St George launches A$300 million preference share issue

The deal, which prices next week, is the first under new regulations governing tier-1 capital issuance by Australian banks.
St George Bank has launched an up to A$300 million ($225 million) hybrid tier-1 capital offer in the form of converting preference shares via joint leads UBS and Goldman Sachs JBWere. The bookbuild to determine the margin opens on November 15 with pricing due to take place a day later. The shares will trade on the ASX.

The bank will issue 2.5 million shares at A$100 each to raise up to A$250 million, with an ability to accept oversubscriptions up to a further A$50 million. The BBB+/A3/A- rated transaction is expected to price at 110bp to 140bp over BBSW.

The deal is the first by an Australian bank under new regulations governing tier-1 capital issuance. In May, the Australian Prudential Regulation Authority (Apra) issued new guidelines on how much innovative and non-innovative tier-1 capital can be held by banks. Up until now, most hybrid transactions have been innovative, meaning they contain a step-up which requires the issuer to pay a higher interest rate, say around 100bp, unless they convert on a certain date or dates. The new rules put a cap on the amount of these ôinnovativeö securities that banks can issue.

The new St George transaction is considered non-innovative because it doesnÆt contain a step-up. Instead, the maturity on the instrument is set via a mandatory conversion which requires the bank to convert the securities into ordinary shares by August 2012. Conversion will be delayed, however, if St GeorgeÆs share price drops by more than 50% in the interim. The effect of this condition ensures that security holders will receive no less than A$101.01 worth of ordinary shares for each preference share upon conversion.

Steve Hawkins, head of hybrid capital at UBS, says investors have been curious about the mandatory conversion structure. ôStep-ups have always been viewed by investors as an automatic call which has given them some certainty that the securities will pay out,ö he says. ôI am unaware of any step-up preference securities that havenÆt converted on the step-up date, so investors have become very comfortable with the structure.ö Hawkins says investors now have to get comfortable with the mandatory conversion feature and believe that the risk that the share price will drop by 50% is low enough to subscribe to the securities.

Hawkins says being in uncharted territory means that he doesnÆt expect the deal to price at the tight end of guidance. ôWe have set guidance at 110bp to 140bp over which means we donÆt expect the deal to price through the step-up transaction St George did in June,ö he says, referring to a A$150 million step-up preference share placement completed five months ago.

That deal, also managed by UBS, priced at the lower end of guidance at 110bp over BBSW and was sold to 16 fixed-income and dedicated hybrid institutional investors, as well as retail investors. The book was 2.5-times oversubscribed. That deal will be classified as innovative capital under the new Apra rules.

Jeff Sheehan, chief manager of capital markets at St George, says the completion of the new preference share issue will see the bankÆs tier-1 capital ratio return to its target range of 7%-7.5%. The bank has been operating under the target range since a A$300 million reset preference share transaction issued in 1999 rolled off in February when St George allowed the shares to convert and then conducted an off-market buy-back. ôWe knew that Apra would be releasing their new guidelines so we held back on the replacement of that hybrid issue until now.ö

Sheehan says he expects retail investors to show a lot of interest in the deal. ôThe June placement saw a 50/50 split in institutional and retail demand and we would be happy with the same sort of split this time, but we expect that there may be more retail interest,ö he says.

One of the reasons for reduced institutional participation is the fact that the shares carry franking credits (allowing holders to reduce their taxable income) and some institutions have reached their annual limits on such securities. ôInstitutions can only buy so much franked paper and there have already been a number of other hybrid transactions where the securities have been franked, like St GeorgeÆs June placement and the Commonwealth BankÆs recent deal,ö says Hawkins at UBS. ôInstitutions might have to sell out of existing holdings in order to buy the new paper.ö

The institutional bookbuild next Wednesday will be followed by a security-holder offer, whereby existing St George shareholders will be offered up to 50 million shares. This will be followed by a broker firm offer to retail investors with co-managers UBS, Goldman Sachs JBWere, Bell Potter Securities, Ord Minnett and St George bank itself set to sell the shares to residential retail clients. Allotment is scheduled for December19.

St George has another $250 million US dollar hybrid that is due for reset next year. ôWe will make a decision on what to do with these securities at that time,ö says Sheehan. ôPricing in the hybrid market has certainly improved since we did that deal.ö

St George Bank is AustraliaÆs fifth largest bank and has most of its operations in the state of New South Wales. Its recent focus on retail distribution and corporate banking has seen it gain some market share from the four majors. It is also a potential takeover target. On November 1, St George posted a $1.05 billion annual profit up 14.5% on the previous year. The bank maintains an expense-to-income ratio was 44% and this year paid a total dividend of A$1.51, up 10.2% on the previous year.
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