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USD MQGAU 6.125% March-27 Callable at 6.06% YTC

Recent market volatility driven by rising inflation, geopolitical tensions, and the Ukrainian/Russian conflict, has had a meaningful impact on credit markets here and abroad. The impact on credit spreads has varied from issuer to issuer, with European-based financials more heavily impacted as investors reprice or reassess risks associated with Russian exposure.

No issuer (or very few) has been immune from the repricing of credit risk with lower tier debt (Tier 2 and Tier 1) impacted more heavily than senior spreads, as expected. For Australian banks, whose Tier 1 debt is predominantly ASX-listed hybrids, their spreads have been incredibly resilient in the retail (ASX) market, while the small number of over-the-counter issues have weakened in line with the broader move in credit spreads.

A prime example, and one that best illustrates the opportunity for investors who participate in both ASX-listed and wholesale (OTC) markets is Macquarie, who have numerous ASX-listed hybrids but only one wholesale market Tier 1 issued in USD.

Table 1. Macquarie Bonds

Issuer Market CCY Ticker Coupon Franking Call Date TM/ASW Yield Cpn Reset (if not called)
Macquarie Bank ASX AUD MBLPC BBSW+ 4.70% 40% 21/12/2025 2.56% 4.66% No
Macquarie Bank ASX AUD MBLPD BBSW+ 2.90% 40% 7/09/2028 2.90% 5.19% No
Macquarie Group ASX AUD MQGPC BBSW+ 4.00% 40% 16/12/2024 2.26% 3.97% No
Macquarie Group ASX AUD MQGPD BBSW+ 4.15% 40% 10/09/2026 2.69% 5.08% No
Macquarie Group ASX AUD MQGPE BBSW+ 2.90% 40% 18/09/2027 2.81% 5.24% No
Macquarie Bank OTC USD MQGAU 6.125% NA 8/03/2027 4.23%* 6.36%* US5Swap + 3.70%

*AUD Equivalent

Source: Bloomberg

The Macquarie Bank USD issue reached a high of AUD110.834 in September 2021 or 3.71%ytc (+320asw). Since then, the sharp move higher in longer term yield curve – coupled with a weakened credit market – has dragged pricing down to AUD100.25, or a yield of 6.06% YTC (+410 asw) in USD.

At the same time, all of the ASX-listed hybrids apart from the MBLPC (+2bps) have actually rallied on a credit spread basis. During the volatility we saw in 2020 as the pandemic took hold of global markets, the wholesale market corrected or repriced first, with the ASX lagging but ultimately following movements in OTC market spreads – and in some cases, moving much further.

We frequently talk about the continued arbitrage between ASX and Wholesale Tier 1 markets and the opportunity for investors who can “toggle” between the two. We believe the Macquarie USD issue is a great opportunity for investors to take advantage of the arbitrage between those markets today.

Chart 1. Macquarie USD Issue

Source: IAM Capital Markets

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