Glossary

Term definitions

Additional Tier 1 Capital

Securities forming part of a Bank’s capital which contain Loss Absorption and other features which satisfy requirements prescribed by APRA to classify as Additional Tier 1 Capital. “Capital notes” and “convertible preference shares” are examples of Additional Tier 1 Capital. These instruments are referred to in this guide as Tier 1 Hybrids.

APRA

The Australian Prudential Regulation Authority.

ASX

ASX Limited (ABN 98 008 624 691) or the securities market operated by it (as applicable).

Bank

An Australian authorised deposit-taking institution, regulated by APRA, which issues a Hybrid.

Business Day

Will be defined in the Prospectus, typically a day which is both:

• a day on which banks are open for general banking business in Sydney and Melbourne; and
• a day which is a business day for the ASX.

Common Equity Tier 1 Capital

Components of capital of a Bank that satisfy requirements prescribed by APRA to classify as Common Equity Tier 1 Capital. Ordinary Shares and retained earnings are examples of Common Equity Tier 1 Capital.

Common Equity Trigger Event

APRA or the Bank determines that the Common Equity Tier 1 Capital ratio applicable to the Bank is equal to or below 5.125%.

Conditions to Optional Conversion

In summary, Optional Conversion will only be permitted if:

• APRA approves of the Optional Conversion and considers that the capital position of the Bank will not be adversely affected by it; and
• specific conditions regarding the Bank’s share price and listing of Ordinary Shares are satisfied.

Conditions to Optional Redemption

In summary, APRA approves the Optional Redemption and considers that the capital position of the Bank will not be adversely affected by it.

Conditions to Scheduled Mandatory Conversion

In summary, Mandatory Conversion will only be permitted if specific conditions regarding the Bank’s share price and listing of Ordinary Shares are satisfied.

Convert or Conversion

Conversion of a Hybrid into Ordinary Shares.

Conversion on Acquisition of the Bank

Tier 1 Hybrids typically include a feature which requires Conversion to occur if the Bank is acquired by a third party. Conversion on an acquisition of the Bank is subject to conditions which are broadly similar to the Conditions to Optional Conversion. If those conditions are not satisfied, Conversion will not occur.

Delisting Event

In summary, any of the following occurs:

• the Bank ceases to be listed or its Ordinary Shares cease to be quoted on the ASX
• trading of Ordinary Shares on the ASX is suspended for a period of at least five Business Days
• any other event subsists which would prevent the Bank from Converting a Hybrid.

Design and Distribution Obligations Regime

The design and distribution obligations regime in Part 7.8A of the Corporations Act 2001 (Cth).

Distribution Period

The period from one distribution payment date to the next (for example, three months).

Distribution Rate

The rate applicable to distributions on a Tier 1 Hybrid, which is given by the following formula (assuming distributions are fully franked):

Distribution Rate = (Market Rate + Margin) x (1 – Tax Rate).

Face Value

The price at which a Hybrid is issued (typically $100).

Financial Claims Scheme

An Australian government scheme for the protection of depositors from potential loss due to failure of an authorised deposit taking institution, subject to certain limits.

Franking Credits

A credit which may be available to be passed on to investors reflecting income tax paid by the Bank. Franking Credits may, depending on the investors’ individual circumstances, be used to decrease the income tax payable by the investor or potentially be received by the investor as a tax refund.

Hybrid

Tier 1 Hybrids and Tier 2 Notes.

Interest Period

The period from one interest payment date to the next (for example, three months).

Interest Rate

The rate applicable to interest on a Tier 2 Note, which is given by the following formula:

Interest Rate = Market Rate + Margin.

Issue Date

The date when a Hybrid was first issued.

Issue Date VWAP

The VWAP during a period (usually 20 Business Days) immediately preceding the Issue Date.

Loss Absorption

A feature of Hybrids which means that losses suffered by a Bank may be passed on to or “absorbed by” Hybrid investors.

Loss Absorption Event

A Common Equity Trigger Event or a Non-Viability Trigger Event.

Mandatory Conversion

The mandatory Conversion of a Tier 1 Hybrid on the Scheduled Mandatory Conversion Date.

Margin

A fixed value above the Market Rate used to calculate distributions and interest (as appropriate) payable on a Hybrid. The Margin is set at the time of the initial offer in light of market conditions at the time. The Margin does not change during the life of a Hybrid and will be specified in the Prospectus.

Market Rate

A benchmark interest rate for the Australian money market (such as BBSW), which varies over time. It is used as a reference for the pricing, rate-setting and valuation of Australian dollar denominated financial securities and is typically specified for a period such as 90 or 180 days.

Maximum Conversion Number

The maximum number of Ordinary Shares into which a Hybrid may be Converted. This number is given by a formula specified in the Prospectus and is intended to provide a “cap” on the number of Ordinary Shares issued on Conversion following a Loss Absorption Event.

NAB

National Australia Bank Limited (ABN 12 004 044 937).

Non-Viability Trigger Event

In summary, APRA has provided a written determination to the Bank that:

• a Conversion or Write-Off of Hybrids is necessary because without the Conversion or Write-Off, APRA considers that the Bank would become non-viable, or
• without a public sector injection of capital into, or equivalent support with respect to, the Bank, APRA considers that the Bank would become non-viable.

Optional Conversion

The Conversion of a Hybrid at the option of the Bank (subject to APRA approval).

Optional Conversion Date

A date specified in the Prospectus on which Optional Conversion may occur, if the Conditions to Optional Conversion are satisfied. There may be more than one Optional Conversion Date.

Optional Redemption

The redemption of a Hybrid at the option of the Bank (subject to APRA approval).

Optional Redemption Date

A date specified in the Prospectus on which Optional Redemption may occur, if the applicable conditions are satisfied. There may be more than one Optional Redemption Date.

Optional Resale

Investors being bound to resell Hybrids to one or more nominated third parties at the option of the Bank (subject to APRA approval), and receiving the Face Value in cash.

Optional Resale Date

A date specified in the Prospectus on which Optional Resale may occur, if the applicable conditions are satisfied. There may be more than one Optional Resale Date.

Ordinary Shares

Fully paid ordinary shares in the capital of the Bank.

Payment Restrictions

Broadly a Payment Restriction will exist if any of the following conditions exists:

• the payment would cause the Bank to cease to be compliant with its prudential capital requirements or any limits on distributions under APRA’s capital conservation requirements;
• APRA objects to the Bank making the payment;
• making the payment would result in the Bank becoming (or being likely to become) insolvent; or
• the Bank is prohibited by law from making the payment.

Perpetual

Means that there is no fixed date on which an investment must be repaid. Perpetual Hybrids could remain on issue indefinitely if they are not Converted, redeemed or resold, in which case Hybrid investors may not receive their investment back.

Prospectus

An offering document which provides information to potential investors such as the key features and risks of a security (such as a Hybrid) and information about the issuer of the security (such as a Bank).

Regulatory Event

In summary, an unexpected change in regulation that has an impact on the regulatory treatment of the Hybrid from the perspective of the Bank.

Scheduled Mandatory Conversion Date

A date specified in the Prospectus on which Mandatory Conversion may occur, if the Conditions to Scheduled Mandatory Conversion are satisfied.

Solvency Condition

A condition of payment for Tier 2 Notes, as defined in the Prospectus. Broadly, the condition is linked to the Bank remaining solvent following the payment.

Target Market Determination

The target market determination for a Hybrid issued by the Bank in accordance with its obligations under the DDO Regime.

Tax Event

In summary, an unexpected change in tax law or policy that has an impact on the tax treatment of the Hybrid from the perspective of the Bank.

Tax Rate

The Australian corporate tax rate applicable to the franking account of the Bank on the relevant distribution payment date.

Tier 1 Capital

Common Equity Tier 1 Capital and Additional Tier 1 Capital.

Tier 1 Hybrid

A Hybrid, often called a “capital note” or a “convertible preference share”, that qualifies as Additional Tier 1 Capital.

Tier 2 Capital

Securities forming part of a Bank’s capital which contain Loss Absorption and other features which satisfy requirements prescribed by APRA to classify as Tier 2 Capital. “Subordinated notes” are an example of Tier 2 Capital. These instruments are referred to in this guide as Tier 2 Notes.

Tier 2 Note

A Hybrid, often called a “subordinated note”, that qualifies as Tier 2 Capital.

VWAP

The average of the daily volume weighted average sale prices of Ordinary Shares sold on the ASX during a specified period.

Write-Off

The immediate and permanent termination of all of a Hybrid investor’s rights in respect of that Hybrid. Investors in Tier 1 Hybrids in the form of convertible preference shares may retain some limited rights in these circumstances.