Through their stockbrokers, many investors have likely been asked for an expression of interest in Capital Notes issued by AMP Limited (ASX: AMP).
Similar to Westpac Banking Corp's (ASX: WBC) Capital Notes issued recently, AMP is issuing hybrid securities (essentially debt that has been packaged so it can be traded like a stock) to bolster its capital position.
Like Westpac's offering, it's hard to see the advantage of owning Capital Notes compared to owning ordinary shares in the company. Here's what you need to know:
- AMP will raise $200m in perpetual, unsecured notes
- Offer opens on the 3rd of November and closes on the 20th of November
- Minimum investment of $5000 and in increments of $1000 after that
- Pays quarterly distributions, subject to AMP's discretion (doesn't have to be paid)
- Distributions expected to be Bank Bill Rate + margin of 5.1-5.3% for a total yield of approximately 2-7.4% plus franking credits (franking credits paid at discretion of AMP)
- AMP aims to convert notes into ordinary AMP shares on 22 December 2021
- Conversion is subject to a 'maximum conversion number' meaning that if shares fall in value, there is a limit on how many shares investors will receive
- If some form of 'capital event' or insolvency occurs, Capital Notes will automatically convert into ordinary AMP shares
- Hybrids are complex financial instruments with a lot of strings attached, and this one is no different. All investors should read the entire prospectus before participating.
AMP might cancel dividend payments, convert your Notes into shares, repay your Notes, or re-sell your Notes depending on various conditions and you should familiarise yourself with these possible outcomes.
It is important to remember that hybrids tend to behave like ordinary shares when the market falls. Indeed, a number of recent bank hybrids have traded below their issue price since launch, so there is still the risk of seeing capital losses.
Unlike Westpac's earlier offering, AMP Capital Notes look to offer decent compensation (with an estimated franked yield of above 7%) to investors in return for the additional risks of taking on a hybrid.
I am not personally participating, but investors who want a quarterly income stream for their portfolio could find AMP's Capital Notes to be a lucrative, albeit riskier option.
