Yesterday, Suncorp announced a new hybrid offer launching the Capital Notes 5, looking to raise approx. $300m in Tier 1 capital through the deal. The offer includes a new money portion, though holders of Suncorp Capital Notes 2 (SUNPG) will also have the opportunity to roll and likely make up the bulk of the deal given the new offer is smaller (at this stage) than the $375m Capital Notes 2.
Given the small offer and sizable roll opportunity, we expect SUNPJ to be issued at the low end of the margin range at just 280bps over the 90-day BBSW, equating to a Yield to Call (YTC) of just 7% over the 6 years. This compares poorly to two recent issues:
- IAG Cap Notes 3 (IAGPF) issued at 320bps for 6.75yrs, trading at 306bps
- Bendigo Cap Notes 2 (BENPG) also issued at 320bps for 6.75yrs, trading at 288bps
SUNPJ is coming in 40bps below on issued margins, and 26bps below on a YTC basis for the IAGPF. This difference comes down to Suncorp coming to market with a higher credit rating, however, the ’bonus’ issue margin appears tight on many metrics.
If we compare this to the major bank hybrids, a few steps higher on the credit rating scale:
- AN3PK is trading at a YTC margin of 244bps for 5.9yr
- CBAPM is trading at a YTC margin of 237bps for 6.2yr
Overall, major bank hybrid margins have come in significantly due to an increase in the credit rating by S&P from BBB- to BBB earlier this year. This change quickened the pace of higher demand for Hybrids at a time when new supply has been hard to come by. Australian banks, and other financial institutions that are required to hold capital buffers such as Suncorp, are very well capitalised after a period of prudent management post-COVID combined with strong returns.
It’s also important to note that SUNPG was issued on a huge margin of 365bps. Holders, at least those who participated in the initial Capital Notes 2 issue, will see a significant drop off in yield if they participate in the roll. We still expect to see strong demand from new and reinvestment money here in the deal, however, this screens overly tight for our liking.
