ASBPA, ASBPB and ASB030

[mcdongle]

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.

[blackcap]

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!

[macduffy]

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.

[GTM 3442]

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.