Law firms experienced in both retail and debt advice are in for a busy first half of 2012, as four brand new hybrid securities were announced to an income-starved investment market in the last week. Already three from the top tier, Freehills, Mallesons and Allens Arthur Robinson ,have appeared on the list of advisors relating to the latest hybrid securities transactions, and Clayton Utz was involved in the hybrid notes issued by Woolworths and Origin Energy in late 2011. “Firms with the most equity capital markets experience are advising, so it’s mostly us and one other firm. If you’ve got on the first deal of this sort you tend to get a role on others. People want to do these transactions quickly and they don’t want any hiccups,” said Freehills partner and advisor the last transactions, Rebecca Maslen-Stannage.
Freehills has experience on all sides of hybrid deals, having advised the issuer for one transaction (for Colonial, Philippa Stone, Patrick Lowden and Rebecca Maslen-Stannage), the joint lead manager for two others (ANZ and Westpac, both led by Philippa Stone) and the trustee for another one (Tabcorp, led by Lachlan Root). A team of lawyers including Philippa Stone and rebecca Maslen-Stannage worked on various aspects. “It’s good to advise on hybrid raisings from both angles because you’ve got to make sure they work from the perspective of the issuer. But acting for the JLMs you’re very conscious of how the instrument will work for investors. Working for both issuers, JLMs and the trustee on different transactions gives the best understanding across the board,” said Maslen-Stannage.
There is an open window at the moment where the market is receptive to retail bonds, and the deals need to be brought to market before that window closes, according to Maslen-Stannage. “There’s pent up demand by companies who want to diversify their funding sources. Everyone’s also been thinking more laterally about what kinds of debt you can have,” she added.
The fixed income investment provided by hybrid securities is most appealing to those investors looking for an income they can live off. “These types of deals are often appealing to retirees – [the return is] higher than you get on a bank deposit. They’re appealing for people who want to get an income on investments they can actually live on,” said Maslen-Stannage. Maslen-Stannage also pointed out that investors are satisfied with the ability to plan how much income they are likely to get and when it is likely to come, which is another key driver behind hybrid securities. In general these securities tend to combine features of debt and of equity, and the current form of retail bonds is at the debt end of the hybrid spectrum.
During the week of February 13-17 Westpac Bank, The Colonial Group, the wealth management arm of the Commonwealth Bank of Australia Ltd, and ANZ have all announced the issue of hybrid security notes. The banks’ announcements came in quick succession, adding to a flurry of activity which began late last year and kicked off again when Tabcorp announced its A$200 million notes issue on Tuesday, February 14.
Of the latest four hybrid securities to be issued, Tabcorp’s and Colonial’s are the only ones not being issued by a regulated financial institution. Colonial is not itself a regulated financial institution. It has APRA-regulated businesses and is a subsidiary of an APRA-regulated bank,making it an institution in the regulated sector. The fact that the banks are involved has not prevented speculation over how the ratings agencies will view the hybrid products being issued in the financial press. Maslen-Stannage was unconcerned, but agreed that banks and financial institutions have a higher requirement for advice on the regulatory side, because of the Australian Prudential Regulation Authority’s (APRA) influence over them. “When it’s a banking sector transaction there’s a whole overlay of the APRA requirements,” she concluded.
From last week’s announcements Westpac is planning to issue A$750 million in hybrid shares, and news reports say it hopes to eventually raise as much as A$1 billion while Colonial has launched a A$500 million subordinated debt issue. Mallesons partners David Friedlander and Anne-Marie Neagle advised the arrangers and bookrunners Goldman Sachs Australia and CBA and the joint lead managers on the Colonial group transaction.
