WESTPAC PERPETUAL FRN NO INSTANT CURE, DEALERS SAY
Morgan Guaranty Ltd's novel and complex
repackaging of Westpac Banking Corp's perpetual floating rate
note (FRN) may attract some investors, but is unlikely to aid
current holders of the Westpac securities or the FRN market,
FRN traders said.
    "It actually does nothing for anyone who has been stuffed
and right now, that's the problem," said a trader at one U.K.
Clearing bank that has also issued its own perpetuals.
    Trading in perpetual issues, which pay interest but never
mature, has come to a virtual halt. Prices have fallen so far
that only about five firms still make markets in them.
    The Westpac perpetual notes are technically now the
property of a newly formed single-purpose finance subsidiary,
Pacific Securities. If Morgan tried to find a home for the
actual Westpac notes, as is, they would be paid no more than 85
cents on the dollar, at most, traders said.
    But the repackaging allows them to target a new class of
investor for the notes and take the old issues off their books
without registering a loss, the traders said.
    "The only one the repackaging favours is Morgan," a trader
said.
    Meanwhile, the end-holders of perpetual notes, most of whom
are Japanese banks, must still find a way to value them by
year-end, now a week away.
    From Morgan's point of view, the repackaging does aid the
present holders of the notes as well as offering value to a new
class of investors.
    "At least we've put a floor under the price of the notes.
We've created a way to set a real value for them," one Morgan
official said. Morgan had earlier attempted, but abandoned,
another plan to repackage the Westpac securities.
    Morgan's holdings of Westpac paper create special problems
for it because of the way U.S. Regulators view bank holdings of
the primary capital of other banks, traders said. Therefore, it
is crucial that a vehicle for selling the paper be found.
    And indeed, note traders said, the FRN portion of the
repackaged securities -- which Westpac has offered to redeem
for cash in 15 years -- does have real value.
    For one thing, traders noted, it pays about the highest
rate over the London Interbank Offered Rate of virtually any
newly issued security. The spread is 50 basis points.
    However, the other portion of the security, in which the
investor pays 20 cents on the dollar for a zero coupon 15-year
bond, is of dubious value unless the Westpac perpetual assumes
a market value near par 15 years from now, traders said.
    The zero-coupon portion could provide value for an account
which for tax purposes, wants to take a large capital loss, the
traders said. In the 15-year period between the time the note
is purchased and the time it is redeemed, no interest is paid.
    When repayment finally occurs, it is not in cash like an
ordinary zero-coupon bond. Instead, the investor receives one
of the Westpac perpetual floaters.
 REUTER
