On 15 February 2023, Australia and New Zealand Banking Group (referred to as AN3 in this report), a wholly owned subsidiary of ANZ Holdings (ASX: ANZ), launched an offer for ANZ Capital Notes 8 (expected ASX Code: AN3PK), to raise $1.0 billion, with the ability to raise more or less. The purpose of the transaction is to raise regulatory capital (Additional Tier 1) for AN3/ANZ with the proceeds intended to refinance ANZ Capital Notes 3 (ASX: AN3PF) and for general business purposes. The securities are structured as convertible, perpetual, unsecured, subordinated notes. Distributions are expected to be discretionary, non-cumulative, floating rate, franked at the same rate as ANZ Holdings ordinary shares (currently 100%), and paid on a quarterly basis in arrears until converted or redeemed. The margin is guided at 2.75-3.00% p.a. above 90-day BBSW. The distribution rate has a floor of 0.00%, noting therefore the floor for 90-day BBSW is effectively -2.75-3.00%.
This security has no fixed maturity date but is scheduled for mandatory conversion into ANZ Holdings ordinary shares on 20 September 2032, or later, when conversion conditions have been satisfied. ANZ can choose to redeem or resell the Notes for cash at face value ($100), or covert the Notes into ANZ Holdings ordinary shares on 20 March 2030, 20 June 2030, or 20 September 2030, or following a Tax or Regulatory Event, subject to conditions including APRA approval. The Notes will convert into ANZ Holdings ordinary shares following a Change of Control Event, subject to conversion conditions.
We see fair value for outstanding comparable securities at the 7-year tenor at the 275bps margin mark. At the left-hand side of an issue margin indicative range of 275-300bps, AN3PK is fairly priced, albeit with little to no concession premium. At the top end of the indicative range, we see a suitable new issue concession. Consequently, we would recommend bidding in greater size at the top of the range rather than the bottom. To be clear, a concession is additional compensation to what we consider fair value in secondary markets. We recommend investors Subscribe due to the incremental relative value premium and our fundamental credit comfort with the Issuer, ANZ.