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:

• a day on which banks are open for general banking business in Sydney and Melbourne; and
• a day which is a business day for the ASX

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:

• APRA approves of the Optional Redemption and considers that the capital position of the Bank will not be adversely affected by it; and
• specific conditions regarding the Bank’s share price and listing of Ordinary Shares are satisfied

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:

• APRA approves the Mandatory Conversion and considers that the capital position of the Bank will not be adversely affected by it; and
• specific conditions regarding the Bank’s share price and listing of Ordinary Shares are satisfied.

Convert or Conversion

conversion of a Hybrid into Ordinary Shares

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:

• the Bank ceases to be listed or its Ordinary Shares cease to be quoted on the ASX
• trading of Ordinary Shares on the ASX is suspended for a period of at least five Business Days
• any other event subsists which would prevent the Bank from Converting a Hybrid

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:

• without a Conversion or Write-Off of Hybrids, the Bank would become non-viable, or
• without a public sector injection of capital (or equivalent support), the Bank would become non-viable

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:

• the payment would cause the Bank to cease to be compliant with its prudential capital requirements or any limits on distributions under APRA’s capital conservation requirements;
• APRA objects to the Bank making the payment;
• making the payment would result in the Bank becoming (or being likely to become) insolvent; or
• the Bank is prohibited by law from making the payment

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