Non-Viability Trigger Event
Conversion of a Bank Hybrid following a Non-Viability Trigger Event
- John invests $10,000 in Bank Hybrids (100 Bank Hybrids at a Face Value of $100 per Bank Hybrid).
- The bank experiences severe financial difficulty and APRA determines that a Non-Viability Trigger Event has occurred.
- Following the Non-Viability Trigger Event, John’s entire investment is converted into ordinary shares.
- On conversion, the number of ordinary shares John will receive will be the lower of:
- the conversion number (see Formula A below); and
- the Maximum Conversion Number (see Formula B below).
Formula A – calculation of conversion number
For example, if
Face Value = $100
VWAP = $2 (calculated as the VWAP during the 5 business days prior to conversion, not including the date of conversion)
Conversion discount = 1% (reflected as 0.99 in the formula below)
|Conversion number per Bank Hybrid|
0.99 × VWAP
0.99 × $2
|= 50.5051 ordinary shares|
The 1% discount on conversion is designed to compensate investors for transactions costs (i.e. brokerage costs) which may be incurred on the disposal of ordinary shares the investor receives on conversion.
Formula B – Maximum Conversion Number
The Maximum Conversion Number in this example is based upon the Issue Date VWAP which is determined at the time of issue of the Bank Hybrids. The Issue Date VWAP is then multiplied by a factor of 0.20 as required by APRA (i.e. to broadly reflect 20% of the bank’s ordinary share price at the time of issue of the Bank Hybrid).
For example, if:
Face Value = $100
Issue Date VWAP = $20
|Maximum Conversion Number per Bank Hybrid|
0.20 × Issue Date VWAP
0.20 × $20
|= 25 ordinary shares|
|Conversion number per Bank Hybrid||50.5051 ordinary shares|
|Maximum Conversion Number per Bank Hybrid||25 ordinary shares|
On conversion John will receive the lower of the conversion number and the Maximum Conversion Number of ordinary shares. As the share price has fallen significantly from the issue date of the Bank Hybrid, the Maximum Conversion Number of ordinary shares will apply and John will receive 25 ordinary shares for each Bank Hybrid.
- For 100 Bank Hybrids, John receives 2,500 ordinary shares (100 × 25 ordinary shares). If the market price of ordinary shares at the time of conversion is $2 per ordinary share, the value of John’s investment will be approximately $5,000 (2,500 ordinary shares at $2 per ordinary share).
- If John sells his ordinary shares when he receives them he will realise a loss of $5,000 on his initial investment of $10,000.
It is not possible to predict the price of a bank’s ordinary shares or whether a market would exist for the bank’s ordinary shares following a Non-Viability Trigger Event.