While retail investors are expected to be attracted to an upcoming issue of Woolworths hybrid securities, institutions are likely to be less interested in the security, with hybrids often too risky for fixed-income portfolios.
The supermarket chain recently announced it would launch a new hybrid security to raise $500 million, the Woolworths Notes II, to replace recently-redeemed hybrid notes.
Demand for the issue from retail investors is expected to be strong, given the company's strong name and the attractive headline returns being offered. The latest issue is expected to pay a margin of 3.25-3.50 per cent over the 90-day bank bill swap rate (BBSW).
"As one of Australia's largest companies offering an attractive floating rate and greater security than the previous issue (WOWHB), we anticipate there to be considerable investor appetite for this issue," Brad Newcombe, research director with fixed-income broking house FIIG, said.
"The indicative returns of 3.25-3.50 per cent over BBSW look attractive for a debt security of a highly-regarded issuer like Woolworths. These returns are substantially above the senior debt securities of the company, with the 2016 senior bonds of the company trading on a margin of approximately 1.30 per cent over BBSW."
The hybrid offer will be used as part of Woolworths' ongoing capital management strategy and help replace $600 million of Woolworths notes that were redeemed in September. Those notes had paid a margin of 1.1 per cent over the 90-day BBSW.
Principal Global Investors (Australia) Asia-Pacific fixed income managing director Robert da Silva said institutions were less likely to buy into hybrids than retail investors.
"They have limited liquidity, so if you really want to build a position of a decent size, it's going to take some time. And if you find that the market turns, you can find yourself trapped into a position," da Silva said.
He said over the past three or four years since the global financial crisis, hybrids had been very volatile and institutional investors had not been heavy investors.
"They tend to behave more like equities than fixed income and that's exacerbated by their limited liquidity," he said.
"So given all of this, if hybrids do have a role in an institutional investor's fixed-income portfolio, it's likely to be a fairly limited role."
Antares Fixed Income investment manager Ken Hyman said for retail investors, the issue would have some appeal, given a reasonably attractive return.
"It sounds like a good headline number and it's a good defensive household name. They have a robust business and this gives the investor a high level of confidence that their business is sustainable," Hyman said.
"It also has taken advantage of the private investors in Woolies hybrids who are cashed up after a recent redemption of hybrids.
"However, the investor must appreciate that hybrids have equity-like characteristics and if Woolies decides in five years that it isn't profitable to call the security, for example, if it needs the funds, then the final maturity date of the hybrid could be as long as 25 years, so it's potentially a very long time."
Like Da Silva, Hyman said he expected institutional investors would be less keen on the Woolworths hybrid than retail investors.
"Institutional investors would have other areas that you could get those sorts of margins, but with better security," he said.
