In a pre-sale report on the CBA Perpetual Exchangeable Resalable Listed Securities VII (PERLS VII), Morningstar credit analyst John Likos and associate analyst Ravi Reddy said the offer provides a margin above the 90-day bank bill swap in the indicative range of 2.80 per cent to 3 per cent.
The Morningstar analysts said a margin of around 3.30 per cent over the 90-day bank bill swap rate would, however, be closer to fairer value and recommended investors wait for margin closer to this.
Both Mr Likos and Mr Reddy said the margin is also likely to be towards the bottom of the 2.8 to 3.0 per cent on offer, given the high participation levels expected in the CBA PERLS V reinvestment offer.
Morningstar believes CBA PERLS V is being replaced with a security that has “greater risk for the investor, a lower margin and a longer term to conversion”.
The analysts said while credit markets have tightened significantly since the issuance of CBA PERLS V, and it is in the best interests of CBA equity holders to issue new capital at the price available, the market is “increasingly mispricing risk when it comes to Basel III-compliant hybrids”.
“We are seeing margins tighten sharply on recent securities despite having inferior terms to the ‘old-style’ issues in the form of non-viability and capital triggers,” said the analysts.
“Although we don’t anticipate such triggers being activated, we believe investors should be incrementally compensated for taking on that risk.”
Goldman Sachs managing director Philip Moffitt holds a similar view to Morningstar on newer ‘convertible’ hybrids, stating that the ‘new style’ hybrids are looking expensive compared to their older cousins.
“The new ones can convert into equity basically at the company’s discretion. It doesn’t look to us as though you’re getting properly compensated for that risk,” said Mr Moffitt.
Morningstar said while investing in higher yielding CBA ordinary shares may present higher price volatility and risk than hybrids, investors often “underestimate the tendency of hybrids to become volatile in times of distress similar to shares and unlike traditional senior bonds.
“While some may argue hybrids fulfil the need for fixed-income diversification in an investor’s portfolio, we’re in the camp that views them as a complex form of equity with only mild improvements in risk and limited diversification in an adverse economy or market.”
