Do Bank Hybrids provide a regular income stream?
Bank Hybrids may not always provide a regular income stream.
Tier 1 Bank Hybrids pay distributions at the absolute discretion of the bank and are subject to the distribution payment conditions Distribution payment conditions There are certain conditions that must be satisfied before distributions can be paid, including (i) that the payments are at the discretion of the bank, (ii) that the payments will not result in a breach of the bank’s regulatory capital requirements or in the bank becoming insolvent, and (iii) that APRA does not object to the payment. . If a distribution is not paid, the missed payment will not be made up (often referred to as being non-cumulative Non-cumulative Unpaid distributions will not accumulate or be made up by the issuing bank. ). As distribution payments are based on BBSW BBSW BBSW is a key benchmark interest rate for the Australian money market that moves over time in line with market conditions and monetary policy. It is typically the 90 day bank bill swap rate. , distribution payments are likely to vary over the term of the Tier 1 Bank Hybrid.
For an example of how to calculate distributions for Tier 1 Bank Hybrids, see Case Study 1.
Tier 2 Bank Hybrids pay interest, subject to the solvency of the bank. Interest is typically determined as the sum of BBSW plus a margin Margin The margin is fixed at the time of issue and typically reflects the risk premium of a Bank Hybrid above a floating market rate (e.g., BBSW) at the time of issue. . Any unpaid interest will accumulate and be payable at a later date, when the bank is solvent (often referred to as being cumulative Cumulative If interest is not paid in full, unpaid interest will accumulate and compound for payment at a later date if certain conditions are met. ) unless conversion or write-off Write-off If Bank Hybrids are written-off, investors will lose all of the value of their investment and they will not receive any compensation or unpaid distributions or interest. occurs due to the bank becoming non-viable. As interest payments are based on BBSW, interest payments are likely to vary over the term of the Tier 2 Bank Hybrid.
Will the distribution / interest rate be the same for the life of a Bank Hybrid?
The distribution / interest rate is typically based on a margin Margin The margin is fixed at the time of issue and typically reflects the risk premium of a Bank Hybrid above a floating market rate (e.g., BBSW) at the time of issue. above BBSW BBSW BBSW is a key benchmark interest rate for the Australian money market that moves over time in line with market conditions and monetary policy. It is typically the 90 day bank bill swap rate. . As BBSW is a floating market rate of interest (usually the 90 day bank bill swap rate), payments are likely to vary over the term of a Bank Hybrid. The margin typically reflects the risk premium of the Bank Hybrid above a floating market rate of interest at the time of issue.
Under what circumstances may an investor receive less than the face value of a Bank Hybrid investment?
If Bank Hybrids are quoted on the ASX ASX The Australian Securities Exchange. , an investor may choose to sell their Bank Hybrid investment at the prevailing market price to realise their investment. That market price may be less than the face value Face value The face value is typically the issue price, which will be reduced by any partial conversion or write-off. of the Bank Hybrid (or the price at which the Bank Hybrid was purchased on market), or there may be no liquid market in the Bank Hybrids (i.e., there may not be enough buyers or sellers in the market), which may result in investors suffering loss.
Tier 1 Bank Hybrids - If a bank’s capital falls below certain capital levels (a capital trigger event Capital trigger event A capital trigger event occurs when the issuing bank determines (or is notified by APRA) that the bank’s common equity tier 1 ratio is equal to or less than 5.125%. See capital trigger event. ) or a non-viability trigger event Non-viability trigger event A non-viability trigger event will occur when APRA notifies a bank in writing that it believes (i) conversion to ordinary shares of some or all of its Bank Hybrids or (ii) a public sector injection of capital or equivalent support, is necessary to prevent the bank becoming non-viable. See non-viability trigger event. occurs (see non-viability trigger event for guidance on when APRA APRA The Australian Prudential Regulation Authority. may consider a bank to be non-viable), the bank may be required to convert some or all of the Tier 1 Bank Hybrids into ordinary shares or completely write them off Write-off If Bank Hybrids are written-off, investors will lose all of the value of their investment and they will not receive any compensation or unpaid distributions or interest. .
Tier 2 Bank Hybrids - If a non-viability trigger event Non-viability trigger event A non-viability trigger event will occur when APRA notifies a bank in writing that it believes (i) conversion to ordinary shares of some or all of its Bank Hybrids or (ii) a public sector injection of capital or equivalent support, is necessary to prevent the bank becoming non-viable. See non-viability trigger event. occurs (see non-viability trigger event for guidance on when APRA APRA The Australian Prudential Regulation Authority. may consider a bank to be non-viable), the bank may be required to convert some or all of its Tier 2 Bank Hybrids into ordinary shares or completely write them off.
Conversion of Tier 1 Bank Hybrids following a capital trigger event or a non-viability trigger event, and conversion of Tier 2 Bank Hybrids following a non-viability trigger event, is not subject to conversion conditions Conversion conditions Conversion of some Bank Hybrids may be subject to conversion conditions set out in the prospectus for the particular Bank Hybrid. See Case Study 3, including a worked solution, for further detail. being satisfied. If Bank Hybrids are converted into ordinary shares, the value of ordinary shares an investor receives may be significantly less than the face value Face value The face value is typically the issue price, which will be reduced by any partial conversion or write-off. of the Bank Hybrid. This is because the number of ordinary shares an investor will receive following a conversion in these circumstances is limited to a maximum conversion number Maximum conversion number The maximum conversion number is a limit or cap on the number of ordinary shares of the bank that may be issued on conversion. For a scheduled or mandatory conversion, the maximum conversion number reflects 50% of the bank's ordinary share price at the time of issue of the Bank Hybrid. For conversion following a non-viability trigger event or a capital trigger event, the maximum conversion number reflects 20% of the bank's ordinary share price at the time of issue of the Bank Hybrid. , which is based on the share price at the time of issue and the bank’s ordinary share price may have dropped considerably due to the bank’s financial difficulty. If for any reason conversion does not occur and if the ordinary shares are not issued for any reason within a specified period, all rights in relation to the Bank Hybrids will be terminated and investors will lose all of the value of their investment and they will not receive any compensation or unpaid distributions / interest.
See Case Study 2 for conversion following a non-viability trigger event.
Will I receive franking credits? How will these be paid to me?
Tier 1 Bank Hybrids may have franking credits Franking credits Franking credits represent each holder’s share of tax paid by the issuing bank on the profits from which the distributions are paid. attached to distribution payments (see Case Study 1). The ability of an investor to use franking credits, either as an offset to a tax liability or by claiming a tax refund, will depend on each investor’s individual tax position.
Tier 2 Bank Hybrid interest payments typically do not have franking credits attached to them.
How can I get my money back after investing in a Bank Hybrid?
Scheduled conversion into ordinary shares on the scheduled or mandatory conversion date Scheduled or mandatory conversion date A date on which conversion of a Tier 1 Bank Hybrid is expected to occur (subject to the conversion conditions being met) and set out in the prospectus for the particular Bank Hybrid. See scheduled conversion. (subject to conversion conditions), and subsequent sale of the ordinary shares on the ASX. See Case Study 3.
Redemption on the maturity date Maturity date The date on which a Tier 2 Bank Hybrid is scheduled to mature. .
There is the risk that investors may not get some or all of their money back after investing in a Bank Hybrid. See the FAQ above, "Under what circumstances may an investor receive less than the face value of a Bank Hybrid investment?".
If a Bank Hybrid is 'perpetual', when will my investment be returned to me?
Tier 1 Bank Hybrids are perpetual Perpetual If a security is perpetual, it does not have a fixed maturity date and could exist indefinitely. , but typically have a set date (the scheduled or mandatory conversion date Scheduled or mandatory conversion date A date on which conversion of a Tier 1 Bank Hybrid is expected to occur (subject to the conversion conditions being met) and set out in the prospectus for the particular Bank Hybrid. See scheduled conversion. ) on which the instruments are scheduled to convert into ordinary shares. Whether conversion occurs will depend on conversion conditions Conversion conditions Conversion of some Bank Hybrids may be subject to conversion conditions set out in the prospectus for the particular Bank Hybrid. See Case Study 3, including a worked solution, for further detail. being satisfied. If the conversion conditions are not satisfied on the scheduled conversion date, then scheduled or mandatory conversion will not occur until the next distribution payment date on which the conversion conditions are met. However, there is a risk that the conversion conditions are never satisfied and the Tier 1 Bank Hybrid remains on issue indefinitely.
If Tier 1 Bank Hybrids are quoted on the ASX ASX The Australian Securities Exchange. , investors may sell their Tier 1 Bank Hybrids on the ASX whenever they choose. Any sale will however be at the market price at the time of sale, which may be more or less than the face value Face value The face value is typically the issue price, which will be reduced by any partial conversion or write-off. of the Tier 1 Bank Hybrids (or the purchase price of the Tier 1 Bank Hybrid if purchased on the ASX) and may incur brokerage costs.
Tier 2 Bank Hybrids are not perpetual and have a fixed maturity date Maturity date The date on which a Tier 2 Bank Hybrid is scheduled to mature. .
What are my options at maturity?
Tier 1 Bank Hybrids are perpetual Perpetual If a security is perpetual, it does not have a fixed maturity date and could exist indefinitely. and do not have a maturity date	but are scheduled to convert into ordinary shares on a specified date (the scheduled or mandatory conversion date Scheduled or mandatory conversion date A date on which conversion of a Tier 1 Bank Hybrid is expected to occur (subject to the conversion conditions being met) and set out in the prospectus for the particular Bank Hybrid. See scheduled conversion. ), subject to the conversion conditions Conversion conditions Conversion of some Bank Hybrids may be subject to conversion conditions set out in the prospectus for the particular Bank Hybrid. See Case Study 3, including a worked solution, for further detail. being satisfied. The conversion conditions operate to ensure that upon conversion on the scheduled or mandatory conversion date, investors will receive ordinary shares worth approximately $101.01 for each Tier 1 Bank Hybrid (based on a face value of $100 per Tier 1 Bank Hybrid and taking into account a 1% discount to the relevant VWAP). However, there is a risk that the conversion conditions are never satisfied and the Tier 1 Bank Hybrid remains on issue indefinitely.
Tier 2 Bank Hybrids are generally redeemed in cash on a fixed maturity date or may be repaid earlier on a call date or an early redemption date (subject to APRA APRA The Australian Prudential Regulation Authority. ’s prior approval, which APRA may withhold).
Tier 1 Bank Hybrid investors and Tier 2 Bank Hybrid investors cannot request conversion or early redemption.
How do I invest in Bank Hybrids?
You may subscribe to a Bank Hybrid offer when it is first offered or issued under a prospectus by contacting the relevant wealth management, private banking, stockbroking or financial advisory firms distributing the offer. Whether you can subscribe to the initial offer will depend on a range of factors including the eligibility requirements. Bank Hybrids may also be bought on the ASX through a stockbroker after they have been issued. The purchase price of Bank Hybrids bought on market may be higher or lower than the face value Face value The face value is typically the issue price, which will be reduced by any partial conversion or write-off. of the Bank Hybrids at the time of issue.
Westpac Banking Corporation ABN 33 007 457 141 and AFSL and Australian credit licence 233714.