Non-viability trigger event
Tier 1 and Tier 2 Bank Hybrids
In order to be treated as regulatory capital by
The Australian Prudential Regulation Authority.
the terms of Tier 1 Bank Hybrids and Tier 2 Bank Hybrids must contain a non-viability trigger event.
A non-viability trigger event occurs when APRA notifies a bank in writing that it believes:
conversion to ordinary shares of some or all of its Bank Hybrids or
a public sector injection of capital or equivalent support
is necessary to prevent the bank becoming non-viable. Whether a non-viability trigger event will occur is at the discretion of APRA.
If a non-viability trigger event occurs, the bank may be required to convert some or all of its Tier 1 Bank Hybrids or Tier 2 Bank Hybrids into ordinary shares. Conversion of Bank Hybrids following a
non-viability trigger event is not subject to
Conversion of some Bank Hybrids may be subject to conversion conditions set out in the prospectus for the particular Bank Hybrid. See Case Study 3, including a worked solution, for further detail.
being satisfied. If Bank Hybrids are converted into ordinary shares, investors will receive a variable number of ordinary shares, limited to a
maximum conversion number
The maximum conversion number is a limit or cap on the number of ordinary shares of the bank that may be issued on conversion. For a scheduled or mandatory conversion, the maximum conversion number reflects 50% of the bank's ordinary share price at the time of issue of the Bank Hybrid. For conversion following a non-viability trigger event or a capital trigger event, the maximum conversion number reflects 20% of the bank's ordinary share price at the time of issue of the Bank Hybrid.
Depending on the price of the ordinary shares at the relevant time, investors may suffer loss as the value of the ordinary shares received by an investor is likely to be significantly less than $101.01 for each Bank Hybrid (based on a
The face value is typically the issue price, which will be reduced by any partial conversion or write-off.
of $100 per Bank Hybrid and taking into account a 1% discount to the relevant VWAP). This is because the maximum conversion number is based on the bank's ordinary share price at the time of issue of the Bank Hybrid (and the bank’s ordinary share price may have dropped considerably due to the bank’s financial difficulty). If for any reason conversion does not occur and ordinary shares are not issued for any reason within a specified period, 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 / interest.
APRA has not provided guidance on when it will consider an entity to be non-viable and there are currently no Australian precedents for determining non-viability. However, it is likely that APRA may consider a bank to be non-viable when a bank is:
suffering from significant financial stress;
unable to raise money in the public or private market.
Tier 1 Bank Hybrids are generally required to be converted into ordinary shares (or
If Bank Hybrids are written-off, investors will lose all of the value of their investment and they will not receive any compensation or unpaid distributions or interest.
in certain circumstances) before Tier 2 Bank Hybrids are converted into ordinary shares (or written-off).