-
For the purposes of paragraph 8 of this Attachment, an incentive or expectation to call or otherwise redeem a Tier 2 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 the 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 the additional tax or charges (refer to paragraph 28 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 Tier 2 Capital instruments and Additional Tier 1 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.
-
A Tier 2 Capital instrument must provide for the immediate, automatic and permanent revocation of a call notice upon a non-viability event (refer to Attachment E to this Prudential Standard). A call option cannot be exercised in anticipation of a non-viability event.
-
A Tier 2 Capital 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:
- 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; or
- 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 9 of this Attachment.
-
Where a Tier 2 Capital instrument provides for conversion into ordinary shares,[40] the issue document must:
- specify the number of ordinary shares to be received upon conversion or specify the conversion formulae for determining the number of ordinary shares received;
- provide for the number of ordinary shares to be received under the conversion formula specified in (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 Tier 2 Capital instrument at the time of its issue divided by 20 per cent of the private health insurer’s[41] ordinary share price[42] 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 instrument. In calculating the ordinary share price at time of issue:
- adjustments may be made for subsequent ordinary share splits, bonus issues and share consolidations;
- 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;
- adjustments must exclude transactions involving cash payments or other compensation to, or by, the holder of ordinary shares or the issuer of the capital instrument; and
- 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 a Tier 2 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, objectively, and without further steps; 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 Tier 2 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 Tier 2 Capital instruments, a private health insurer may, within the category of Tier 2 Capital;
- differentiate between instruments as to whether an instrument is required to convert or be written-off in the first instance; and
- provide a ranking under which Additional Tier 1 Capital instruments will be converted or written off.
-
Where a Tier 2 Capital instrument provides for a write-off mechanism, this mechanism must be structured so that:
- the claim 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/payments payable on the instrument must be permanently reduced (i.e. distributions/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 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 Tier 2 Capital instrument in its own right and the minimum original maturity of each tranche must be five years from the time proceeds of the issue are irrevocably received by the issuer.
-
The documentation of any debt instrument or other capital instrument of the issuer of a Tier 2 Capital instrument must not include any of the following clauses:
- a cross-default clause linking the issuer’s obligations under the Tier 2 Capital instrument to default by the issuer under any of its obligations, or default by another party (related or otherwise) under the debt instrument or other capital instrument; or
- an event of default clause specifying an event relating to the Tier 2 Capital instrument that brings the issuer into default under the debt instrument or other capital instrument.
-
For the purposes of paragraph 37(b), an event of default clause includes a clause specifying any of the following events:
- the exercise or non-exercise of discretions within the Tier 2 Capital instrument;
- an adverse event or change, however so described or determined, occurring in respect of the Tier 2 Capital instrument; or
- any consequence arising from, or any action taken or intended to prevent[43] the above events or a default by the issuer under a Tier 2 Capital instrument,