Westpac Bank will launch a fresh issue of hybrid shares, outlining plans to raise $500 million from investors for the notes that are scheduled to convert to ordinary shares within eight years.
The issue kicks off the latest round of hybrid share raisings, after a flurry of issues last year by large companies saw more than $7 billion sold to investors.
Hybrid shares pay a set interest rate, which usually tracks the price of debt, and after a set period convert into ordinary shares. Given they have bond-like features, paying a predictable yield, this makes them attractive to retail investors in times choppy markets.
The Westpac Capital Notes are fully paid, non-cumulative, convertible and redeemable and to be listed on the ASX. However the notes are subordinated to other forms of debt and unsecured. The notes also qualify as tier one capital under new banking rules known as Basel 3.
The notes will provide investors with a quarterly distribution rate calculated as the 90-day Bank Bill Rate plus a fixed margin, together multiplied the tax rate. The margin is expected to be in the range of 3.2 per cent to 3.4 per cent to be determined under the book build and will not change over the life of the notes.
Based on current pricing the distribution rate for the first period would be 4.33 per cent. Although the distributions are expected to be fully franked.
‘‘The issue will further strengthen Westpac’s Tier 1 Capital position. An issue of $500 million would add approximately 16 basis points to Tier 1 Capital”, Westpac’s chief financial officer, Phil Coffey said.
The notes will be sold to both institutional and retail investors and Westpac has left the door open to raise more under the offer.
Westpac has $1.04 billion of hybrid notes due to be redeemed in September this year and $910 million of hybrid notes due to be redeemed in September, 2014.
Hybrid securities are often a more attractive form of capital raising for bank shareholders as they do not dilute profit or dividends across ordinary shares. The Westpac offer is expected to open on February 7.