Q. I have received an offer to buy CommBank PERLS XII Capital Notes via my Stockbroker. With interest rates available on Term deposits now offering less than 2%, should I consider taking up the offer?
A. CBA PERLS XII Capital Notes are a form of Hybrid investment issued by the Commonwealth Bank of Australia (CBA) to CBA shareholders and those with a broker participating in the book build. The CBA intends to raise $750 Million but with the flexibility to extend the offer if oversubscribed.
Hybrid investments are securities that have debt and equity-like features. Generally, they offer a quarterly coupon (interest) payment, with a franking credit and potential for conversion to the underlying issuers shares at a predetermined time, at the discretion of the issuer. In the case of this offer, the call date would be 2027 with a mandatory exchange date of 2029.
The attraction of hybrids is that they often will pay a higher coupon (interest rate) than conventional fixed interest investments such as Term deposits or bonds. In the case of PERLS XII, the coupon return will be in the range of 3% – 3.2% + the Bank Bill Swap rate (BBSW). The current BBSW is roughly 0.84%, so the anticipated rate of return will be around 3.8% – 4.1% (including franking credits).
The big problem with hybrid securities is they are not Term deposits and are priced in the market based on the supply of notes for sale and the demand for said notes. The investor is taking on a variety of equity-like risks with Hybrids which they would not be taking on through investing in a Term Deposit.
Whilst Term Deposits can be cashed with the bank at full face value albeit, with a penalty on interest, hybrids need to be sold on the market and the price could vary dramatically from the face value. For example, investors in CBA Perl VII (ASX:CBAPD), saw the value of their investments hit a of low of $85.48 in 2016 from their issue price of $100. They did not recover to the issue price until June 2019.
Whilst Hybrids are often marketed as fixed interest investments, they are complex in nature and carry risks often not easily understood. So be careful and know what you are buying.
The decision whether to invest in either Term Deposits or Hybrids will be based on your time frame to invest, the issuer’s credit worthiness, the structure of the note and your appetite and capacity to absorb the above-mentioned risks.
CBA PERLS XII Capital Notes offer closes on 8 November.