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Hot on the heels of the NAB Hybrid issue last week, Macquarie are coming to the market to raise $500m through the issue of new income focused Macquarie Group Capital Notes 4 (MCN4).

NAB came to the market with a $750m issue but received bids of over $4 billion, with investors receiving 37% of the amount bid for.

Overview: (courtesy Evans and Partners)

 

  • MCN4 will pay a distribution rate of the 3-month Bank Bill Swap Rate (BBSW or Reference Rate) plus a margin that will be determined by the Bookbuild and is expected to be between 15% and 4.35% per annum, subject to certain payment conditions. Based on the Reference Rate of 1.91% as at Friday 22 February 2019, this equates to an indicative initial distribution rate of between 6.06% and 6.26%, inclusive of franking.
  • The current franking rate is 45%. This equates to a cash yield between 5.07% and 5.24%.
  • MCN4 are perpetual however MQG may elect, at its option, to exchange all or some MCN4 for MQG ordinary shares or redeem or resell all or some MCN4 (subject to APRA approval) for $100 cash per MCN4, on the Scheduled Optional Exchange Dates of 10 September 2026, 10 March 2027 and 10 September 2027. If not exchanged, redeemed, resold or written-off earlier, MQG must exchange all MCN4 for MQG ordinary shares on the Scheduled Mandatory Exchange Date of 10 September 2029, subject to the Exchange Conditions being met.
  • MCN4 are expected to be listed on the Australian Securities Exchange (ASX) under the code MQGPD. The issue price is $100.00 per MCN4.
  • The structure of MCN4 is similar to other bank Capital notes, however given the issue is from the Macquarie Group not Macquarie Bank, MCN4 only contains the non-viability clause and not the 5.125% Tier 1 conversion trigger.

The Macquarie margin will likely be 4.15% above the 90-day bill rate (currently 1.91%), for a total yield of 6.06%. NAB margin last week was set at 4.00%.

Interestingly, the distribution is only franked to a 45% level rather than the usual 100% level. So instead of receiving a $0.70c cash dividend with $0.30c franking credit, you will receive $0.865c cash dividend with $0.135c franking credit. Should the Labor Party abolish the refund of excess franking credit, the Macquarie issue will be relatively more attractive.

For further information on the Offer, please refer to the MCN4 Prospectus at the following link.

https://www.asx.com.au/asxpdf/20190225/pdf/442xf4vnd0n9g6.pdf

 

Please read the Prospectus in full before making any investment decisions.

MCN4 DETAILS
Purpose: MQG is aiming to raise approximately $500 million (with the ability to raise more or less) through the issue of MCN4. The net proceeds of the Offer will be used for general corporate purposes. As at the Issue Date, MCN4 will constitute eligible regulatory capital of MQG in a manner which satisfies APRA’s regulatory capital requirements.

Structure: MCN4 are fully-paid, subordinated, non-cumulative, unsecured, mandatorily convertible, perpetual notes issued by MQG. The distribution rate offered on MCN4 will be the Reference Rate plus a margin that will be determined by the Bookbuild and is expected to be between 4.15% and 4.35% per annum. Distributions are expected to be franked to the same rate as dividends on MQG ordinary shares, currently 45 per cent. Distributions are discretionary, non-cumulative and only payable subject to certain payment conditions.

Ranking: In a winding up of MQG, MCN4 will rank ahead of ordinary shares, equally with Equal Ranking Obligations, but behind all Senior Creditors of MQG.

Scheduled Optional Exchange: On any of the Scheduled Optional Exchange Dates of 10 September 2026, 10 March 2027 and 10 September 2027, subject to certain conditions, MQG may elect to exchange all or some MCN4 for a variable number of MQG ordinary shares worth approximately $101 per MCN4. Alternatively, subject to APRA approval and certain conditions, MQG may elect to redeem or resell all or some MCN4 for $100 cash per MCN4 on those dates.

Scheduled Mandatory Exchange: If not exchanged, redeemed, resold or written-off earlier, MQG must exchange all MCN4 for MQG ordinary shares on the Scheduled Mandatory Exchange Date of 10 September 2029, subject to the Exchange Conditions being met. If any of the Exchange Conditions relevant to that date are not met, exchange will be deferred until the next quarterly Distribution Payment Date where all of the Exchange Conditions are satisfied. Upon exchange, MCN4 holders will receive a variable number of MQG ordinary shares with a value equal to approximately $101 per MCN4.

Non-Viability Event Exchange: MQG is required to immediately exchange MCN4 into MQG ordinary shares if a Non-Viability Event occurs. As an exchange in these circumstances would most likely occur during a time of financial difficultly for MQG, MCN4 holders may receive MQG shares worth significantly less than $101 per MCN4 and may suffer a loss as a consequence. If MCN4 are not exchanged for any reason within 5 business days of the Non-Viability Event, they will be written-off, in which case the MCN4 holders’ rights will be immediately and irrevocably terminated for no consideration and they will suffer a total loss of their investment.

Other Exchange Events: MQG may elect to exchange or redeem or resell (subject to APRA approval), all or some MCN4 at any time following a Tax Event or Regulatory Event. MQG is required to exchange all MCN4 into MQG ordinary shares (except in certain circumstances) following an Acquisition Event. Holders have no right to request an exchange, redemption or resale of their MCN4 for any reason.

For further information regarding the structure and terms of MCN4 please refer to Section 2 of the Prospectus.

RISKS
As with all investment transactions, there are risks associated with an investment in MCN4. These risks include, but are not limited to: market price and liquidity of MCN4; market price and liquidity of ordinary shares; distributions may not be paid; changes in distribution rate; level of franking; MCN4 are perpetual and may never be exchanged, redeemed or resold; MQG has rights for exchange, redemption or resale at its election; losses due to an Acquisition Event; losses due to a Non-Viability Event; and restrictions on rights and ranking in a winding up of MQG.

There are also risks associated with MQG’s businesses which may affect MCN4, including: global credit and market conditions; other general economic and geopolitical risks; liquidity risks; legal, regulatory and compliance risk; increased governmental and regulatory scrutiny; exchange rate risk; risks of strategic opportunities and exiting or restructuring existing businesses; reputation risk; competitive risks; staff recruitment and retention; market, asset and interest rate risk; capital adequacy risk; credit and counterparty risk; credit ratings risk; tax risk; operational systems risks and risk management processes; information security system risks including cyber-attack; insurance risk; risk of unforeseen, hostile or potential catastrophic events and climate change social risks; conflicts of interest; and MQG may be adversely affected by litigation and regulatory actions.

Please carefully read Section 4 of the Prospectus for further information on these and other risks associated with MCN4. Should you have any questions in relation to the risks and/or their implications, please contact our Advisors.