Latest hybrid share issue expects higher return

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Westpac Bank is expected to launch a fresh issue of hybrid shares on 7 February. The issue comes following a flood of issues by large companies last year that saw more than $7bn sold to investors.

The predictable yield of hybrid shares makes them attractive to retail investors during irregular market times. Westpac’s Capital Notes are fully paid, non-cumulative, convertible and redeemable, and are to be listed on the ASX. However the notes are subordinated to other forms of debt and unsecured.

Morningstar credit analyst Nicholas Yaxley said the notes were “suitable for investors looking for stable income with a stable to positive view on the credit profile of the issuer”.

Defensive or conservative investors should stay away though, he said, as the capital and non-viability triggers change the dynamics of the security, making it unsuitable for them. He said the Westpac notes are structurally very similar to Commonwealth Bank’s PERLS VI, so these make a good comparison point for investors.

Yaxley expects the notes to provide a margin at, or above, 3.20%, as similar tier 1 securities are currently trading at margins between 3.20 – 3.30%. “A new issue should provide a slight premium to existing issues and therefore we would prefer a margin above what is currently offered in the secondary market,” he said.

The notes will be sold to both institutional and retail investors at $100 each, with the ability to be more or less depending on demand.