Bank Hybrids contain terms that enable them to be Converted into ordinary shares, or Written-Off completely in certain circumstances, for example, if the bank is no longer viable (including where the bank suffers significant losses), see Ranking and Conversion or Write-Off. There are a number of measures that may be used to assess the strength of a bank and the risk that a bank may become non-viable. Investors should seek to understand these measures and the level of risk they present.
- Bank Hybrids pay regular distributions that are subject to Distribution Payment Conditions. They typically have Franking Credits attached.
- The cash distribution rate on Bank Hybrids, assuming they are fully franked, is typically a floating rate determined as the sum of BBSW plus a Margin, together multiplied by (1 - tax rate).
- For an explanation of how distributions on Bank Hybrids are calculated, see Case Study 1.
- The ability of an investor to use Franking Credits, either as an offset to a tax liability or by claiming a tax refund, will depend on the investor’s individual tax position.
- Distributions may not always be paid as they are at the bank’s absolute discretion and are subject to the Distribution Payment Conditions which include, for example, that the payment of the distribution will not result in either a breach of APRA’s regulatory capital requirements or the bank becoming insolvent.
- If a distribution is not paid, the missed payment will not be made up. This is referred to as being Non-Cumulative. However, to provide some protection to investors, if a distribution is not paid, the bank will be restricted from paying dividends on its ordinary shares or from buying-back its ordinary shares for a specified period. These restrictions are sometimes referred to as "dividend stoppers" or "capital stoppers" respectively.
- If a bank’s capital falls below certain levels, a Capital Trigger Event may occur or where APRA may have concerns about a bank’s capital, funding and liquidity levels or any other matter affecting a bank’s viability, a Non-Viability Trigger Event may occur. In these circumstances, a bank may be required to convert some or all of its Bank Hybrids into ordinary shares.
- Conversion of Bank Hybrids following a Capital Trigger Event or a Non-Viability Trigger Event is not subject to Conversion Conditions being satisfied. If the Bank Hybrids are converted into ordinary shares, the value of ordinary shares an investor receives may be significantly less than the Face Value of their Bank Hybrid. This is because the number of ordinary shares an investor will receive in these circumstances is limited by a Maximum Conversion Number, see Case Study 2.
- If for any reason conversion does not occur following a Capital Trigger Event or a Non-Viability Trigger Event and if the ordinary shares are not issued within 5 business days, all rights in relation to the Bank Hybrids will be terminated and investors will lose all of the value of their investment and they will not receive any compensation or unpaid distributions.
Bank Hybrids are Perpetual but typically have a set date, called the Scheduled or Mandatory Conversion Date, on which they are scheduled to convert into ordinary shares. Whether conversion occurs depends on the Conversion Conditions being satisfied, see Case Study 3 for an example. If the Conversion Conditions are not met on the Scheduled or Mandatory Conversion Date, then conversion will not occur until the next distribution payment date on which the Conversion Conditions are met.
The Conversion Conditions operate to ensure that if the value of ordinary shares an investor would receive on conversion of each Bank Hybrid would not be less than $101.011 (being broadly equal to the Face Value each Bank Hybrid) This protects the investor from suffering loss on conversion.
There is a risk that the Conversion Conditions are never satisfied and Scheduled or Mandatory Conversion never occurs. In this case, investors will continue to hold the Bank Hybrid indefinitely.
1 Based on the Initial Face Value of $100 per Bank Hybrid and the VWAP of bank ordinary shares during the relevant VWAP period before the conversion date, with the benefit of a 1% discount.
Things you should know
This Guide only looks at some of these features and risks. It does not provide investment advice and cannot address your individual circumstances, objectives or needs. Prior to investing in Hybrids you should ensure that you understand the features and risks. You should read the relevant prospectus carefully, paying attention to the investment risks and information about the issuer, including financial information. If you need further information, you should seek professional advice from your stockbroker, solicitor, accountant or other independent and qualified professional adviser.