Hero or Zero: $500m Macquarie hybrid lists on Wednesday...

The $500 million Macquarie Bank Capital Notes 2 (ASX: MBLPB) hybrid begins trading on Wednesday, and it will be fascinating to see how it performs. 

This new deal was issued on a margin of 4.7% (470 basis points) above the quarterly bank bill swap rate, implying an all-in grossed-up running yield of circa 4.8%. At the time, we thought it was attractive and subscribed for our portfolios.

Based on Friday's ASX pricing, it looks like the interpolated credit spread for MBLPB would be around 4.24% above the swap rate (given it sits between two other Macquarie Group hybrids---MQGPC and MQGPD---in terms of tenor), which suggests a clean price of about $102.11 (or a capital gain of more than 2% above its $100 face value) in lieu of the 46 basis points of prospective credit spread compression from the 4.7% issue margin.

Importantly, this doesn’t take into account the superior creditworthiness of a Macquarie Bank hybrid relative to the existing Macquarie Group hybrids. More precisely, the new MBLPB hybrid would be notionally rated BB+ by S&P compared to the lower BB ratings for MQGPC and MQGPD (this is because of the difference between a hybrid issued by the banking entity as opposed to the group where only the bank gets the benefit of things like government-guaranteed deposits and access to the RBA's emergency funding facilities).

While S&P does not officially rate ASX hybrids (it only rates their unlisted equivalents), MBLPBs theoretical BB+ rating puts it on the cusp of the investment-grade/high-yield threshold and one notch below the investment-grade BBB- ratings the major banks' hybrids attract from S&P when issued in the over-the-counter market.

If investors were to price in this superior creditworthiness (ie, the higher rating) by, say, reducing MBLPB’s trading margin 10 basis points tighter than its currently interpolated spread using the Macquarie Group hybrid curve (ie, down from 4.24% to 4.14%), this would increase the expected clean price $0.46 to $102.57.

I was recently interviewed by Pinnacle Investment Management's Gerald Willeston about the new Macquarie hybrid issue, which you can watch by clicking on the player below. The second video is another interview with Gerald where I discuss where I think hybrids should be classified in a multi-asset-class portfolio (either as high yield fixed-income or very low beta, defensive equities).

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