Woolies perpetual hybrid oversubscribed and tightly priced

The Aussie retailer cuts back orders for its A$600 million in fixed-margin floating-rate notes as they price at the tighter end of the bookbuild range.
Woolworths opened and closed the book on A$600 million worth of hybrid notes in just a few hours after generating A$1.5 billion in interest and orders from more than 50 institutions.

Arrangers Citigroup and UBS priced the deal at 110 basis points over 90-day floating BBSW, giving the notes a yield of 6.97%. While the notes priced at the tight end of the range, they give investors a significant premium on the companyÆs senior debt which trades at about 30bps above bank bills.

The deferrable subordinated perpetual notes are reset quarterly and carry a step-up in year five when the issuer has the ability to redeem them, re-market the notes at a new margin or pay a step-up rate of 200bps on top of the 110bps price.

Woolworths issued the securities in order to redeem A$600 million worth of existing income notes which were paying a yield of 200bps over bills. Investors in these existing income notes were given first bite at the new issue, and then A$375 million was set aside for the bookbuild process.

The notes sold well because of the issuerÆs A-minus rating, says Steve Hawkins, head of hybrid capital at UBS. ôWoolworths is such a successful company that when an opportunity comes along to invest in a security that carries a wider spread than senior debt, investors jump at it,ö he says.

HawkinsÆ counterpart at Citigroup, Fraser Todd, says the deal offered fixed-income investors an alternative to buying hybrids issued by financial institutions. ôBank names have so much senior debt in the market that when they issue a hybrid fixed-income investors donÆt benefit much in terms of diversification,ö says Todd.

ôWoolies, on the other hand, has done a lot of its debt funding offshore in the US private placement and 144A markets, so local fixed-income investors are really keen to increase their exposure when they get the chance.ö

Woolworths chose to replace its old income note programme because of the equity credit attached to the new hybrid securities by the ratings agency. The securities achieved an intermediate classification, giving them equity credit of between 40% and 60%.

The promise of greater equity credit has rekindled issuance in AustraliaÆs hybrid market. Several high profile deals have been done in the last six months, including a A$500 million transaction for BBB-minus issuer Orica in February.

Orica priced above Woolworths at 135bps over bills, but OricaÆs transaction was also non-cumulative, giving it the ability to defer coupon distributions indefinitely.

Woolworths also has the ability to defer coupon payments for up to 10 years but the issuer must eventually meet its obligations. ôThis makes it a step closer to true debt,ö says Todd.

At close of business on Wednesday, Citigroup and UBS were notifying WoolworthsÆ investors of their allocations, with allotment of the securities scheduled for June 5.
¬ Haymarket Media Limited. All rights reserved.

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