What is a Tier 2 Note investor likely to receive if a Tier 2 Note is Converted due to a Non-Viability Trigger Event?
If a Tier 2 Note is Converted following a Non-Viability Trigger Event, the Tier 2 Note investor will receive Ordinary Shares in exchange for their Tier 2 Note. The number of Ordinary Shares that a Tier 2 Note investor receives on Conversion following a Non-Viability Trigger Event is determined by a formula which is based on the VWAP during a period leading up to the Non-Viability Trigger Event and is capped at the Maximum Conversion Number. Details of the formula will be set out in the Prospectus.
The Maximum Conversion Number will apply if the VWAP at the time of the Conversion has fallen to or below 20% of the Issue Date VWAP. If the Maximum Conversion Number applies, this is likely to result in Tier 2 Note investors receiving significantly less than $101 worth of Ordinary Shares per Tier 2 Note (assuming a Face Value of $100).
The VWAP at the time of a Non-Viability Trigger Event is likely to be substantially lower than the VWAP at the time when the Tier 2 Note was issued. This means that the Maximum Conversion Number may well apply and Tier 2 Note investors may lose all or a significant amount of their investment. In addition, there may be no market for Ordinary Shares received on Conversion.
If a Tier 2 Note is Converted, the Tier 2 Note investor will cease to have any further rights as a Tier 2 Note investor. Instead, they will become a holder of Ordinary Shares in the Bank and have the rights (and bear the risks) associated with that investment.
Example - number of Ordinary Shares that a Tier 2 Note investor would receive on Conversion following a Loss Absorption Event (Non-Viability Trigger Event)
Face Value: $100
Issue Date VWAP: $25
Current VWAP: $1
The number of Ordinary Shares issued on Conversion following the Loss Absorption Event is calculated as the lesser of: the Maximum Conversion Number (1) and the number given by the Conversion formula in the Prospectus (2).
(1) Maximum Conversion Number:
Face Value/(Issue date VWAP x 20%)
= 100/($25 x 20%)
= 20 Ordinary Shares per Hybrid.
(2) Conversion formula:
Face Value / 99% x Current VWAP.
= $100/ (0.99% x $1)
= 101 Ordinary Shares per Hybrid.
In this example, the Maximum Conversion Number is less than the number given by the Conversion formula, so the Maximum Conversion Number would apply and Hybrid investors would receive 20 Ordinary Shares per Hybrid. A Hybrid investor with 100 Hybrids would be allocated 100 x 20 = 2,000 Ordinary Shares.
At an Ordinary Share price of $1, the total market value of those Ordinary Shares would be 2,000 x $1.00 = $2,000, compared to the original $10,000 investment on the Issue Date. Assuming the Ordinary Shares are able to be sold at $1 (which may not be possible), the Hybrid investor would incur an $8,000 loss (excluding any brokerage costs).
What is a Tier 2 Note investor likely to receive if a Tier 2 Note is Written-Off?
If Conversion following a Non-Viability Trigger Event does not happen within 5 days, the Tier 2 Note will be Written-Off.
If a Tier 2 Note is Written-Off, all of the Hybrid investor’s rights in relation to their investment are terminated. The Tier 2 Note investor will lose their entire investment and will have no further rights in respect of their Tier 2 Note.
Example – Write-Off
If a Hybrid investor’s 100 Tier 2 Notes issued to that investor on the Issue Date at $100 per Hybrid are Written-Off, their entire investment in the Tier 2 Note will be terminated and the Hybrid investor will incur a 100 x $100 = $10,000 loss.