![]() ![]() There are various conversion and trigger events that investors will also need to understand in considering their investment. Most of the bank capital notes have been called at the first opportunity with the banks repaying the $100, or investors being given the opportunity to roll their investment over into a new issue of capital notes. These notes may also be called early where the bank decides to end the investment and can either convert the notes into shares or redeem them by repaying the $100 face value. So, they may not be paid and never have to be made up.” “It’s important to be aware that distributions are non-cumulative and discretionary. Macquarie Bank Capital Notes 3 (BCN3) MBLPD Offer Opens Westpac Capital Notes 8 (WBCPK) Offer Announced If conversion conditions are not met, investors must sell securities to recoup capital. “If the issuer doesn’t redeem at first call date, then they must redeem at a later date when conversion conditions are met or at ‘Mandatory Conversion’ date. “All capital notes are perpetual, they don’t have a maturity date, however, they do have an ‘optional exchange date’ where the issuer at its discretion can redeem,” Ziegler said. Ziegler notes that capital notes are not a bank deposit protected by the Government guarantee scheme and they rank behind deposits, senior debt and subordinated debt in the banks’ capital structure. See the article AMP Hybrid Helps Explain Technical Terms and Returnsfor definitions of these terms. These hybrid instruments are fully paid, unsecured, subordinated, non-cumulative, mandatorily convertible notes. ![]() The returns are greater than any current bank deposit rates but it’s important that investors understand the inherent risk that comes with these investments. Distributions will be quarterly (40% partially franked). ![]() Macquarie Bank’s Capital Notes 3 offer has been priced through a bookbuild at a margin of 2.90% over the 3 Month Bank Bill Rate. “Investors will also benefit from a higher yield including franking credits for undertaking risk.” Who Would Capital Notes Be Most Suited For?īell Potter Securities’ head of fixed income Barry Ziegler says, “These securities suit investors who are prepared to take preferred equity risk of the issuer over a longer duration than a typical retail investment product. In short, banks must hold certain levels of capital to ensure they can continue to operate in stressed markets without government help. The Basel III accords focused heavily on minimum capital requirements including review of an institution’s capital adequacy. Why do the banks issue these Capital Notes?īanks issue these notes to help them raise ‘loss absorbing’ capital they need to meet regulatory capital requirements that were mandated following the 2008 Global Financial Crisis. Like shares, capital note securities are traded on the ASX and pay franked distributions. In return investors will receive a quarterly distribution and at redemption expect to have face value paid back to them or for funds to be converted to shares. Investors in these bank securities are loaning money to the issuer with no fixed maturity date. It is a way for banks and companies to borrow money from investors. What are Capital Notes?Ī capital note is a hybrid product and is a perpetual unsecured security that combines features of both shares and bonds – hence the term hybrid security. There is little growth in the market with new issues typically raising funds to repay existing capital note issues. In fact, all the banks need to issue capital notes to meet APRA capital requirements and cover other liabilities. Recent issues mean it’s worth examining capital notes, their features and why you would consider investing.īoth Westpac and Macquarie Bank have recently been in the market with a capital notes hybrid raising. The Australian bank capital note market has long been favored by income investors and is worth around $30 billion. ![]()
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