Ausnet Hybrids (BBB-/Baa3)
With the Ausnet Hybrids, first call is October 2025 with first step-up date October 2030 (3mBBSW + 0.25bps), second step-up date in October 2045 (3mBBSW + 100bps).
Chart 1. Coupon Formula Schedule
Source: Bloomberg
There are two real factors at play when considering whether a corporate will call a hybrid instrument:
- Economic: Given prevailing funding costs, is it cheaper to hold onto funding rather than reissue and/or repay?
- Equity Treatment: When does the company lose equity credit: Moody’s (50%) and S&P (50%)?
The economic factor is obviously hard to predict, but will be determined relative to where prevailing funding costs are versus a coupon of 3mBBSW + 310bps. On equity treatment, if these securities are not called in October 2025, they would likely lose equity credit from the major rating agencies. This would render them uneconomic from a weighted average cost of capital (WACC) perspective. With 0% equity credit, it would become expensive senior unsecured debt (remember: the credit is rated BBB+/Baa1).
Though we wouldn’t say there is a 90% chance of a call on this security – we do think it more likely than not. We note also that whilst this is issued from a solid credit with a likely call, the risk is an MTM one, which could be significant if it doesn’t call in 2025.
Current RV
Ausnet is a slightly stronger credit than Ampol and should price a little tighter on a comparative basis. Nonetheless, the Ausnet 2080 subordinated notes offer very good value across the BBB spectrum of assets. There have been basically no instances of missed calls for an Australian corporate across many decades, which should give investors conviction over being repaid in October 2025.
Chart 2. BBB Band
Source: BondAdviser, Bloomberg
