Latitude debuts with new hybrid; 4.75% margin likely

Summary: Latitude to issue listed hybrid security; expected to initially pay around 4.75% (annualised, including franking credits); issue margin above high end of trading margin band; first call date in October 2026; no mandatory exchange date, 3% “step-up” if not exchanged.

Latitude Financial’s operations originate from the consumer loans division of the Australian Guarantee Corporation, originally owned by Westpac and then sold to GE Capital. Latitude is now one of the larger, if not the largest, non-bank consumer lenders in Australia. Its shares were listed on the ASX in April this year, having formerly been owned by a private equity consortium. It now plans to add its first listed hybrid security.

Latitude plans to raise $125 million via an issue of Capital Notes securities (code: LSFPA), with the ability to raise more or less than this amount. The new securities will be perpetual, convertible, subordinated, unsecured, redeemable notes and the proceeds will be used “to pursue and accelerate further growth opportunities”.

The new notes have some features in common with both equities and debt securities. Distributions are at the discretion of directors but they are calculated according to a set formula with reference to the $100 face value of the securities. In the event Latitude were wound up, its hybrids would rank above ordinary shares but below ordinary debt securities and other liabilities.

The capital notes will have an indicative distribution rate equivalent to 3 month BBSW plus a margin which lies in a range from 475bps to 500bps. The final margin will be determined by a “book build” and the result will be announced on 9 September 2021. A book build is a tender process managed by investment banks on behalf of the issuer in which investment institutions each place bids for a set volume at a price/yield.

Latitude to issue listed hybrid security; expected to initially pay around 4.75% (annualised, including franking credits); issue margin above high end of trading margin band;

The chart above shows the history of issue margins of hybrid securities over the last decade or so, including the GFC period in 2008/2009.

Distributions will be cumulative, at the discretion of directors and paid quarterly in arrears. However, should a distribution not be paid, Latitude cannot declare or pay a dividend on its ordinary shares. It would also not be allowed to undertake a discretionary buy-back nor a capital reduction of its ordinary shares.

At the prevailing level of interest rates and if the margin is at the lower end of the range, the new notes will initially pay around 4.75%* (annualised) inclusive of franking credits. *As interest rates change, specifically the bank bill swap rate, quarterly payments will also change.

The first call date is 27 October 2026. This is the first date at which Latitude can exchange all or some of the securities in the absence of a “Tax Event”, an “Accounting Event”, a “Regulatory Event” or any other event. Exchange, in the context of listed hybrids, may mean redeem, resell to a third party or convert into ordinary shares. Unlike most other listed hybrids, there is no mandatory exchange date. If exchange does not take place in October 2026, a 3% “step-up” will be added to the margin.

Issue margins are set close to the margins of comparable hybrids already trading on the ASX. Readers will see Latitude’s likely issue margin is above the high end of a band which captures the majority of median trading margin readings from 2011.

From late-2015 through to early 2017, hybrid trading margins blew out as doubts emerged over the sturdiness of a hybrid structure in an economic downturn. They gradually fell back over the following three years, drifting down to below the long-term channel (see above) just before the March 2020 spike. The median margin of hybrids currently listed on the ASX at the close of business on the 2 September was about 2.55%, not particularly far from the July low of 2.42%.

Prices for securities change as soon as trading begins, whether it is on an organised market such as the ASX or an over-the-counter (OTC) market. Other securities issued at different margins may have fallen (or risen) in price, which generally means their trading margins will have changed. The chart below shows the trading margins of comparable securities which trade on the ASX as at the close of business on 2 September 2021.

YieldReport has explained the term “trading margin” in previous articles so for those readers who are not familiar with the term or who just want a refresher explanation, click here.

The offer1 is open to certain institutions via an “institutional” offer while clients of joint lead managers, co-managers and syndicate brokers to the issue may apply via the “broker firm” offer. There will be no offer to the general public.

Trading on the ASX/CHX is expected to begin on 29 September 2021.

1 Must not be in the US or acting for persons in the US.

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