An issue of $150 million of perpetual capital notes from Kiwibank with a speculative, or "junk", credit rating have been priced at the bottom of their indicative margin range.
The notes, being issued via Kiwibank funding vehicle Kiwi Capital Funding Limited (KCFL), will pay investors interest of 7.25% per annum for five years, which is a margin of 3.65% over the five-year swap rate. The indicative margin range was 3.65% to 3.95%.
The notes stand to be reset at the same 3.65% margin over the five-year swap rate on May 27, 2020. The notes have a first call date of May 27, 2022.
Kiwibank says the bookbuild is completed with the full $150 million sought reserved for clients of participants in the bookbuild process who have received firm allocations. The offer's joint lead managers are Deutsche Craigs, Forsyth Barr and Macquarie.
Interest on the notes is scheduled to be paid quarterly but, Kiwibank warns, won't be paid if conditions are not met and may change in certain other circumstances. Furthermore, if an interest payment is not paid for any reason, it will never be paid.
The offer opens on Monday, May 4, and closes on Friday May 22.
"Investors will be paid early bird interest on the perpetual capital notes at 4.5% per annum from the time their application money is banked. Investors are therefore encouraged to lodge their applications as soon as possible to take advantage of this," Kiwibank says.
The notes have a BB- credit rating from Standard & Poor’s, reflecting their ranking behind other obligations of KCFL, discretionary interest payments and loss absorption features. Kiwibank itself has an A+ rating. See credit ratings explained here.
The notes are perpetual, non-cumulative, unsecured, subordinated securities that aren't guaranteed by Kiwibank, the Government or anyone else. See more on this type of debt security here.
Proceeds of the offer will be used by KCFL to invest in regulatory capital instruments issued by Kiwibank, designed to help Kiwibank meet its regulatory capital requirements under the Reserve Bank’s Basel III capital adequacy requirements.
From Kiwibank's perspective there are clear benefits from the issuance of such notes. The two key ones are getting suitable regulatory capital classification from the Reserve Bank, and from an income tax perspective, obtaining deductibility for the coupons that are paid on them.
If Kiwibank encounters severe financial difficulty or doesn't have enough capital, the Kiwibank regulatory instruments may be converted into ordinary shares in Kiwibank or written off. If this happens, the returns on the notes may change or investors could lose their investment.