AMP may not pay up for AMP Capital Notes AMPPA

AMP (ASX:AMP) has the opportunity to squeeze some blood from a stone, by not paying the face value of the AMP Capital Notes (ASX:AMPPA), if it dares to do so. The reason I use “dare” is that the conditions attached to the Capital Notes, if I understand their prospectus, will allow AMP to say that investors were warned that they mightn’t get all their money back.

Capital Notes were issued at a face value of $100 and pay regular interest (although there are all sorts of discretionary and compulsory clauses about if and when they are paid). And most expect them to pay interest up until AMP is finished with them.

AMP can choose to repay holders of AMPPA the $100.00 face value if it decides to call in the AMPPA on 22nd December 2021.

AMP can choose to leave the AMPPA in circulation until 23rd December 2023, when it has the option of handing over shares to the holders, and at a 1% discount. Except that there is a trigger put in place to prevent the issue of too many shares, called a Maximum Conversion Number. According to my arithmetic, if the AMP share price is $1.168 or above, you get $101.01 worth of shares, but if it’s below $1.156 this you get a fixed 86.5052 AMP shares. So if AMP was trading at $1.00, then instead of getting the $100 face value, you might end up with $86.50 worth of shares.

AMP last traded at $1.28, and AMPPA last traded at $99.60. How much would you prepared to bet that AMP will be above $1.156 in three years time? One upside is receiving a 5.1% margin above Bank Bill Swap Rate, the downside is that your capital is not protected, so don’t go comparing this with any standard bank deposits.

Of course, AMP is a financial institution which probably needs a good reputation, and if it chooses not to repay the face value, it may suffer some damage to its reputation. Most analysts operate on the assumption that such instruments are called back at the first “optional” date and not at the “mandatory” date.

I operate on the assumption that such choices by financial institutions may be to their benefit, but will probably be to my detriment.

In any case, if rumours are true, AMP (ASX:AMP) has let someone into their data room to have a look at buying the business, which means a whole set of other clauses relating to a change of control come into play. And if you are looking at this, you need to understand this type of instrument, understand the prospectus, be familiar with AMP’s situation, and be more certain about your arithmetic than I am.