hybrid issue is the first Basel III-compliant hybrid to raise
Tier 2 regulatory capital in the Australian
prudential regulator, the Australian Prudential Regulation
Authority, has been a global leader in the implementation of
Basel III, which took effect on 1 January
- It is unclear
whether there will be a raft of Basel III Tier 2 hybrids
ahead. Counsel say that it heavily depends on the pricing
between Tier 1 and Tier 2 hybrids.
hybrid issue marks the first Basel III Tier 2 hybrid in the
Australian market. But it is unclear whether copycat deals will
Prudential Regulation Authority (Apra) has been a leader in the
implementation of Basel III, requiring banks to be fully
compliant by 1 January of this year. In conjunction with its
interpretation of Basel III, Apra laid out strict guidelines
for bank hybrid offerings, including a non-viability
have been issues of Basel III compliant hybrid bonds in the
Australian market, such as the Commonwealth Bank of Australia's
$1 billion PERLS VI issue last year, all of them have been to
raise Tier 1 capital. Suncorp's A$500 million subordinated
notes due 2023 is the first to raise Tier 2 regulatory
King & Wood
Mallesons' Ian Paterson said that the Australian market is used
to securities that convert to equity under certain
He noted that
the Australian market saw retail Tier 2 deals that were Basel
II-compliant last year, as well as Tier 1 deals with the Basel
III-compliant non-viability conversion included.
combines elements of both," he added.
guidelines for hybrid bonds issued by banks are very specific,
and they require a non-viability trigger. The trigger is
activated when Apra determines that a conversion is necessary,
because otherwise the bank would be non-viable without a public
sector capital injection or similar capital support.
The market is
familiar with non-viability triggers, as investors have seen
Basel III-compliant issues as well as issues before Basel III
that included variations of non-viability triggers. Further,
the Australian market for hybrid and equity-linked deals is
Even so, deal
counsel had to ensure that all parties, especially regulators
and investors, were comfortable with the offering.
that new product always face the challenge of meeting all the
requirements of Australia's complex regulatory environment
while remaining attractive to the issuer and
But King &
Wood Mallesons' Evie Bruce said that the market's response
depended on the product's pricing.
"It will be
interesting to see how the transaction will go, and we hope to
see more issuances," she said.
agreed. He added that the most important point in seeing more
Tier 2 issuances is that issuers believe that they were more
advantageous than Tier 1s.
issuers will want to see a pricing benefit," he said. "If Tier
2 instruments are priced like Tier 1s, they will issue more
regulations ensure onshore bank hybrid issuances are
straightforward, Paterson predicted that instruments issued for
offshore markets may see more innovation.
He said that
some investors may not be used to seeing mandatory convertible
securities or have mandates that restrict their ability to
invest in ordinary equity.
factors come into play, he said, there might be pressure for
Tier 2 issuances with an alternative loss absorption feature to
conversion but which meets Apra's loss absorption
vibrant corporate hybrid market has also slowed.
Bruce said that
she hadn't seen much interest in corporate hybrids as it had
been quite difficult to get the equity credit treatment which
had historically been given on these products from ratings
government is also looking to boost the retail corporate bond
market, its plan for doing so have not yet been
Utz acted for the
joint lead managers and King & Wood
Mallesons acted for the issuer.
A link to the
prospectus can be found here:
hybrid first clarifies Basel III implementation
proposed corporate bond boost won't work http://www.iflr.com/Article/3151127/Why-Australias-proposed-corporate-bond-boost-wont-work.html
structured product approval principles explained http://www.iflr.com/Article/3175975/Afmas-retail-structured-product-approval-principles-explained.html