Income Report / Income Note: New hybrids hit the market – how do the new notes in BOQ, BEN & WBC stake up?

Another strong session for stocks today, recovering much of the declines from yesterday morning’s high, the buying more broad-based today than yesterday with the line we wrote in AM note today ringing true. My “Gut Feel” is the buying in the banks and resources will continue but the aggressive selling of some tech names will abate slightly pushing the underlying index higher. IT has actually bounced back strongly today while the Material stocks are having a rest.

Sector Performances Today

Source; Bloomberg

Overall, the ASX 200 is currently trading up +92pts / 1.46% to 6433.

ASX 200 Chart

The Income portfolio had a strong week with equity markets carrying the portfolio up +3.62%.There were no dividends for the week so performance came from gains from SYD (+14%), SIQ (+12%), NAB (+12%), IFL (+11%) and TCL (+10%).. The portfolio remains well ahead of its benchmark for the current financial year, up 7.58% vs the RBA + 4% target of 1.53%.

New hybrids hit the market – how do the new notes in BOQ, BEN & WBC stake up?

Three new bank hybrids have hit the market in the last few weeks in addition to the higher risk, higher yield Challenger Financial (CGF) note which was also out.

The notes are all tier 1 issues, all have the same conditions with different durations and yields. As a refresher, the quality of the underlying issuer, the structure of the note and the duration are the main influences on the yield paid at issue, from there the market will price it based on other more fluid factors that can see the notes move around. For example, in February the average financial hybrid on the ASX was trading at a margin around 2.9% (i.e. prices were relatively high), however as global market conditions turned on the virus, the risk premium investors demanded blew out to around 4.70% (i.e. prices were relatively low)

The market is now back in the mid 3% range which is ‘middle of the road’ from a historical context. As a broad rule of thumb, we view 3% as expensive and 4% as cheap when it comes to a typical tier 1 major bank hybrid.

Solactive Hybrid Index Chart

MM views all 3 securities as solid for those investors looking for yield, with lower volatility than shares.

1 Bank of QLD Hybrid – Capital Notes – new offer

Key points:

·         Bank of QLD Capital Notes (BOQPF)

·         $200m with the ability to raise more or less

·         3.80% margin over the bank bill rate

·         Optional Call Date 22 March 2027 i.e. 6.2 years

·         No reinvestment

·         Offer closes 17th November

MM is positive this hybrid

2 Bendigo Bank Hybrid – Capital Notes – new offer

Key points:

·         Bendigo Bank Capital Notes (BENPH))

·         $350 with the ability to raise more or less

·         3.80% margin over the bank bill rate

·         Optional Call Date 15 June 2027 i.e. 6.5 years

·         Reinvestments offer for the BENPE

·         Offer closes: 24th November

MM is positive this hybrid


3 Westpac Hybrid – Capital Notes – new offer

Key points:

·         Westpac Capital Notes WBCPJ

·         $750m with the ability to raise more or less

·         3.40% margin over the bank bill rate

·         Optional Call Date 22 March 2027 ~ 6.25 years

·         Re-investment Offer for the WBCPF

·         Offer closes: 30th November

MM is positive this hybrid

Earlier this month Challenger Financial launched a new issue offering a juicy 4.6% over bank bills, however that is a higher risk issuer.

The chart below looks at the current landscape for financial hybrids with more than 3.8 years to run. The AMPPB (which we covered here) continues to offer an attractive yield in our view.


We are positive the 3 hybrids listed above

We view the Challenger note as higher risk

Have a great day!

James & the Market Matters Team


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