Last Monday saw the completion of the Bookbuild for the Westpac Capital Notes 4 (WBCPG) at a margin of 4.90% p.a. above the 90-Day BBSW. The deal was closed at an offer size of $1.45 billion, up from the initial target of $750 million. This indicates there is still substantial demand for high-yielding hybrid securities in a low interest rate environment. With NAB and ANZ both expected to announce their own hybrid issues during 2016, investors continue to see bank hybrids as an attractive investment. The thesis for lower interest rates for a longer period is further supported by expectations that the RBA will continue to have an easing bias for the remainder of 2016, a view being supported by an increasing number of market commentators. As the Westpac transaction was 2x oversubscribed, and investor demand not fully satisfied, we expect similar investor support if either the NAB or ANZ decide to issue over the course of 2016. ANZ also announced on Friday they are conducting a global roadshow to wholesale investors in relation to a potential new US$ hybrid. They also stated they will consider an A$ capital note offer to Australian retail investors later in their financial year (ending September 2016). This issuance is expected to coincide with the ANZ Convertible Preference Shares 2 (ASX Code: ANZPA) expected to be called on the 15th of December 2016. The ANZPA issue size is $1.97 billion. But, given the potential US deal, the size of the A$ transaction may be lower than expected if the US$ hybrid is well supported. The prospect of lower than expected supply of these securities may be enough to drive secondary market activity and trading margin compression throughout the rest of 2016. In terms of corporate news, there were no major surprises. As anticipated, Wesfarmers announced non-cash impairments to Target in the range of $1.1-1.3 billion while ‘challenging’ conditions saw an additional impairment to its Curragh coal asset of between $600-800 million. On a more positive note, Suncorp’s investor day signalled promising signs from the group’s restructure and ongoing benefits should materialise into consistent earnings over the medium term. Finally, the Bank of Queensland had its credit rating reaffirmed by S&P while there is some speculation that Woolworths are looking to divest some of their petrol station assets (in line with their refocused strategy on the Supermarkets business). New senior issuance remains strong: – Westpac has launched a new Australian 5-year Fixed and Floating tranche priced at 3.10% p.a. and 1.17% above the 90-Day BBSW respectively. – Aurizon Network issued its second Euro-Dollar note raising around A$750 million. The deal was equivalent to 3.86% above the BBSW and offered a small premium to the group’s existing 2024 Euro Notes. – On a lesser note, Hyundai, BNP Paribas and Bank of China (Sydney Branch) all issued new $A-denominated securities while the Coca Cola Company (parent of Coca Cola Amatil) is set to launch its first Australian bond in the near future.

Click below for Interactive Charts Chart 1: Bloomberg AUSBond Composite Index (Monthly) Chart 2: Bonds vs Equities 2015/2016 (Monthly)

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