QBE priced a US$700m new-style subordinated debt deal this week receiving over US$2bn of bids into the book. The subordinated debt issue has a 30 year maturity with a first issuer call at 10 years (30nc10). The securities pay a fixed coupon of 6.75% which equates to a margin of US$ swap + 4.30%. This new issue includes a point of non-viability trigger (PONV) at APRA’s option and qualifies as regulatory capital for QBE. FIIG has identified several older style QBE subordinated debt and hybrids that offer 4.35% to 5.1% with no regulatory triggers. For hybrid holders the new deal provides an interesting pricing comparison and puts a price on the inclusion of a non-viability trigger of 0.70%.
FIIG has a preference for older style subordinated debt and hybrids that do not contain the point of non-viability (PONV) triggers. These triggers have been required by APRA, as the regulator for banks and insurers, to qualify as regulatory capital since the 1 January 2013. The PONV trigger allows APRA to convert the subordinated debt into equity, or where that is not possible to permanently write off the capital, when the bank or insurer is in financial distress to the point of becoming non-viable. The difficulty for investors is that a PONV trigger is yet to be tested and the market has no experience as to how and when this trigger will be used by regulators. This makes putting a value on the trigger, in terms of additional yield required, difficult.
The new QBE issue provides an interesting price comparison between the existing subordinated debt issue (QBE 21) without the PONV trigger and the new deal with the PONV trigger. The difference in pricing is 0.70%, this means investors are requiring 0.70% additional yield for this risk.
FIIG’s preference for the older style securities is due to two reasons:
- They don’t contain the PONV trigger risk
- They are likely to be called at the first call date. Once the securities pass this date they will no longer count as regulatory capital for the issuer.
Below is a table that contains QBE USD issues including the new issue (in black) and older style QBE issues (in blue) that do not contain the PONV.
For investors interested in the older style QBE issues the minimum parcel sizes are US$100,000 to US$200,000. Also, note that the June 2017 can not be purchased by super funds and family trusts. Please contact your FIIG dealer for the further information.
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