Glossary

APRA

The Australian Prudential Regulation Authority as the regulator for Australian banks.

ASX

The Australian Securities Exchange on which Australian bank Hybrids are typically listed.

Common Equity Capital

The bank’s ordinary shares, certain reserves and retained earnings (also referred to as common equity Tier 1 capital).

Common Equity Capital Ratio

The ratio is a measure of a bank’s financial strength. It measures the relative amount of common equity capital that it holds. Each Australian bank is required by APRA to hold an amount of common equity capital in excess of a minimum ratio.

Common Equity Capital Trigger Event

The bank is in financial difficulty and its common equity capital ratio significantly declines to or below 5.125%.

Face Value

The issue price of the investment, which may be reduced by any conversion or write-off.

Higher Ranking

The investment is one which will be repaid out of a bank’s available assets in a winding-up of the bank before a lower ranking one.

Loss Absorbing/loss Absorption

The Hybrid is required to convert into ordinary shares of the bank or be written-off if the bank is in financial difficulties. This means that investors in Hybrids are at the risk of suffering loss if the bank is in financial difficulties.

Lower Ranking

The investment may not be repaid in a winding-up of the bank, as there may be insufficient assets remaining after higher ranking investments have been repaid. It is also said to be “subordinated”.

Mandatory Conversion

Where the Hybrid is required to convert into ordinary shares in the bank or its listed holding company on a scheduled date, subject to various conditions.

Maturity Date

The date on which an investment is scheduled to be repaid.

Non-cumulative

If a distribution is not paid, it is not payable at a later date by the bank and the investor is not entitled to compensation in respect of the non-payment.

Non-viability Trigger Event

The bank is in financial difficulty and APRA determines that the bank is non-viable.

Perpetual

The investment does not have a maturity date and could remain outstanding indefinitely.

Subordinated

The investment may not be repaid in a winding-up of the bank, as there may be insufficient assets remaining after higher ranking investments have been repaid.

Trigger Event

The bank is in financial difficulties and either APRA determines that it is non-viable (referred to as a non-viability trigger event) or its common equity capital ratio declines to or below 5.125% (referred to as a common equity capital trigger event).

VWAP

The average price of ordinary shares of the bank on a specified number of days on which the shares are traded prior to conversion.

Written-off / Write-off

The bank’s obligations under the Hybrid will be terminated. Investors will lose all of their investment and not receive any compensation or distributions.

Next Section: Example: How many ordinary shares will I receive on conversion following a trigger event?