This example of how many ordinary shares in the bank or its listed holding company are typically issued on conversion of a Hybrid following a trigger event is for illustrative purposes only and the actual number of ordinary shares issued may be higher or lower than this example.
In this summary, we have used the following assumptions:
- the average price for the bank’s ordinary shares over the 20 days on which those shares traded immediately prior to the issue of the Hybrid is $25. This is known as the “Issue Date VWAP”.
- the face value of the Hybrid is $100.
- a discount of 1%. The discount generally reflects the estimated costs of selling the shares on the ASX.
Step 1. Calculate the number of shares to be issued on conversion
The conversion mechanics require the average share price (or VWAP) at conversion to be determined, which for conversion following a trigger event where the bank is in financial difficulty, is over the 5 days on which shares are traded immediately prior to conversion.
For this example, a VWAPs of $4 will be used. Any conversion discount is applied to the VWAP.
The number of ordinary shares to be issued is calculated by dividing the face value of the Hybrid by the discounted VWAP.
| Face value of the Hybrid | $100 |
|---|---|
| VWAP at conversion | $4.00 |
| Multiply by the conversion discount, which in this example is 1% | × 0.99 |
| Equals the adjusted VWAP after applying the conversion discount. | = $3.96 |
| The number of ordinary shares to be issued is calculated by dividing the face value of the Hybrid by the discounted VWAP. | = 25.2525 |
Step 2. Calculate the Maximum Conversion Number
A maximum conversion number applies where Hybrids are required to be converted following a trigger event.
The maximum conversion number is calculated by applying the average share price at issue of the Hybrid (the Issue Date VWAP, which in this example is assumed to be $25) by a multiple specified in the terms of the Hybrid. The multiple for conversion following a trigger event where the bank is in financial difficulty is determined for regulatory and ratings requirements as 0.2.
The face value of the Hybrid is then divided by the product of the Issue Date VWAP and the relevant multiple to determine the maximum number of shares which can be issued.
This maximum conversion number is fixed at issue of the Hybrid and (except in a number of limited circumstances) will not change over the life of the Hybrid.
| Face value of the Hybrid | $100 |
|---|---|
| Issue Date VWAP | $25 |
| Multiple applied to adjust the Issue Date VWAP | × 0.2 |
| = $5.00 | |
| Maximum number of ordinary shares which can be issued | = 20 shares |
Step 3. Determine the impact of the maximum conversion number on the number of shares issued
The table below sets out the impact of the maximum conversion number in this example.
| Face value of the Hybrid | $100 |
|---|---|
| VWAP at conversion | $4.00 |
| Number of ordinary shares to be issued applying the conversion mechanics | 25.2525 |
| Maximum number of shares which can be issued | 20 shares |
| Effect of the maximum conversion number | Holder receives 20 ordinary shares with a value of approximately $80 |
There are no conditions to conversion in these scenarios and so conversion will automatically occur if the bank is non-viable or the bank’s common equity capital ratio equals or is less than 5.125%.
Where the number of shares to be issued is limited to the maximum conversion number (for example where the average share price at conversion is $4 and so has fallen by more than 80% from the date of issue of the Hybrid), the Hybrid will convert into the maximum conversion number of shares, in this case 20 shares. Assuming the prevailing share price remains the same, investors would suffer significant loss as the shares they receive would be worth significantly less than the face value of the Hybrid.