Westpac PPS Offer

[Grimy]

Westpac are considering issuing more PPS. Details next week, but interest rate could be around 7%.

[GTM 3442]

Irrespective of the coupon, I’m ambivalent about perpetuals at time of issue – I think the potential for capital loss due to interest rate movements over time is too great.

I think they’re best bought on the secondary market at a discount to face value - IFTHA at an entry price of $0.56 has served me well over the years, but I sure wouldn't have liked to have bought at time of issue.

[Perky]

That’s an interesting perspective. I bought a few perpetual last few months before interest rates were actually cut in anticipation of interest rates dropping. I’m using them as a replacement for some expiring term deposit. Ie I’m rolling out of 6.4. - 6.5 TD’s and get 7.2 -7.6 on perpetuals
My plan is to hold them whilst interest rates drop and sell them well before interest rates rises devalue them. Happy to leave something on the table for next punter.
Thats my plan …I guess we will see how it plays out. Not sure if liquidity might be an issue when I come to sell if everyone has the same plan..lol

I like the simplicity of the mechanics of perpetuals vs bonds but surely both bonds and perpetuals are going to have their value determined by interest rate movements.

What am I missing ? Keen to learn from more experienced punters in this fixed interest space.
cheers

[thebusinessman]

I think the main difference is that your bond issue and term deposits can't have their payments stopped (without substantial issues!) whereas the PPS can do though it is rare. I think during COVID a couple of PPS payments were stopped and I am not sure if they were caught up on. There is no obligation to catch up on a missed payment. So there is your extra risk in exchange for the extra return.

I am considering a purchase of the Westpac ones...

[Perky]

Yes I think you’re right here and a valid risk.

They do have that dividend stopper clause where they can’t pay divies on the head shares either if they don’t pay the PPS divs.

I think the risk is pretty low on PPS with the big 4 banks…the **** will have well and truly hit the fan if they have to stop paying divs.

Banks Pretty highly regulated in this part of world I feel.

See clause 5.2 Distributions in the westpac offer documents for explanations

[Grimy]

During 2020 the reserve bank instructed banks they could not repay PPS on their optional repayment dates until further notice. In my case this was both ANZ's ANBHB and Kiwibank's KCFHA.
Dividends were still paid and the capital repayment was allowed in 2021 (the interest rate did drop as they were reset during this period). So not a biggie.
There are risks, but risks I am comfortable with.
If the banks get to the stage of not being able to service these shares, or repaying them (outside of reserve bank direction) then I think most people with bonds and shares will already be in a world of pain.
I've put in my request for an allocation of these WNZHA PPS.