Glossary
Additional Tier 1 Capital |
securities forming part of a Bank’s capital which contain Loss Absorption and other features which satisfy requirements prescribed by APRA to classify as Additional Tier 1 Capital. “Capital notes” and “convertible preference shares” are examples of Additional Tier 1 Capital. These instruments are referred to in this guide as Tier 1 Hybrids |
APRA |
the Australian Prudential Regulation Authority |
ASX |
ASX Limited (ABN 98 008 624 691) or the securities market operated by it (as applicable) |
Bank |
an Australian authorised deposit-taking institution, regulated by APRA, which issues a Hybrid |
Business Day |
will be defined in the Prospectus, typically a day which is both:
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Common Equity Tier 1 Capital |
components of capital of a Bank that satisfy requirements prescribed by APRA to classify as Common Equity Tier 1 Capital. Ordinary Shares and retained earnings are examples of Common Equity Tier 1 Capital |
Common Equity Trigger Event |
APRA or the Bank determines that the Common Equity Tier 1 Capital ratio applicable to the Bank is equal to or below 5.125% |
Conditions to Optional Conversion |
in summary, Optional Conversion will only be permitted if:
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Conditions to Optional Redemption |
in summary, APRA approves the Optional Redemption and considers that the capital position of the Bank will not be adversely affected by it |
Conditions to Scheduled Mandatory Conversion |
in summary, Mandatory Conversion will only be permitted if:
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Convert or Conversion |
conversion of a Hybrid into Ordinary Shares
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Conversion on Acquisition of the Bank |
Tier 1 Hybrids typically include a feature which requires Conversion to occur if the Bank is acquired by a third party. Conversion on an acquisition of the Bank is subject to conditions which are broadly similar to the Conditions to Optional Conversion. If those conditions are not satisfied, Mandatory Conversion will not occur. |
Delisting Event |
in summary, any of the following occurs:
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Distribution Period |
the period from one distribution payment date to the next (for example, three months) |
Distribution Rate |
the rate applicable to distributions on a Tier 1 Hybrid, which is given by the following formula (assuming distributions are fully franked): Distribution Rate = (Market Rate + Margin) x (1 – Tax Rate) |
Face Value |
the price at which a Hybrid is issued (typically $100) |
Financial Claims Scheme |
an Australian government scheme for the protection of depositors from potential loss due to failure of an authorised deposit taking institution, subject to certain limits |
Franking Credits |
a credit which may be available to be passed on to investors reflecting income tax paid by the Bank. Franking Credits may, depending on the investors’ individual circumstances, be used to decrease the income tax payable by the investor or potentially be received by the investor as a tax refund |
Hybrid |
Tier 1 Hybrids and Tier 2 Notes |
Interest Period |
the period from one interest payment date to the next (for example, three months) |
Interest Rate |
the rate applicable to interest on a Tier 2 Note, which is given by the following formula: Interest Rate = Market Rate + Margin |
Issue Date |
the date when a Hybrid was first issued |
Issue Date VWAP |
the VWAP during a period (usually 20 Business Days) immediately preceding the Issue Date |
Loss Absorption |
A feature of Hybrids which means that losses suffered by a Bank may be passed on to or “absorbed by” Hybrid investors |
Loss Absorption Event |
a Common Equity Trigger Event or a Non-Viability Trigger Event |
Mandatory Conversion |
the mandatory Conversion of a Tier 1 Hybrid on the Scheduled Mandatory Conversion Date |
Margin |
a fixed value above the Market Rate used to calculate distributions and interest (as appropriate) payable on a Hybrid. The Margin is set at the time of the initial offer in light of market conditions at the time. The Margin does not change during the life of a Hybrid and will be specified in the Prospectus |
Market Rate |
a benchmark interest rate for the Australian money market (such as BBSW), which varies over time. It is used as a reference for the pricing, rate-setting and valuation of Australian dollar denominated financial securities and is typically specified for a period such as 90 or 180 days |
Maximum Conversion Number |
the maximum number of Ordinary Shares into which a Hybrid may be Converted. This number is given by a formula specified in the Prospectus and is intended to provide a “cap” on the number of Ordinary Shares issued on Conversion following a Loss Absorption Event |
NAB |
National Australia Bank Limited (ABN 12 004 044 937) |
Non-Viability Trigger Event |
in summary, APRA determines that:
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Optional Conversion |
the Conversion of a Hybrid at the option of the Bank |
Optional Conversion Date |
a date specified in the Prospectus on which Optional Conversion may occur, if the Conditions to Optional Conversion are satisfied. There may be more than one Optional Conversion Date |
Optional Redemption |
the redemption of a Hybrid at the option of the Bank |
Optional Redemption Date |
a date specified in the Prospectus on which Optional Redemption may occur, if the applicable conditions are satisfied. There may be more than one Optional Redemption Date |
Optional Resale |
investors being bound to resell Hybrids to one or more nominated third parties at the option of the Bank (subject to APRA approval), and receiving the Face Value in cash |
Optional Resale Date |
a date specified in the Prospectus on which Optional Resale may occur, if the applicable conditions are satisfied. There may be more than one Optional Resale Date |
Ordinary Shares |
fully paid ordinary shares in the capital of the Bank |
Payment Restrictions |
broadly a Payment Restriction will exist if any of the following conditions exists:
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Perpetual |
means that there is no fixed date on which an investment must be repaid. Perpetual Hybrids could remain on issue indefinitely if they are not Converted, redeemed or resold, in which case Hybrid investors may not receive their investment back |
Prospectus |
an offering document which provides information to potential investors such as the key features and risks of a security (such as a Hybrid) and information about the issuer of the security (such as a Bank) |
Regulatory Event |
in summary, an unexpected change in regulation that has an impact on the regulatory treatment of the Hybrid from the perspective of the Bank |
Scheduled Mandatory Conversion Date |
a date specified in the Prospectus on which Mandatory Conversion may occur, if the Conditions to Scheduled Mandatory Conversion are satisfied |
Solvency Condition |
a condition of payment for Tier 2 Notes, as defined in the Prospectus. Broadly, the condition is linked to the Bank remaining solvent following the payment. |
Tax Event |
in summary, an unexpected change in tax law or policy that has an impact on the tax treatment of the Hybrid from the perspective of the Bank |
Tax Rate |
the Australian corporate tax rate applicable to the franking account of the Bank on the relevant distribution payment date |
Tier 1 Capital |
Common Equity Tier 1 Capital and Additional Tier 1 Capital |
Tier 1 Hybrid |
a Hybrid, often called a “capital note” or a “convertible preference share”, that qualifies as Additional Tier 1 Capital |
Tier 2 Capital |
securities forming part of a Bank’s capital which contain Loss Absorption and other features which satisfy requirements prescribed by APRA to classify as Tier 2 Capital. “Subordinated notes” are an example of Tier 2 Capital. These instruments are referred to in this guide as Tier 2 Notes |
Tier 2 Note |
a Hybrid, often called a “subordinated note”, that qualifies as Tier 2 Capital |
VWAP |
the average of the daily volume weighted average sale prices of Ordinary Shares sold on the ASX during a specified period |
Write-Off |
the immediate and permanent termination of all of a Hybrid investor’s rights in respect of that Hybrid. Investors in Tier 1 Hybrids in the form of convertible preference shares may retain some limited rights in these circumstances |