Reuters: Bankruptcy News: Macquarie's hybrid hampered by complex structure

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Macquarie's hybrid hampered by complex structure Mar 22nd 2012, 11:04 Thu Mar 22, 2012 7:04am EDT * USD250m hybrid Tier 1 deal's size only half of maximum targeted * Macquarie pays almost 200bp extra for Basel 3 compliant structure * Sub investment-grade rating impacts demand By Helene Durand LONDON, March 22 (IFR) - A USD250m hybrid Tier 1 issue for Australian bank Macquarie struggled to garner strong investor support this week, hampered by the complex nature of the structure in a sign that banks still have to cover a lot of ground to educate buyers on new hybrid structures. The transaction, the first Basel 3 compliant hybrid Tier 1 from an Australian bank outside of the domestic market, was only one and a half times covered and short of the maximum USD500m target the issuer said it would raise. This was in contrast to other recent new style Reg S hybrid Tier 1 issues from banks such as Banco do Brasil, which were covered multiple times. As well as the small oversubscription, the transaction came at a high price and printed at the wide end of the 10% to 10.25% price guidance. Many hope that the European hybrid Tier 1 market will be able to start up again soon after months of regulatory uncertainty, but while banks might have clarity on what they will be able to do soon, a deep buyer base could be elusive if structures are too difficult to understand. "The structure was very complicated and the feedback we had from Asian investors was that they would have preferred a simpler deal," said a banker not directly involved. "While there have been similar deals from Australian banks in the domestic market, Macquarie added layers of complexity which raised investors' eyebrows." While the new style European hybrid Tier 1 is unlikely to replicate the structure, Macquarie was formatted in order to comply with APRA transitional rules for bank capital, it nevertheless shows that new style hybrids which seek to comply with much harsher regulatory rules could struggle to sell. "This instrument has a conversion into equity, on the upside as well as the downside and is another interesting data point, telling us where demand comes from and at what price," the banker said. "What it does remind us though is that we need institutional investors to also be buying this product and provide added depth." The hybrid banker added that competing supply from high-yield corporate issuers from the region could have also impacted demand for the trade. "Some of these private banks might prefer to invest in easier structures from well-known names regionally," he said. Another agreed that the structure would have made the deal a difficult sell as it was unclear when this would be called. However, Andy Young, head of FIG syndicate at Credit Suisse, which led the deal with HSBC, JP Morgan and Macquarie, saw it differently. "It is a slightly more involved structure than what we may have seen up until now but that shouldn't be to its detriment," he said. "The fact that the book was one and a half times covered demonstrates that investors have been able to get comfortable with the structure." He added that the bonds had mandatory exchange features, but not in the traditional sense of a mandatory convertible. At the first call date, the bonds are mandatorily exchangeable into shares if the bank's share price is above 50% of the share price at the time of issue. The shares get delivered to investors at a 5% discount to the market price. At the call date, the issuer may facilitate for a third party to sell the shares so that investors get par. However, if the share price is below 50%, the deal just extends and the level gets tested at the next call date six months thereafter. If the deal extends to the 45-year point, the bond will then automatically convert into shares. There is also an early mandatory exchange event if the bank breaches a 5.125% Core Tier 1 ratio or is declared non-viable. The structure was by and large similar to domestic hybrid Tier 1 issues sold by ANZ and Westpac in recent months, but some features such as the third party involvement was new. NEW TERRITORY The transaction also ventured into new bank capital territory as it carried a sub-investment grade rating at BB+, which bankers felt would have also hampered demand. This does not bode well given that it is quite likely that new-style hybrid Tier 1 from European banks will be rated junk, given the downward direction their ratings currently taking. Moody's cut Macquarie's rating to A2 (stable) from A1 in March while Fitch also lowered Macquarie to A from A+. Bankers said that the rating certainly limits the number of private banks that can buy the deal, they can also secure more leverage with investment grade rated securities. However, Credit Suisse's Young maintained that this was not the major issue. "The fact that the instrument is rated below investment grade might narrow the investor base, but only at the margin," he said. One thing for sure was that the deal came at a price for Macquarie, which also explains why the issuer chose to limit the size. "It is undoubtedly more costly than old-style hybrids, but the premium Macquarie is paying is in line with what other borrowers have paid for new style hybrids versus old style instruments." The added cost of issuing new-style hybrids has been anything between 100bp and 200bp and Macquarie was no different. The issuer's outstanding old-style perpetual hybrid Tier 1 was trading around 8.375%. (Reporting by Helene Durand, Editing by Andrew Perrin, Alex Chambers) Link this Share this Digg this Email Reprints

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