Retirement products firm Challenger has joined the Commonwealth Bank in the rush to raise hybrid capital amid evidence that investors are still too cautious to wade back into the stock market.
On Tuesday Challenger began marketing a $350 million offer 'Capital Notes 2', as flagged by The Australian Financial Review's Street Talk column, to support the annuities provider's regulatory capital base.
The offer comes as Commonwealth Bank set the margin on its PERLS IX hybrid security offer at 3.9 percentage points over the bank rate, offering investors an initial yield of 5.7 per cent. The bank raised $1.45 billion via brokers appointed to market the securities.
Holders of $1 billion of Colonial Group subordinated notes sold in April 2012 were given a priority allocation in the PERLS offer with an unusually high total of $500 million electing to roll into the new offer.
Given the amount of Colonial notes sold via brokers, the refinancing rate is equivalent to about 70 per cent. In the previous CBA retail hybrid offer, about 30 per cent of the demand was via holders of the refinanced notes.
The high proportion of investors that are electing to maintain their exposure to quasi-fixed income securities, is a sign, sources say, of lingering aversion to wade back into the stock market, even after the strong gains of recent years.
CBA has been keen to limit potential oversupply of its notes after the ill-fated $3 billion PERLS VII and will only make the general offer available to existing CBA shareholders and hybrid holders, with these investors limited to buying $15,000 of securities. The bank may still elect to scale bids below that amount if they attract too much interest.
CBA is targeting a total issue from the PERLS XI offer of about $1.6 billion to $1.7 billion.
Meanwhile Challenger returned to the hybrid market for the first time since 2015, with an offer than is materially more attractive than its Capital Notes raising.
Materially more attractive
The company is marketing the securities, which are due for redemption in six years at a margin of 4.4 to 4.6 percentage points over the bank rate.
That is the equivalent of an initial yield of about 6.2 to 6.4 per cent based on the current bank rate of 1.8 per cent. The margin on the 2014 offer was 3.4 to 3.6 percentage points above the bank rate.
Morningstar analyst John Likos said the margin on the Challenger securities was attractive enough to compensate investors for the higher risk relative to major bank securities. The yield is also 1.9 percentage points higher than the gross up dividend yield on Challenger shares, he said.
Research firm BondAdviser also recommended that clients subscribe to the Challenger offer which is said was "being offered to investors at a premium to other comparable securities".
The funds raised will support the capital base of the Challenger Life Company and the securities will have a "non-viability" clause which allows the Australian Prudential Regulation Authority to convert them into ordinary equity if the institution is in extreme stress.
UBS is arranging the Challenger offer, with ANZ, National Australia Bank and Westpac appointed lead managers.
