Commonwealth Bank has launched an issue of hybrid securities, PERLS XII, which will pay 3 per cent above the bank bill rate as a part of a $1.25 billion raise.
PERLS XII are subordinated, unsecured notes scheduled to pay floating rate distributions quarterly.
The margin rate of 3 per cent will be paid on top of the three-month bank bill swap rate, which is currently around 82 basis points.
The distributions are discretionary. The first is scheduled to be paid on 15 March 2020 and is expected to be fully franked.
The yield is down from CBA’s previous hybrid, PERLS XI, which was launched in December last year with a margin of 3.70 per cent.
Hybrid securities have characteristics of both shares and debt. The CBA notes do not have fixed maturity date but have a call date of 20 April 2027, when security holders may be offered redemption or resale at the bank’s option.
If the notes are not redeemed, mandatory conversion to ordinary shares will occur in April 2029.
The Australian Securities and Investment Commission’s MoneySmart warns that the hybrid securities can be written off completely if CBA was to experience financial difficulty or convert to ordinary shares following a trigger event.
In addition, MoneySmart and CBA advise that hybrid securities are often less liquid than ordinary shares, and therefore are not suitable for investors who may need to sell quickly as it may be at a lower price.
The face value of the PERLS XII is $100 and the initial investment is a minimum of 50 PERLS XII, or $5000, and thereafter in multiples of 10 PERLS.
All currently listed bank hybrid securities are trading at a premium above their issue price. CBA’s previous hybrid security PERLS XI are currently listed at $104.85
The distribution rate will fluctuate with the market rate. It is possible for the market rate to become negative and should this occur, the negative amount will be taken into account in calculating the distribution rate.
The initial offer will close on 8 November and will begin trading on the ASX on 19 November. The bank may raise more than the goal $750 million or less, depending on demand.
The net proceeds of the PERLS XII offer will be used to fund CBA’s business.