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CBA Tier I hybrids priced to perform, says Commonwealth Bank treasurer Paulo Tonucci

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Commonwealth Bank Treasurer Paulo Tonucci has assured investors the bank's $1.25 billion hybrid security offer has been priced to "perform" as the lender returns to the retail hybrid market for the first time since its ill-fated 2014 issue.

The bank began marketing an ASX-listed $1.25 billion Tier I hybrid capital raising to investors on Tuesday offering a historically high margin above the bank rate of up to 5.35 percentage points over the bank rate, to yield between 7.49 per cent and 7.64 per cent. 

But the pricing was criticised by some investors and analysts who pointed out that the total return on offer was lower than what was available from bank hybrid securities already listed on the Australian Securities Exchange. ​

Independent research firm Bond Adviser told clients not to subscribe to the new offer, warning investors they may get "hurt in the secondary market upon listing". 

The research firm believes that a fair margin for the new offer is 5.80 percentage points over the bank rate and said investors should rather consider buying hybrids of NAB, Westpac and ANZ that offer yields to maturity of 8.38 per cent, 8.37 per cent and 8.19 per cent, after accounting for franking credits. 

Morningstar, however, told investors to subscribe to the offer which provides an "attractive entry point for hybrid investors looking to gain exposure" to a preferred issuer whilst pointing out the historically high running yield. 


"We have tried to identify a pricing range that is going to be fair to investors and want them to feel appropriately rewarded. We want to see the security perform well," Mr Tonucci told Fairfax Media.  

Hybrids traded

The calculated pricing he explained factored in recent trading in hybrids and not just the last few trading sessions which may have been impacted by anticipation of the deal. 

"The feedback has been quite constructive and we feel we have put this in the right range. It's a small deal. This is going to be the smallest amount for many years and we are doing that because we want the security to perform," he said. 

Bank hybrids are part debt, part equity securities which offer investor higher yields compared to senior debt and deposits in exchange for the ability to convert them into shares or write them off if the bank faces severe losses. The purpose is to protect these more senior ranking investors from losses. 

Mr Tonucci said movements in credit spreads on Australian bank hybrids had been more material than more senior ranking Tier II subordinated bonds and senior bank debt. 

"The increase in spreads we have seen in hybrids is close to double what we have seen in Tier II and senior securities.  As you move down the capital structure you are getting a meaningful increase in the return relative to other parts [of the capital structure]." 

The sell-off in hybrids has led to losses amongst investors in CBA's previous issuance. The bank's last deal in 2014, a $3 billion issue pays a margin of 2.80 percentage points over the bank rate. But those securities trade at a 14 per cent discount to par value. At that price investors can earn an equivalent yield of almost 8 per cent per annum, provided the bank repays the full $100 in 2022 when the notes are due for refinancing. 

Secondary market

While some analysts steered investors towards the secondary market in search of better value others have pointed to the attractive "running yield" compared to a "yield to maturity" and CBA's status as a premium issuer as reasons to buy the new deal.  

Mr Tonucci said that part of the reason hybrids have fallen in value is because of the additional equity issuance of the banks to meet higher capital requirements, a move that should actually make bank hybrids safer as equity ranks below hybrids in the capital structure. 

"The performance has been disappointing and it's a market which is less liquid. it's difficult to establish a fair price. All securities have under-performed despite the fact that the capitalisation of the banks has improved."

He explained that the demands placed by banks on retail investors for capital, in terms of both equity and Tier I capital had placed demand pressures on market prices

"That has put pressure on the market more generally. We have tried to price at a level that offers an attractive level and whilst giving investors capital upside."