A number of key reasons we see value in this trade:
– Yields on the Macquarie Group AT1s have pushed significantly wider with treasury yields, while the dividend yields (lower ranking investment) have not kept pace. The AT1s now provide almost 4.5% higher yields than the junior ranking common equity.
– It is similar when viewing the wholesale USD AT1s vs ASX Listed. The yield on ASX Listed have remained stable in the mid 6% range in 2023 while USD AT1s now provide nearly 10%.
– Retail listed investors don’t seem to distinguish much between the major banks, Macquarie Bank and Macquarie Group. The AUD retail AT1s trade within 10-20bp of each other while the USD MQG AT1s trade 100bp behind WSTP AT1s.
– We think a call on the USD AT1s is very likely as APRA is consulting on changing terms of the AT1s to make them more flexible. As a result, the existing AT1s will likely be grandfathered in only for a few years.
– Macquarie AT1s also do not have Libor fallback clauses.
We view this as an opportunity to enter into a trade delivering a running return of ~6.7% and a total return of ~9.3% at the call date in 2027 from an issuer with strong credit fundamentals and returns higher than common equity . Liquidity in this issue is solid with domestic price makers and offshore USD investors active on a daily basis.
MQG 6.125% AT1s ytc vs. MQG Equity Dividend Yield
