The Commonwealth Bank's new $1.25 billion PERLS VIII capital notes offer is priced below fair value and investors should steer clear, according to fixed income research house BondAdviser.
CBA announced yesterday it will raise approximately $1.25 billion with the offer of a new Tier 1 hybrid product, the CommBank PERLS VIII Capital Notes, which will be listed under the ASX ticker CBAPE.
The current guidance for the PERLS VIII interest rate is in the range of 5.2 per cent to 5.35 per cent plus the bank bill swap rate (BBSW).
However, a research report by BondAdviser said the new CBA hybrid is being offered below fair value, which is closer to 5.8 per cent plus BBSW.
"Therefore post listing if the security was to move to this fair margin alongside similar bank hybrids investors would see a capital loss of approximately $2.50 per $100 face value," said the report.
"On the basis of the indicative margin range of [5.20 – 5.35 per cent] we recommend investors do not subscribe."
Speaking at the PortfolioConstruction Forum in Sydney yesterday, Pimco head of portfolio management Rob Mead pointed to CBA's previous PERLS VII hybrid, which was issued in October 2014 with an interest rate of 2.8 per cent plus BBSW.
"So in that one year period, in order to get their Tier 1 equity funded, [CBA] have had to pay an extra 240 bps for the privilege of issuing that hybrid," Mr Mead said.
"PERLS VII was down 10 per cent [since it was issued in October 2014].
"If you do basic bond maths and say 'What should the PERLS VII price be today, based on the PERLS VII at 520 basis points', it should be more like 75 cents. At best 80 cents.
"That's a dramatic shift in terms of what these sort of so-called sources of income look like," Mr Mead said.
Morningstar recommended that investors subscribe to the PERLS VIII issuance in its own research report.
"We believe the indicative pricing range of 5.20 – 5.35 per cent is an attractive entry point for hybrid investors looking to gain exposure to a Morningstar-preferred issuer at a gap in the Commonwealth Bank hybrid curve," said Morningstar.
"The indicative issue margin range of 5.20 – 5.35 per cent will make CBAPE the highest on offer in the current universe of domestic Basel III-compliant major bank hybrids. This translates into the highest running yield relative to comparable like-for-like securities."