No rush for bank hybrids by retail investors

Hybrid fixed-interest securities marketed by three banks and one industrial company over the last week or two have failed to generate the scale of investor demand sometimes associated with such issues, at least in the case of those promoted by the banks.

Last week, ANZ and Westpac, and then CBA-owned Colonial all upsized their issues and set coupon rates, but perhaps too many issues came to the market at the same time.

Investor demand for ANZ's comparatively simple subordinated debt issue was such that not only was the credit spread on the coupon set at the low end of the indicative range of 275 basis points to 300 bps but the bank trebled the issue size to A$1.5 billion.

Westpac did not receive quite the same warm reception for its convertible preference shares. Given a marketing range for the credit spread of 320 to 350 basis points, the spread was set at 325 basis points and the issue size was set at an imprecise plus or minus $1.0 billion, after being launched at $750 million.

Later in the week, Tabcorp priced its offer of subordinated debt at 400 bps over the bank bill rate, compared with the marketing range of 400 to 450 basis points, but left the issue size unchanged at $200 million. However, Tabcorp did say that it may increase the issue size, depending of the level of subscriptions received.

If a broker rings you twice to ascertain your interest or lack thereof in a new issue, then the issue in question is struggling. This happened not only with the Westpac CPS issue but also with the Colonial Group subordinated notes issue.

In the case of the latter, the difficult sales job was seemingly confirmed with the outcome of Thursday's book build only being announced late on Friday by Colonial. The apparently face-saving announcement said the issue size had been increased to $1.0 billion from $500 million and the credit spread on the coupon was set at 325 basis points.

While no credit spread was specified in the original prospectus, 325 basis points is at the lower end of the unofficial marketing range of 325  to 375 basis points.

Bank hybrids rated near junk

Late last week, Fitch Ratings concluded the review of the credit ratings assigned to the four major banks initiated at the end of last month.

The long term issuer default ratings assigned to CBA, National Australia Bank and Westpac were lowered one notch to AA-.

Fitch affirmed the AA- long term issuer default rating assigned to ANZ.

In a commentary, Fitch wrote that the downgrades "reflect the weaker funding profile of the major Australian banks relative to similarly rated international peers. Despite some improvement since 2008, all four banks retain a reliance on wholesale funding, particularly from offshore markets."

At the same time, Fitch lowered the ratings assigned to the hybrid and preferred securities issued by CBA, NAB and Westpac by three notches to BBB.

The multiple-notch downgrade of the securities reflects "the application of Fitch's new bank regulatory capital securities rating criteria.

"In Australia, payment of distributions on Tier 1 instruments is subject to an annual profits test. Fitch believes this is an easily activated non-performance trigger and therefore rates Australian banks preference shares five notches below an institution's viability rating," said the ratings agency.