AMP offer adds to hybrids boom

AMP has kicked along the rapid growth of Australia’s ‘hybrid’ securities market with its offer of up to $1.15 billion of ‘reset preferred securities’ (RPS).

The AMP issue will lift the total value of hybrids and other interest rate securities listed on the ASX to more than $15 billion.

The hybrid market has thrived because it meets the needs of investors and issuers.

For issuers such as AMP, Coles Myer, Fairfax, St George Bank, Santos and Suncorp Metway, hybrids offer a cost effective and flexible means of raising extra capital.

For investors, hybrids offer an interesting mix of features. They offer a defined income, similar to debentures or bonds, but they also have some of the characteristics of shares.

The key attraction for many investors is the high yield on hybrid securities.

The yield on AMP’s RPS securities, for instance, is expected to be about 8.35 per

cent per annum, according to Grange Securities. (The actual yield will depend on prevailing market rates when the securities are issued later this month).

In comparison, ‘investment grade’ debentures with a four to five-year maturity currently yield about 5.5 per cent a year.

The higher yield on hybrids compensates for higher risk and uncertainty.

In particular, AMP can change the distribution rate (and certain other features) in five years, on October 24 2007, and on other later ‘reset dates’.

AMP may also decide that all RPS securities must be converted into ordinary shares.

Holders of RPS securities also have the right to convert some or all of their securities into ordinary AMP shares, but only on the reset dates.

Investors can buy and sell the RPS securities through a stockbroker, just like ordinary shares.

The ability to buy and sell hybrids and other interest rate securities has improved substantially, as awareness and usage of this market has risen.

The number of trades in interest rate securities rose 61 per cent last year, while the value of turnover was up 90 per cent, according to the ASX.

The relatively high yield on AMP’s RPS securities also reflects their ‘preferred’ status.

This means that, in the unlikely even AMP was liquidated, the holders of RPS securities would be paid after all creditors but before, or in preference to, amounts owing on AMP’s ordinary shares.

Another feature of AMP’s RPS offer is that holders will participate in any increase in AMP’s ordinary share price above $20.

Grange Securities’ analyst Rodney Pryor describes

AMP’s RPS issue as “attractive compared to other listed reset preference shares”.

He values the securities at $104.40, compared with their $100 issue price.

This valuation is based on an assessment of AMP’s credit quality and the extent to which the dividend exceeds market rates (in technical terms, the credit margin over the swap rate).

Mr Pryor used a credit margin of 2.25 per cent (225 basis points) to value the AMP securities.

“The most comparable issues are the Fairfax, Santos and Suncorp Metway preference shares, which trade at margins of 230, 260 and 245 basis points respectively,” he said.

“Therefore we see the AMP issue as attractive and value the securities at $104.40.

“Recent press regarding AMP’s management and cap-ital position has no material impact on our credit assessment.”

AMP will use the funds to reduce short-term debt, increase its capital resources and generally reinforce the AMP Group’s financial strength.