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  1. #1
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    Default ASBPA, ASBPB and ASB030

    I note that ASB are going to issue $400m of new debt but as Common Equity Tier 1 Capital: https://nzx.com/files/attachments/232330.pdf

    Does anyone have an opinion as to what this means for the current ASBPA and ASBPB's if anything?

  2. #2
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    Some research i have been sent.


    ASB CAPITAL LIMITED (NS) – ASBPA & ASBPB
    (PERPETUAL PREFERENCE SHARES)
    ASB Capital was incorporated in 2002 as a special purpose company to issue
    perpetual preference shares (ASBPA). It was a subsidiary of CBA Funding (NZ) Ltd.
    The ultimate parent of this company, and of ASB Bank Ltd, is Commonwealth Bank
    of Australia.
    ASB Capital No.2 was incorporated in 2004 as a special purpose company to issue
    perpetual preference shares (ASBPB).
    In March 2006 it announced that, as part of a restructuring, the party responsible for
    its shares would become ASB Group Ltd. ASB Group Ltd also was to be renamed
    ASB Holdings.
    ASB has two types of equity securities listed:
    ASBPA Perpetual Preference Shares – $200,000,000m $1 Face Value
    ASBPB No. 2 Perpetual Preference Shares – $350,000,000m $1 Face Value
    Both Preference shares are Investment PIEs with the maximum tax rate being 28%.
    This makes them even more attractive to investors on 30% or 33% tax rates.
    .
    ASBPA – Investment Grade BBB
    Interest Rate: Annual reset at 1.3% above the one year bank swap rate
    Interest Paid Quarterly : Feb, May, Aug, Nov
    Reset Date : 15th November
    Current Interest Rate : 4.00%
    Forward Interest Rate if rest today : 3.74%
    Current Price : $0.86
    Current Purchase Yield : 4.7%
    Forward Purchase Yield : 4.36%
    ASBPB – Investment Grade BBB
    Interest Rate: Annual reset at 1.0% above the one year bank swap rate
    Interest Paid Quarterly : Feb, May, Aug, Nov
    Reset Date : 15th May
    Current Interest Rate : 4.62%
    Current Price : $0.80
    Current Purchase Yield : 5.80%
    Forward Purchase Yield : 4.32%
    The Investment Proposition
     Both the ASBPA and ASBPB are trading significantly below their face value
    This is because they are preference shares and thus have no set maturity
    date. They can only be redeemed by the issuer ASB.
     Investors are thus buying and selling the Preference shares purely on yield
    assuming they will not be paid back any time soon. This is why the ASBPAs
    are trading at $0.86 and the ASBPBs are trading at $0.80. This implies a
    forward yield of 4.36% and 4.32% respectively.
     However we believe there is a strong incentive for ASB to redeem the
    preference shares at par on or after January 2018
     This is because under banking rules brought in subsequent to the GFC, the
    preference shares are losing their ‘Equity” status for ASB at 20% a year.
     At the time of this note (March 2016) they only have 40% equity status left.
     On 1st January 2018 they will have 0% equity status left.
     Then they will effectively become debt to ASB costing 1% and 1.3% above
    the 1 year bank rate.
     Considering ASB can issue 1 year debt at only 0.5% above the benchmark,
    there would be a 0.5% - 0.8% saving for ASB by redeeming the shares. This
    is done at par ie $1
     If this was to happen, buyers of the ASBPBs would make $0.20 on $0.80 buy
    price + 4.6% running yield
     Buyers of the ASBPA’s would get $0.14 on the $0.86 buy price + 4.5%
    running yield
    Estimated Yield to Assumed Call 1st of January 2018
    ASBPA = 4.5% interest + 8.8% capital gain = 13.3% p.a.
    ASBPB = 4.6% interest + 13.63% capital gain = 18.24% p.a.
     What makes this investment so attractive is the lack of risk. Essentially you
    would need ASB Bank (and presumably CBA in Australia) to go broke to lose
    money. As it is, with 60% of the preference shares already not counting as
    equity, they rank ahead of other preference shares equity, and issues of new
    hybrid securities that must turn into equity when the banks equity ratios drop
    too low.
     To reiterate, the preference shares would only be affected if ASB Bank went
    broke, a somewhat unlikely scenario.
     Should ASB not redeem the shares in 2018, that is ok as well as investors will
    own a one year reset security, that effectively ranks ahead of $5.4 Billion in
    equity and being a reset security protects holders from rising interest rates
     Finally the shares are easily traded on the secondary market which will
    provide good liquidity. We are hopeful that even if the shares are not
    redeemed, the market will price them higher, simply on their reduced risk
    ranking.

  3. #3
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    Cheers for the reply McDongle, really interesting reading that. My theory was that they may be issuing this new debt to redeem the ASBPA's and B's as per your scenario above. Although $400m is not enough to take out the $550m at face and the timing is slightly off.
    Then there is the question.. why are the PA's and PB's currently trading at such a discount to face? I have been trying to get my head around that one without much luck!

  4. #4
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    I've held ASBPB for a few years now and doubled my holding today (average 69 cents). As in the above research I think there is a strong probability they will be repaid 2018, but if not I'm still happy enough to hold.

  5. #5
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    Quote Originally Posted by blackcap View Post
    Cheers for the reply McDongle, really interesting reading that. My theory was that they may be issuing this new debt to redeem the ASBPA's and B's as per your scenario above. Although $400m is not enough to take out the $550m at face and the timing is slightly off.
    Then there is the question.. why are the PA's and PB's currently trading at such a discount to face? I have been trying to get my head around that one without much luck!
    Probably because they are seen by the market at large almost exlusively as an income stock with little weight given to the possibility of redemption/capital gain. I hold a few B's.

  6. #6
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    Quote Originally Posted by blackcap View Post
    Cheers for the reply McDongle, really interesting reading that. My theory was that they may be issuing this new debt to redeem the ASBPA's and B's as per your scenario above. Although $400m is not enough to take out the $550m at face and the timing is slightly off.
    Then there is the question.. why are the PA's and PB's currently trading at such a discount to face? I have been trying to get my head around that one without much luck!
    After a couple more cuts to the OCR rate, and an interest rate reset, there are no doubt those who think the arse is going to fall out of the price, down to a possible 60c.

  7. #7
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    The Bs are sitting around 70 cents at present. 30% upside probably sometime in the not-too-distant-future is still pretty enticing.
    And if it's not in the next couple of years I'm still relaxed about holding.
    I've been topping up over the past few months. Now my biggest single investment.

  8. #8
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    Quote Originally Posted by Grimy View Post
    The Bs are sitting around 70 cents at present. 30% upside probably sometime in the not-too-distant-future is still pretty enticing.
    And if it's not in the next couple of years I'm still relaxed about holding.
    I've been topping up over the past few months. Now my biggest single investment.
    Thanks for your post and for highlighting this opportunity.
    Will admit I am not up with the investment play of the technical aspects of how these perpetual preference shares are classified but if we take the above research at face value and assume the classification is changing on 1 January 2018 I think its important to note that ASB has extremely cheap perpetual debt. The current 1% premium on this instrument above 1 year bank swap rate currently 2.16% put this perpetual debt at 3.16%.

    Sure ASB might be able to possibly issue new one year debt slightly cheaper, (maybe not ?) but that's one year debt not perpetual debt. Its very important to make that distinction because the issuance of one year debt seriously affects their liquidity, anything 1 year and under is considered to be a current liability, over 1 year, term liability. I think the analysis glosses over this very important point. Banks need sources of cheap secure long term funding and there is currently increasing pressure on term deposit rates, (e.g. TSB Bank in the market offering 3.75% on 9 month term deposits). I question whether ASB really could go to the market and raise $350m at half a percent lower than this debt $350m and 2.7% really ???? and what about the issuance cost and even if it could would it want too considering this is perpetual debt at the very cheapest price you'll ever get for non repayable debt of that kind ? I suggest these perpetual instruments are one of the worst issuances most dramatically in the bank's favor than have ever been issued to date.

    I technically back tested my theory that these are extremly unlikely to be repaid. Since the above research has been issued the price has been in a steady decline and is currently trading under its 100 day MA. Many millions of dollars of these securities have changed hands in recent months in that steady downtrend. With 1 January 2018 less than a year away, why would an instrument be trading at circa 70 cents on the dollar if the market believed it would be redeemed a year or two from now at $1.00 a 43% premium to the current price ? (100 / 70).

    Clearly the market sees the prospects of an early redemption as very slim and I agree. Banks are struggling for cheap committed long term debt and this instrument appears to be a very attractive one for the ASB going forward in the long run. Worth noting that the ASB are currently offering 4.1% on 5 year term deposits, a security which is considerably further up the security food chain than these perpetual preference shares. Back testing the current yield 3.2 / .70 = 4.57% gross, fully imputed dividend. Enough reward considering its perpetual status ? I think people would be better to treat their chances of early repayment as extremely slim and look on this as an investment opportunity that's reasonable liquid and gives protection against rising interest rates. Certainly the premium over 1 year term deposits isn't great, less than 1% but they're liquid whereas once you lock in with a bank they'll sting like a bee if you want out early. On the other hand there's brokerage costs in and out to consider and with typical NZDX brokers costs at 0.5% either way that's quite a material cost to consider in the overall equation.
    Last edited by Beagle; 09-01-2017 at 01:35 PM.

  9. #9
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    Hi Roger,
    Agree that repayment is not a given and like you I think that this is cheap money for ASB.
    It's one of those investments that I am comfortable with holding short/medium/long term.
    Like my investments in CASHA & IFTHA, these have been quite good to me over the long term, with some great buying and selling opportunities along the way.
    Their liquidity is also worth something to me.
    Like a lot of investments, the less pressure you are under to make a quick buck and move on, the easier it is to do alright with them (and the easier it is to sleep!).
    Thanks for the figures you supplied.
    Grimy

  10. #10
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    I hold too but see firmer this week wonder if repaymen might be coming I bought at about .78 thought lower yield was balanced against gain available on repayment.

  11. #11
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    I guess only ASB knows if and when they are repaying, but a nice lift this week.
    My average is .738 so happy sitting and collecting the pay outs while waiting for news.....

  12. #12
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    Another good week for a& bs announcement eminent?

  13. #13
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    First call date I think is next year, so I doubt there would be any announcement from ASB this far out.
    And if there was then no one who knows about it would be buying with insider knowledge. Surely........

  14. #14
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    I expect the price to gradually increase towards the first call date, and then jump either way depending on what ASB decide to do.

  15. #15
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    So far your prediction is spot on...

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