Part Attachment C — Criteria for inclusion in - Health Insurance (prudential standard) determination No. 3 of 2024 - Attachment C — Criteria for inclusion in Additional Tier 1 Capital | Zoe
Attachment C – Criteria for inclusion in Additional Tier 1 Capital
To be classified as Additional Tier 1 Capital, an instrument must satisfy all the criteria in this Attachment.
The instrument must be paid-up and the amount must be, irrevocably received by the issuer.
The instrument represents, prior to any conversion to Common Equity Tier 1 Capital (refer to Attachment E), the most subordinated claim in liquidation of the issuer after Common Equity Tier 1 Capital instruments.
The paid-up amount of the instrument, or any future payments related to the instrument, is neither secured nor covered by a guarantee of the issuer or related entity, or other arrangement that legally or economically enhances the seniority of the holder’s claim. The instrument may not be secured or otherwise subject to netting or offset claims on behalf of the holder or the issuer of the instrument.
The principal amount of the instrument is perpetual (i.e. it has no maturity date).[21]
The instrument contains no step-ups or other incentives to redeem. The issuer and any other member of a group to which the issuer belongs must not create an expectation at issuance that the instrument will be bought back, redeemed or cancelled. The contractual terms of the instrument must not provide any feature that might give rise to such an expectation.[22]
The instrument may only be callable at the initiative of the issuer and only after a minimum of five years from the date on which the issuer irrevocably receives the proceeds of payment for the instrument. The issuer:
must receive prior written approval from APRA to exercise a call option;
must not do anything that creates an expectation that a call will be exercised; and
must not exercise a call unless:
the issuer, prior to or concurrent with the exercise of the call, replaces the instrument with a capital instrument of the same or better quality, and the replacement of the instrument is done under conditions that are sustainable for the income capacity of the issuer; or
the private health insurer meets the requirements relating to reductions in capital in HPS 110.
The instrument may provide for multiple call dates after five years. However, the specification of multiple call dates must not act to create an expectation that the instrument will be redeemed upon any call date.
An issuer must:
have full discretion at all times to cancel distributions/payments on the instrument.[23] Any waived distributions are non-cumulative (i.e. are not required to be made up by the issuer at a later date, or are otherwise not made up by the issuer). The instrument must not provide for payment of a higher dividend or interest rate if dividend or interest payments are not made on time, or a reduced dividend or interest rate if such payments are made on time;
ensure that cancellation of discretionary distributions/payments is not an event of default. Holders of the instruments must have no right to apply for the winding-up or administration of the issuer, or cause a receiver, or receiver and manager, to be appointed in respect of the issuer on the grounds that the issuer fails to make, or is or may become unable to make, a distribution on the instruments;
have full access to cancelled distributions/payments to meet obligations as they fall due; and
ensure that cancellation of distributions/payments do not impose restrictions on the issuer, or any other member of the group to which the issuer belongs, except in relation to distributions/payments or redemptions/buybacks on Common Equity Tier 1 Capital instruments.
Distributions on the instrument are paid out of distributable items of the issuer, and the instrument must not provide for payments to investors other than in the form of a cash payment. The level of distributions must not be tied or linked to the credit standing of the issuer.
The instrument cannot have a credit sensitive distribution/payment feature (i.e. a distribution/payment that is reset based in whole or part on the credit standing of the issuer or the group or any other member of the group to which it belongs). An instrument may utilise a broad index as a reference rate for distribution or payments calculation purposes. Where an issuer is a reference entity in the determination of the reference rate, the reference rate must not exhibit any significant correlation with the issuer’s credit standing. APRA may require a private health insurer to exclude an instrument from Additional Tier 1 Capital where it considers that the reference rate is sensitive to the credit standing of the issuer.
The instrument cannot contribute to liabilities exceeding assets if such a balance sheet test forms part of any national insolvency law applying in the jurisdiction of issue. The issue documentation must specify that the insolvency law that applies is the law of the place of incorporation of the issuer.[24]
The paid-up amount of the instrument is classified as equity under relevant accounting standards.
The instrument is directly issued by the issuer, and, except where otherwise permitted in this Prudential Standard, the issuer, any other member of a group to which the issuer belongs, or any related entity[25] cannot have purchased or directly or indirectly[26] funded the purchase of the instrument.
Where the terms of the instrument provide the ability (even in contingent circumstances) to substitute the issuer of the Additional Tier 1 Capital instruments, or the issuer of the ordinary shares into which they convert (i.e. to replace the private health insurer with another party), the relevant documentation must set out the mechanism to ensure that there will be a capital injection into the private health insurer to replace the transferred capital instrument. The capital injection must occur at least simultaneously with the substitution and must be unconditional. The capital injection must be of equal or better quality capital and at least the same amount as the original issue, unless otherwise approved by APRA.
The rate of dividend or interest on the instrument, or the formulae for calculating dividend or interest payments, must be predetermined and set out in the issue documentation.
The instrument includes provisions which comply with loss absorption requirements at the point of non-viability as required by Attachment E to this Prudential Standard.
The instrument is clearly and separately disclosed in the issuer’s financial statements and in any consolidated financial statements.
The instrument must not include the following clauses:
a cross-default clause linking the issuer’s obligations under any debt instrument or other capital instrument to default by the issuer, or default by another party (related or otherwise), under the instrument itself; or
an event of default clause specifying an event relating to any debt instrument or other capital instrument of the issuer, that brings the issuer into default under the instrument itself.
For the purposes of paragraph 19(b) an event of default clause includes a clause specifying any of the following events:
the exercise or non-exercise of discretions within the debt instrument or other capital instrument;
the adverse event or change, however so described or determined, occurring in respect of the debt instrument or other capital instrument; or
any consequence arising from, or any action taken or intended to prevent,[27] the above events or default by the issuer under the debt instrument or other capital instrument,
but does not include a clause specifying the irrevocable winding-up (that is, either by way of an effective resolution by shareholders or members for winding-up, or a court order has been made and the time for the appeal of the decision has passed) of the issuer.
The issue documentation must clearly and prominently state:
the instrument is perpetual;
the instrument is unsecured;
the subordinated nature of the instrument and that neither the issuer nor the holder of the instrument is allowed to exercise of any contractual rights of set-off;
the instrument is not subject to netting;
the issuer cannot buy back, repurchase or redeem the instrument other than in terms permitted under this Prudential Standard;
if relevant, the application of requirements for loss absorption at the point of non-viability under Attachment E to this Prudential Standard; and
that the issuer has full discretion over the timing and amount of any distributions paid on the instrument, including not paying a distribution.
For the purposes of paragraph 9 of this Attachment, failure to make a distribution or payment must not trigger any restrictions[28] on the issuer other than its ability to pay a distribution on Common Equity Tier 1 Capital instruments[29] or to redeem such instruments. Such ‘stopper’ provisions must not:
impede the full discretion of the issuer at all times to cancel distributions/payments on the instrument or act in a way that could hinder the recapitalisation of the issuer;
prevent payment on another instrument where such payment was not fully discretionary;
prevent distribution to holders of Common Equity Tier 1 Capital instruments for a period that extends beyond the point in time the distributions/payments on the Additional Tier 1 Capital instruments are resumed;
impede the normal operation of the issuer or any restructuring activity (including acquisitions or disposals); or
hinder any recapitalisation of the issuer.
A ‘stopper’ provision may, however, act to prohibit actions that are equivalent to payment of dividend or interest, such as a private health insurer undertaking discretionary buybacks of ordinary shares.
An instrument must not include any provision that permits an additional distribution or payment to be made. Any structuring of a distribution or payment as a bonus payment, or any arrangement to compensate for unpaid distributions or payments is also prohibited. An instrument cannot provide for investors to convert an instrument into ordinary shares or mutual equity instruments upon non-payment of a distribution.
For the purposes of paragraph 6 of this Attachment, an incentive or expectation to call or otherwise redeem an Additional Tier 1 Capital instrument includes, but is not limited to:
a call option combined with a requirement, or an investor option, to convert the instrument into ordinary shares if the call is not exercised;
a call option combined with a change in reference rate where the credit spread over the second reference rate is greater than the initial payment rate less the swap rate (i.e. the fixed rate paid to the call date to receive the second reference rate);
a call option combined with an increase in redemption amount in the future;
automatic redemption or an option to redeem following a change of control event;
mandatory conversion within the first five years of issue, except conversions arising from change of control, regulatory or tax events;
any arrangement whereby an investor will become subject to: (i) known tax or charges, or to (ii) known higher tax or charges than they would have had to pay before, following a call date and the issuer is required to compensate an investor for any payment of additional tax or charges (refer to paragraph 27 of this Attachment); or
an application of maximum or minimum rates on distributions.
A call option and a provision to convert into ordinary shares will not constitute an incentive to redeem provided there is at least two years from the date upon which the private health insurer may have an option to call the instrument to the nearest subsequent date upon which that conversion option may be exercised.
Calling an instrument and replacing it with an instrument with a higher credit spread or that is otherwise more expensive is deemed to create the expectation that the issuer will exercise a call option on other outstanding Additional Tier 1 Capital instruments or Tier 2 Capital instruments with call options, unless the issuer can satisfy APRA as to the economic and prudential rationale and that such an action will not create an expectation that other instruments will be called in similar circumstances.
An instrument must provide for the immediate, automatic and permanent revocation of a call notice upon a non-viability event. A call option cannot be exercised in anticipation of a non-viability event.
An instrument may only provide for a call within the first five years of issuance as a result of a tax or regulatory event. A tax or regulatory event is confined to:
but does not include a clause specifying the irrevocable winding-up (that is, either by or an effective resolution by shareholders or members for winding-up, or a court order has been made, and the time for the appeal of the decision has passed) of the issuer.
Where issue documentation, or marketing of an instrument, or any ongoing dealings with investors in the instrument suggest the instrument has attributes not consistent with the eligibility requirements in this Attachment, the instrument will be ineligible to be included in the private health insurer’s Additional Tier 1 Capital.
The instrument may be subject to the laws of a foreign country jurisdiction, except that the terms and conditions of the instrument that relate to non-viability conversion or write-off must be subject to the laws of an Australian jurisdiction.
Where the instrument is subject to the laws of a foreign country, the private health insurer must also ensure that the instrument satisfies all relevant eligibility criteria applicable to the instrument under this Attachment are enforceable under the laws of that jurisdiction.
APRA may require the private health insurer to provide an independent expert opinion, addressed to APRA by a firm or practitioner of APRA’s choice and at the private health insurer’s expense, confirming that the instrument satisfies all applicable criteria for an Additional Tier 1 Capital instrument under this Prudential Standard.
changes in statute and regulations (and judicial and administrative actions pertaining to the application of a statute or regulations) which impact a specific capital instrument;
changes related only to the jurisdictions relevant to an instrument;
changes that have occurred, or will occur, as opposed to changes that may occur; and
changes which impact the issuer of an affected capital instrument. Changes in tax or regulation impacting the holder of a capital instrument will not constitute a tax or regulatory event for the purposes of this Attachment.
APRA may require a private health insurer not to exercise a call where it relates to a tax or regulatory event if APRA forms the view that the private health insurer was in a position to anticipate the tax or regulatory event when the instrument was issued. In order for a call to be exercised the issuer must comply with the provisions in paragraph 7 of this Attachment.
Where an Additional Tier 1 Capital instrument provides for conversion into ordinary shares,[30] the issue documentation must:
specify the number of ordinary shares to be received upon conversion, or specify the conversion formula for determining the number of ordinary shares received;
provide for the number of ordinary shares to be received under the conversion formula specified in 29(a) of this paragraph to be capable of being ascertained immediately and objectively;
set the maximum number of ordinary shares received so as not to exceed the price of the Additional Tier 1 Capital instrument at the time of its issue divided by 20 per cent of the private health insurer’s[31] ordinary share price[32] at the same time. However, this cap does not apply if the only holder of the converting capital instrument is a listed parent entity which wholly-owns the issuer of the capital instruments. In calculating the ordinary share price at time of issue, adjustments may be made for subsequent ordinary share splits, bonus issues and similar transactions. In calculating the ordinary share price at the time of issue, adjustments may only be made for transactions that change the number of shares on issue without involving an exchange of value and which have no impact on capital.[33] Adjustments must exclude transactions involving cash payments or other compensation to, or by, holders of the ordinary shares or the issuer of the capital instrument. The method of calculation of adjustments must be fixed in issue documentation and adjustments must be capable of being ascertained immediately and objectively; and
where a capital instrument is denominated in foreign currency, provide a clear method for determining: (i) the exchange rate to be used in calculating the number of ordinary shares to be issued upon conversion (e.g. the prevailing exchange rate); and (ii) the exchange rate to be used in calculating the maximum number of ordinary shares which could be issued on conversion (issue date exchange rate). Documentation must include how exchange rates would be determined, if at a time of conversion, foreign exchange markets were to be closed at the intended time of conversion.
For mutually owned private health insurers, where an Additional Tier 1 Capital instrument provides for conversion into mutual equity interests, the issue documentation must:
Specify the number of mutual equity interests to be received upon conversion, or specify the conversion formula for determining the number of mutual equity interests received;
Provide for the number of mutual equity interests to be received under the formula specified in (a) of this paragraph to be capable of being ascertained immediately and objectively; and
Set the maximum number of mutual equity interests received such that the aggregate nominal value of the interests received cannot exceed, at the date of conversion, the nominal value of the Additional Tier 1 Capital instrument converted.
Conversion must generate an unequivocal addition to Common Equity Tier 1 Capital of the private health insurer under Australian Accounting Standards.
In issuing Additional Tier 1 Capital instruments a private health insurer may, within the category of Additional Tier 1 Capital:
differentiate between instruments as to whether an instrument is required to convert or be written-off in the first instance; and
provide for a ranking under which Additional Tier 1 Capital instruments will be converted or written off.
Where an Additional Tier 1 Capital instrument provides for a write-off mechanism, this mechanism must be structured so that:
the claim of the holder of the instrument on liquidation of the issuer is reduced to, or below, the value of the written-off instrument;
the amount of the instrument that may be paid if a call is exercised is irrevocably reduced to the value of the instrument after write-off;
there is an immediate and unequivocal addition to the Common Equity Tier 1 Capital of the private health insurer; and
the distribution or payments payable on the instrument must be permanently reduced (i.e. distributions or payments must be calculated at no more than the rate set for the written-off value of the instrument).
The instrument must not include a mechanism that would require a holder to sell the instrument to the issuer or a related entity of the issuer other than as part of a call option or redemption of the instrument. A mechanism that requires a holder to sell the instrument to a nominated party other than the issuer or a related entity of the issuer will not constitute an incentive to redeem provided there is at least two years from the date upon which the holder is required to sell the instrument to the nearest subsequent date upon which conversion may be exercised.
Where an instrument is drawn down in a series of tranches, it must meet the requirements in this Prudential Standard as if each tranche is a separate Additional Tier 1 Capital instrument in its own right.
The documentation of any debt instrument or any other capital instrument of the issuer of an Additional Tier 1 Capital instrument must not include any of the following clauses:
a cross-default clause linking the issuer’s obligations under the Additional Tier 1 Capital instrument to default by the issuer under any of its other obligations, or default by another party (related or otherwise) under the debt or other capital instrument; or
an event of clause specifying an event relating to the Additional Tier 1 Capital instrument that brings the issuer into default under the debt or other capital instrument.
For the purposes of paragraph 36(b) of this Attachment, an event of default clause includes a clause specifying any of the following events:
the exercise or non-exercise of discretions within the Additional Tier 1 Capital instrument;
an adverse event or change, however so described or determined, occurring in respect of the Additional Tier 1 Capital instrument; or
any consequence arising from, or any action taken to prevent,[34] the above events or a default by the issuer under the Additional Tier 1 Capital instrument,