Investors of Commonwealth Bank of Australia (ASX: CBA) shares undoubtedly wonder about the bank's latest announcement. What in the world are 'subordinated securities', and why is Australia's biggest bank issuing $1.25 billion worth of them?
The black and gold bank's share price is trading at $97.29, down 0.8% in a shaky start to the day. The big four bank is still closer to its 52-week low price than its 52-week high.
Interestingly, the entire financial sector has been under pressure over the last year. While utilities are up 26.3% versus a year ago, financials are down 3.1% over the past 12 months.
What are the terms?
This morning, CBA announced it had issued $1.25 billion worth of subordinated securities. It means the bank has sold unsecured bonds to investors to raise debt.
The bond sale is comprised of two parts:
- $550 million of subordinated fixed to floating rate securities
- $700 million of subordinated floating-rate securities
For those interested, subordinated means that the debt ranks lower than senior secured and unsecured debt. It means it is a 'riskier' form of debt to own as an investor because there's a higher chance of not being paid out if the company falls into financial distress.
As such, bondholders expect a more attractive yield (interest) earned on the bond. Today's announced bond issuance has the following terms:
- Fixed rate bonds: 6.446% per annum paid semi-annually due 25 October 2033
- Floating rate bonds: +2.05% per annum margin paid quarterly due 25 October 2033
The bonds can potentially convert into fully paid ordinary shares regarding CBA shares. However, this would only occur under a non-viability trigger event. Such an event occurs when the Australian Prudential Regulation Authority (APRA) believes CBA is at risk of becoming non-viable, i.e. insolvent.
Will an extra billion in debt impact CBA shares?
Banks use a combination of customer deposits and debt to meet their capital requirements.
As of 30 June 2023, the Commonwealth Bank of Australia held $290.65 billion in debt on its balance sheet. An extra $1.25 billion in issued debt would represent a 0.4% increase in the bank's outstanding debt — hardly significant.
CBA was in good standing with its capital buffer requirements as per its release on 9 August 2023. According to the release, the bank maintained a common equity tier 1 ratio of 12.2%. For context, APRA requires a minimum of 11%.
The CBA share price is down 3.5% year-to-date.
