33635
ANZ's Capital Notes 3 recently sold like hotcakes. It's no surprise NAB is ready to tap investors with its own flaky hybrid offering.
ANZ recently sold $850m of Capital Notes 3 at a margin of 3.6% over the bank bill rate, for a current yield of 6%. Now its NAB’s turn. It plans to raise $750m from Capital Notes pitched at a 3.5-3.7% margin over the bank bill rate.
That’s bang in line with ANZ’s offer but it’s the widest margin that NAB has offered in recent memory. Past offers had margins of 3.2% and 3.25%, well above the 2.8% margin for last year’s largest deal, Commonwealth Bank’s $3bn PERLS VII.
Some of that margin reflects Commonwealth’s safer business – NAB is Australia’s largest business lender – but the flood of hybrid offers means investors are asking for higher returns to keep buying them.
Many investors are also nursing losses as the prices for past issues have fallen lately along with interest rates; the CBA PERLS VII’s have fallen from a face value of $100 to around $96, erasing most of the gains investors made in interest payments.
What worries us most is that the investors that are loading up on hybrid securities are probably the same ones that already own a portfolio neck deep in bank shares.
All things equal we’d prefer to own ordinary shares as you get to participate in any upside, while the hybrids offer little to no capital gains in the good times but will likely fall along with and potentially convert into ordinary shares anyway during a downturn.
Investors that avoided buying the litany of hybrid securities listed across various industries (mostly the A-REIT sector) prior to the GFC were able to scoop them up at prices of anywhere between 10 and 50% of face value during 2008 and 2009.
They’re anything but the cash substitute that many are buying them for. In any case, the notes are perpetual so you may never receive your capital back.
The bank also has the option to redeem the securities after five years if it finds more attractive financing, but that could be most unlikely given the only reason the banks are tripping over themselves to sell the hybrids is because they’re such a one-sided bet.
You’re under no obligation to return the money and, if things go belly up, then they’ll potentially convert into worthless shares anyway. In a worst-case scenario the notes could be entirely written-off. If I were Andrew Thorburn I’d be doing exactly the same thing.
The bottom line is that while the yield may look attractive next to term deposit rates, in good times the Notes act like fixed income securities (minimal capital gains) but in a downturn they act like stocks (large capital losses).
To paraphrase Warren Buffett, of all the securities listed on the stockmarket the chance that the offer in your inbox is the best opportunity is virtually nil.
This article contains general investment advice only (under AFSL 282288).