CBA PERLS V - what is it?

[johenmo]

I understand it is an acronym for Perpetual Exchangeable Resaleable Listed Securities.
(“PERLS V”), which are stapled securities comprising:
– an unsecured subordinated Note issued by the Bank’s New Zealand branch; and
– a Preference Share issued by the Bank.

Can anyone explain how these work in plain english?
It'd be appreciated.
Thanks

 

[soren_lorensen]

Re: CBA PERL V - what is it?

I understand it is an acronym for Perpetual Exchangeable Resaleable Listed Securities.
(“PERLS V”), which are stapled securities comprising:
– an unsecured subordinated Note issued by the Bank’s New Zealand branch; and
– a Preference Share issued by the Bank.

Can anyone explain how these work in plain english?
It'd be appreciated.
Thanks

Johenmo, we do appreciate you anyway, however i can't help here, you will need someone else to explain the perls V

 

[johenmo]

Re: CBA PERL V - what is it?

I understand the preference share. And vaguely understand the note (i'll read some more). But I don't quite understand why they are bundled together. And what makes them attractive enough to buy. CBA obviously expect to come out on top on these.

So if someone can give an outline it'd be aprpeciated.

 

[Hyperion]

Re: CBA PERL V - what is it?

This is my understanding:

For the investor:
Debt like returns: floating rate of 3.40% above the bank bill swap rate.
This return is comprised of 70% cash and 30% in franking credits.

Price movements will thus also be similar to debt.

Ranking on insolvency: is like a preference share (i.e. priority is below debt, but above ordinary shares)

Tax: Returns are treated like franked dividends. Gain or losses on sale are like shares (i.e. capital gains/losses if investor). NOT treated as a s26BB Traditional Security.


Why does the bank sell them?
Tax reasons
Because the returns are treated as dividends, they can attach franking credits to them, and thus bank pays you less cash, but still provides you a high rate of return (because you get the attached franking credits, which are useless to them)

Even though it counts as equity under Australian tax law, it apparently counts as debt under NZ tax law. Hence they can claim a tax deduction in New Zealand. (yes, so they attempt to double dip....)

Obviously the ATO doesnt like this, and they are definitely going to litigate. Luckily for investors, CBA and ATO have come to some agreement where CBA indemnifies you if they get an adverse ruling. There is some complicated scheme where u can opt out - but read PDS for more info on that.


Also, because classified as Tier 1 equity by APRA and not debt, then in improves their prudential ratios and make them look like a safer bank (lower debt/equity).

 

[gooner]

Re: CBA PERL V - what is it?

This is my understanding:

For the investor:
Debt like returns: floating rate of 3.40% above the bank bill swap rate.
This return is comprised of 70% cash and 30% in franking credits.

Price movements will thus also be similar to debt.

Ranking on insolvency: is like a preference share (i.e. priority is below debt, but above ordinary shares)

Tax: Returns are treated like franked dividends. Gain or losses on sale are like shares (i.e. capital gains/losses if investor). NOT treated as a s26BB Traditional Security.


Why does the bank sell them?
Tax reasons
Because the returns are treated as dividends, they can attach franking credits to them, and thus bank pays you less cash, but still provides you a high rate of return (because you get the attached franking credits, which are useless to them)

Even though it counts as equity under Australian tax law, it apparently counts as debt under NZ tax law. Hence they can claim a tax deduction in New Zealand. (yes, so they attempt to double dip....)

Obviously the ATO doesnt like this, and they are definitely going to litigate. Luckily for investors, CBA and ATO have come to some agreement where CBA indemnifies you if they get an adverse ruling. There is some complicated scheme where u can opt out - but read PDS for more info on that.


Also, because classified as Tier 1 equity by APRA and not debt, then in improves their prudential ratios and make them look like a safer bank (lower debt/equity).

Spot on

The only thing I would add is that CBA expect to call after 5 years, so you get your money back then barring exceptional circumstances. When the majors say they "expect to call" they have always done so.

 

[Hyperion]

Re: CBA PERL V - what is it?

Spot on

The only thing I would add is that CBA expect to call after 5 years, so you get your money back then barring exceptional circumstances. When the majors say they "expect to call" they have always done so.

Yep, agree with that.

The problem is that sometimes the PDS is confusing because it deliberately makes things uncertain.

E.g. technically the bank has no obligation to pay you anything. This is because if they were obliged to pay you, then the security might risk falling into the "debt" classfication.

However, these preference share things often have "dividend stoppers" such that if the preference shares dont pay "dividends" then the ordinary shares aren't allowed to pay dividends either.

And everyone knows what will happen if CBA doesnt pay ANY divs on its ordinary shares... hence CBA will pretty much always pay the PERLs if it can...

 

[jono1887]

Re: CBA PERL V - what is it?

whats the current bank bill swap rate?
and what happens if you want to cash out before the 5 years? can you just selll them on the stock market?

 

[boofhead]

Re: CBA PERL V - what is it?

BBSW changes daily but it is around the 3.4% mark.

If you want out you sell them on the market like other securities. It's like any other hybrid product.

 

[Sir Osisofliver]

Re: CBA PERL V - what is it?

This is my understanding:

For the investor:
Debt like returns: floating rate of 3.40% above the bank bill swap rate.
This return is comprised of 70% cash and 30% in franking credits.

Um this isn't quite right Hyperion. From the CBA website

Distribution Rate (% p.a.) = (Market Rate + 3.40%) x (1 - Tax Rate)

They give an example here https://ipo.comsec.com.au/IPO/Application.aspx?IPOID=39#offerdetails


Market Rate is 3.2800% p.a. + Margin 3.4000% p.a. = 6.6800% p.a. * 0.70
Distribution Rate 4.6760% p.a.


Cheers

Sir O

 

[dasmith1973]

Re: CBA PERL V - what is it?

whats the current bank bill swap rate?
and what happens if you want to cash out before the 5 years? can you just selll them on the stock market?

Yes you can sell them out on the market like a share and you should note that these issues are not as safe as made out to be by the bank. Look at the current price of PERL3 at $169, at one stage down to 130's..that's one hell of a drop & a real loss if forced to sell out. One of my family members has these 'on advice of the bank' which really peeves me, I think that is a massive conflict of interest & a trap for unwary if you don't consider the downside.

This is a good article by Huntleys explaining them further...

http://www.morningstar.com.au/s/pdf/newsletters/YMW_090611_Hybrids_free.pdf

 

[johenmo]

Re: CBA PERL V - what is it?

...you should note that these issues are not as safe as made out to be by the bank. Look at the current price of PERL3 at $169, at one stage down to 130's..that's one hell of a drop & a real loss if forced to sell out.

"not as safe" - that was my feeling. Thanks everyone. Another thing I can add to the pile of learning.
Cheers

 

[Calliope]

Re: CBA PERL V - what is it?

This is a good article by Huntleys explaining them further...

http://www.morningstar.com.au/s/pdf/newsletters/YMW_090611_Hybrids_free.pdf

That article was very interesting da. I note they will soon be running an article on a range of hybrids. It would be appreciated, if when they run the article, you could post it on the "Hybrid Securities" thread.

Cheers, Calliope.

 

[boofhead]

Re: CBA PERL V - what is it?

Sir Osisofliver: Isn't that approximately what Hyperion was saying? Grab a calculator.

dasmith1973: Earlier PERLS had a smaller margin which in the lower BBSW rate of the current market has a greater impact. Other hybrids with a healthy margin issued by companies with a greater feeling of security (AMP) are trading above issue price. I'm sure if the earlier PERLS products had a higher margin they would be trading much better. That said the recent PERLS is not as healthy margin as AMP but is expected to be fully franked.

 

[drlog]

Re: CBA PERL V - what is it?

I am very new to all of this.

Let's say the market value of PERLS V drops to $150. I can purchase some on market at $150 and on 31st of October 2014 I will either get $200 or I will get $200 + 1% of CBA ordinary shares?

Actually, CBAPB (PERLS IV) are currently trading at $188ish. If you buy them, it will be the same deal on 31st October 2012? That's around a 6.3% return plus the remaining distributions, right?

 

[Bill M]

Re: CBA PERL V - what is it?

I am very new to all of this.

Let's say the market value of PERLS V drops to $150. I can purchase some on market at $150 and on 31st of October 2014 I will either get $200 or I will get $200 + 1% of CBA ordinary shares?

Yes you can but that probably won't happen. If anything the capital value ($200) will probably rise due to the fact of the healthy 3.4% interest rate spread on the product. All the other PERLS offers were much lower.

Actually, CBAPB (PERLS IV) are currently trading at $188ish. If you buy them, it will be the same deal on 31st October 2012? That's around a 6.3% return plus the remaining distributions, right?

I don't know the dates but Yes, just remember though that the interest rate spread is only 1.05% on this product so it means lower income.

Perls 4 BBSW + 1.05% = Approx 4.4%

Perls 5 BBSW + 3.4% = Approx 6.8% What you need to work out is if the capital gain on the Perls 4 brings it up an end result to what Perls 5 will give you.

About Perls 5, from the replacement prospectus dated Sept 7th. Page 5.

It says the general offer which was to have been open to other Australian residents, will now not proceed

 

[Hyperion]

Re: CBA PERL V - what is it?

Um this isn't quite right Hyperion. From the CBA website

Distribution Rate (% p.a.) = (Market Rate + 3.40%) x (1 - Tax Rate)

They give an example here https://ipo.comsec.com.au/IPO/Application.aspx?IPOID=39#offerdetails


Market Rate is 3.2800% p.a. + Margin 3.4000% p.a. = 6.6800% p.a. * 0.70
Distribution Rate 4.6760% p.a.


Cheers

Sir O

I was referring to the "total return".

E.g. if BBSW is 6.6% and margin is 3.4%, then your "total return" is 10%.

7% is in cash, and what you/the prospectus refers to as the "distribution rate"
3% is in franking credits.

But the 10% number is more important, because any investor would be indifferent between 10% in cash, and 7%cash + 3% franking credits.

 

[YELNATS]

Re: CBA PERL V - what is it?

About Perls 5, from the replacement prospectus dated Sept 7th. Page 5.

It says the general offer which was to have been open to other Australian residents, will now not proceed

That's significant. I was of the opinion that there would be a massive scaleback on this new product issue, which put me off it a bit.

Now that it is apparently only available to current CBA ordinary shareholders plus holders of previous PERLS, the scaleback may not as great, which makes it more attractive to those that qualify.

 

[YELNATS]

Re: CBA PERL V - what is it?

As per CBS'a SEpt 7 media release;

Quote
Commonwealth Bank of Australia (the “Group”) has successfully completed the bookbuild for the offer of its Perpetual Exchangeable Resaleable Listed Securities (“PERLS V”) to eligible institutional investors and brokers to the offer.
The offer of PERLS V has been extremely well received, with strong demand from brokers to the offer resulting in the bookbuild attracting just over $3bn in demand. Given the level of support for the offer, the Group has decided to allocate $1.5billion of PERLS V under the bookbuild1.
Unquote

Based on the above it looks like at least a 50% scaleback under the institutional investors and brokers part of the offer.

The retail part of the offer is due to close October 2nd, but if you are going ahead, it may be a good idea to get in asap, particularly if CBA decides to close the offer earlier.

 

[bylife]

Re: CBA PERL V - what is it?

First of all, there is information of PERL IV from web search,

PERLS lack lustre

The glossy pamphlets have been sent out and the brokers are on the phones. Those marketing efforts, combined with the featured rate of 7.4% and the magnificent Commonwealth Bank brand should all but guarantee the bank gets the $850m it is seeking through the issue of PERLS IV. We recommended the original PERLS (since redeemed), but the latest offering falls well short of the mark.

Comparison

For various reasons, PERLS IV do not offer much in the way of capital gains, though there is the potential for capital loss. But, before we explore those scenarios, let’s place that attractive-looking 7.4% under the microscope.

right next to an ad spruiking the PERLS IV offer, we found one for a term deposit at 6.4%. But there are some important differences. For a start, the dividend payments you’ll receive in relation to PERLS IV will be at a rate of approximately 5.18%. The difference between that and the advertised 7.4% will be made up in your tax return by the associated franking credits. With your trusty old term deposit, what you see is what you get – and you get all of your interest when you’d expect it.

To make the comparison easier, let’s ignore this disadvantage of the PERLS and just assume that the advertised 7.4% is comparable to the 6.4% term deposit rate (which you can top by shopping around at other reputable institutions). So what risks do you have to accept to get the additional 1% return from the PERLS?

Catalogue of risks

Firstly, in the case of the Commonwealth Bank getting into serious trouble, you’re much further up the chain for getting your money back as a deposit holder than as a PERLS IV holder. So you’re accepting a degree of ‘default risk’ in return for your extra 1% (or 100 basis points, as they say in the financial markets, a basis point being a hundredth of a percentage point).

Credit risk ready reckoner
Odds of default Additional return required (%)
1-in-1,000 0.1
1-in-500 0.2
1-in-100 1.0
1-in-50 2.0
1-in-20 5.0

You can price this risk by estimating the odds of the bank getting into serious financial trouble before the PERLS IV mature on 31 October 2012. If you think this is a 500-to-1 shot, then you’d want at least 20 basis points of extra return over the term deposit. If you think it’s a 100-to-1 shot, then you should demand an extra 100 basis points (see accompanying table).

Short of a complete blow up of the Commonwealth Bank, there’s the risk that the bank has a less serious hiccup which renders it unable to pay dividends for a period of time. PERLS IV are ‘non-cumulative’, meaning the bank doesn’t have to make good any missed payments. How much is that drawback worth? Perhaps 15 or 20 basis points, perhaps more.

Then there’s the risk that you need to sell your securities for some reason before they mature, when their price has fallen. This could happen if, for example, the yield investors require from fixed-interest investments generally, or from Commonwealth Bank securities in particular, has increased.
.....

weblink:seach PERL IV in google: intelligentinvestor

The advise for PERL IV is avoid. Hope it is helpful to consider PERL V.
I will figure it out.

 

[bylife]

Re: CBA PERL V - what is it?

More, PERLS should belong to kind of Bond, because the distribution is similar as interets.