Prefer Off-the-run ANZ B3T2 3/24 Over New ANZ B3T2 5/26

19 May 2016

Credit & Relative Value Ideas

           

Prefer Off-the-run ANZ B3T2 3/24 Over New ANZ B3T2 5/26

Highlights/Updates:

·      On 12 May 2016, ANZ (Aa2/AA-/AA-) priced a USD1.5bn 4.4% 10y B3T2 at T+265bps, against IPT at a high of 200bps area. Secondary quotes per Bloomberg indicate that the new B3T2 is currently trading at 4.28% (T+258.3bps), or c.7bps tighter from primary. Although it looks relatively cheap per RV of Australian and Singaporean banks’ subdebts, we continue to prefer ANZ B3T2 3/24 (previously recommended in our Credit and RV Idea on 19 April 2016 and 8 March 2016) over the new B3T2 due to shorter duration of 1.5y relative to the 22bps absolute yield pick-up. 

·      Furthermore, we are neutral on the impairment charges in relation to its stake in AMMB Holdings Berhad in its 1H9/16 results, which coupled with other one-off charges, resulted in a 24% YoY drop in net profit. Our Marketweight view on ANZ remains intact while any progress in divestment efforts of its non-core Asian assets will be a credit positive.

Bond Details:

Bond(s)	ANZ 4.4% B3T2 5/26	ANZ 4.5% B3T2 3/24
Price/YTM/Spread	100.9/4.28%; T+258.3bps; Z+274.9bps	102.9/4.06%; T+250.4bps; Z+266.7bps
Amount Outstanding	USD1.5bn	USD800m
ISIN	USQ0426RND62	USQ0426RNB07
Rating(s)	A3/NR/A+	A3/BBB+/A+
Key Term(s)	Mandatory conversion into ordinary shares or written off is triggered upon Australian Prudential Regulatory Authority (APRA) deeming it is necessary otherwise the bank becomes non-viable or APRA determines that a capital injection or equivalent support is required.

Relative Value Commentary:

We prefer investors to remain invested in ANZ B3T2 3/24 rather than switching to the new ANZ B3T2 5/26. We opine the new B3T2’s YTM of 4.28%, or 22bps absolute yield pick-up over ANZ B3T2 3/24, is not commensurate with the higher duration of 1.5 years. From a T- and Z- spread perspective, the new subdebt only offers a c.8bps pick-up, which we do not deem as attractive given the duration difference. Furthermore, based on relative value analysis of Aussie and Singaporean subdebts, ANZ’s 3/24 subdebt is trailing the interpolated yield curve by 29bps whilst the new ANZ B3T2 offers only a pick-up of 6bps on a fair valuation basis.