Innovative Tier 1 capitalInnovative Tier 1 capital

Innovative Tier 1 capital

5. To qualify as Innovative Tier 1 capital at Level 1 and Level 2, in addition to the criteria in paragraph 1 of this Attachment, an instrument must also satisfy the following criteria:

(a) where the instrument provides for a “step-up” in dividends or interest, the terms of the step-up are limited, fixed at the time of issue and subject to APRA’s prior written approval:

(i) a step-up in dividends or interest includes the following events:

(A) a change in margin on a floating rate instrument;

(B) a change in rate on a fixed rate instrument;

(C) a conversion from fixed to floating rate (or vice versa), with a change in the effective margin included in the rate of dividend or interest of the instrument; or

(D) a switch in the index basis (e.g. from a 3-month to 6-month floating rate or from a 3-month LIBOR to a 3-month BBSW) with a change in the effective margin included in the rate of dividend or interest of the instrument;

(ii) a moderate step-up in the rate of dividends or interest is permitted, provided the increase in dividends or interest is no greater than either:

(A) 100 basis points, less the swap spread between the initial index basis and the stepped-up index basis; or

(B) 50 per cent of the initial credit spread, less the swap spread between the initial index basis and the stepped-up index basis;

(iii) the issue documentation specifies which of the two measures in paragraph 5(a)(ii) of this Attachment is to apply to the instrument. Switching between measures is not allowed;

(iv) where the step-up involves a conversion from fixed to floating rate (or vice versa), as set out in paragraph 5(a)(i) of this Attachment, or a switch in index basis, the swap spread must be fixed as at the pricing date and reflect the differential in pricing on that date between the initial reference rate and the stepped-up reference rate;

(v) any step-up in dividends or interest must not be operative within the first 10 years from drawdown; and

(vi) in principle, only one step-up in dividends or interest is permitted over the life of the instrument. Exceptions for step-ups to be undertaken on multiple occasions (and/or for variable amounts) may be approved by APRA in writing at the time of issuing the instrument;

(b) a step-up in dividends or interest or an equity conversion is permitted in conjunction with an issuer call option, provided the step-up or equity conversion meets all relevant criteria in paragraphs 5(a) and 5(c) of this Attachment respectively and, where the application of a step-up or equity conversion is optional, the issue cannot mandate the exercise of the call option if the step-up or equity conversion is not applied;

(c) where the instrument provides for a mandatory conversion or an option to the holders or the issuer to convert into another form of eligible Tier 1 capital instrument, the instrument must not contain any conversion feature that effectively provides for a return of capital or compensation for unpaid dividends or interest. The rate of conversion in all circumstances must be fixed (e.g. by way of a formulae) at the time of issue; and

(d) where the instrument is issued indirectly through an SPV, it satisfies the criteria set out in Attachment C.