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Guidance Note AGN 111.3

Criteria for Capital Issues Involving Use of Special Purpose Vehicles (SPVs)

1. Capital instruments issued through SPVs must satisfy the following:

(a) the SPV issuing the instrument is a single purpose non-operating entity established for the sole purpose of raising capital for the ADI or for a consolidated subsidiary of the ADI. The SPV should have no liabilities outside the capital instrument it issues, and its assets should not exceed materially the amount of the capital instrument issued. The SPV must not be able to operate independently of the ADI or its relevant subsidiary;

(b) the proceeds of the instrument issued by the SPV are fully invested in the capital instrument issued by the ADI or its relevant subsidiary. The proceeds must flow immediately into the ADI or its relevant subsidiary;

(c) the terms and conditions of the instrument issued by the ADI or its relevant subsidiary mirror substantially those included in the instrument issued by the SPV. Essentially, both instruments must be unsecured, fully paid-up (any partly paid issue is eligible only to the extent that it has been paid-up) and subordinated to all depositors and other creditors of the ADI or its relevant subsidiary. They must have the same maturity;

(d) to satisfy the essential characteristic of loss absorption for Tier 1 and Upper Tier 2 capital instruments and to activate this loss absorption ability well before any serious deterioration in the ADI’s financial position, the instrument issued by the SPV must permit the absorption of losses in the event of any of the following:

(i) APRA determines in writing that the ADI has a Tier 1 capital ratio of less than five per cent or a total Tier 1 and Tier 2 capital ratio of less than eight per cent at Level 1 and/or Level 2;

(ii) APRA issues a written directive to the ADI under section 11CA of the Banking Act 1959 (Banking Act) for the ADI to increase its capital;

(iii) APRA appoints a statutory manager to the ADI pursuant to sub-section 13A(1) of the Banking Act or proceedings are commenced for the winding-up of the ADI; or

(iv) retained earnings have become negative;

(e) unless otherwise agreed with APRA, the mechanism used to satisfy the loss absorption requirement in subparagraph (d) is mandatory conversion into ordinary shares or non-cumulative irredeemable preference shares of the ADI or its relevant subsidiary as appropriate. The rate of conversion must be fixed (e.g. by way of a formulae) at the time of subscription to the instrument. The ADI or its relevant subsidiary should maintain a sufficient margin of authorised but unissued share capital to enable such conversion to take place at any time;