APRA has released the final amended Prudential Standard APS 111 Capital Adequacy: Measurement of Capital (APS 111), which allows mutually owned ADIs to issue Additional Tier 1 (AT1) and Tier 2 (T2) Capital instruments that will qualify to be included in Common Equity Tier 1 (CET1) Capital provided they meet the requirements in Attachments B, F, J and K of APS 111.
To qualify, the capital instruments must provide for conversion into mutual equity interests (MEI) in the event that the loss absorption or non-viability provisions in these instruments are triggered.
Conversion into ordinary shares is not possible for mutual ADIs due to their mutual corporate structure.
The direct issue by mutually owned ADIs of CET1 capital instruments other than ordinary shares raises issues associated with the interaction of Basel III requirements, demutualisation provisions in the Corporations Act and the competing needs of potential investors as against existing members of mutually owned ADIs.
The conditions for the qualifying instrument include the requirement for mutual equity interests to provide no voting rights (other than as required under the Corporations Act) and to limit both the claim of mutual equity interest holders on any surplus of a failed mutual ADI and the amounts that can be paid by way of dividends to these holders.
Prior to the issue of any eligible Additional Tier 1 or Tier 2 Capital instrument whose terms provide for conversion to mutual equity interests, the issuer must:
(a) have a constitution that permits the issue of mutual equity interests and the terms of the issue must be consistent with the issuer’s constitution;
(b) have obtained approval from its members, if required by the issuer’s constitution, to the issue of mutual equity interests if the prescribed events occur;
(c) have obtained approval from members, if required by the issuer’s constitution, for the terms of issue of mutual equity interest; and
(d) have obtained any relief considered by the ADI to be necessary under Part 5 of Schedule 4 of the Corporations Act for the issuance of mutual equity interests.
Bright Corporate Law is advising mutual ADI’s on the implication of the changes.