Scheduled or Mandatory Conversion
An example of how to calculate the number of ordinary shares an investor will receive following scheduled conversion.
Scheduled or Mandatory conversion
- Bank XYZ issues Bank Hybrids in September 2021.
- Shirley purchases $10,000 of Bank Hybrids on the ASX in November 2021.
- At the time of purchase the market price is $100 per Bank Hybrid. Shirley receives 100 Bank Hybrids.
- The Bank Hybrids have the following key dates set out in the prospectus:
| First optional redemption / conversion date | Scheduled or Mandatory Conversion Date |
|---|---|
| September 2026 | September 2029 |
| Bank can elect to redeem for cash (subject to APRA’s prior approval (there can be no certainty that APRA will provide its prior written approval)) | Scheduled or mandatory conversion into bank ordinary shares (subject to the Conversion Conditions) |
On the first optional redemption in September 2026, the bank elects not to redeem the Bank Hybrids. Shirley decides to continue to hold her investment until the Scheduled or Mandatory Conversion Date of September 2029 rather than sell the Bank Hybrids on the ASX at the prevailing market price.
- In September 2029 on the Scheduled or Mandatory Conversion Date, the conversion conditions need to be satisfied for Shirley’s Bank Hybrids to be converted into ordinary shares.
- If the conversion conditions are not satisfied on the Scheduled or Mandatory Conversion Date, conversion will not occur on this date and will be retested on the next distribution payment date.
Step 1 – Scheduled conversion conditions
| Condition 1 | the VWAP of ordinary shares on the 25th business day before (but not including) the potential Scheduled or Mandatory Conversion Date must be greater than 56.12% of the Issue Date VWAP; and |
| Condition 2 | the VWAP of ordinary shares during the 20 business days before (but not including) the potential Scheduled or Mandatory Conversion Date must be greater than 50.51% of the Issue Date VWAP.
|
The conversion conditions are intended to ensure that upon conversion on the Scheduled or Mandatory Conversion Date, investors should receive bank ordinary shares worth approximately $101.01 for each Bank Hybrid held (based on a Face Value of $100 per Bank Hybrid and taking into account a 1% discount to the VWAP of ordinary shares during the 20 business days before the Scheduled Conversion Date or Mandatory Conversion Date).
For example, if
Face Value = $100
Issue Date VWAP = $20
| Condition 1 | VWAP of ordinary shares on the 25th business day before (but not including) the Scheduled or Mandatory Conversion Date = $15 (which is greater than 56.12% of the Issue Date VWAP) calculated as: 56.12% × $20 = $11.22 |
| Condition 2 | VWAP of ordinary shares during the 20 business days before (but not including) the Scheduled or Mandatory Conversion Date = $12 (which is greater than 50.51% of the Issue Date VWAP) calculated as: 50.51% × $20 = $10.10 |
Result
Both Conversion Conditions are met, therefore conversion will occur on the Scheduled or Mandatory Conversion Date.
Step 2 – The number of ordinary shares received on conversion is calculated as follows:
For example, if:
Face Value = $100
VWAP of ordinary shares during the 20 business days before (but not including) the conversion date = $12 (see above)
Conversion discount = 1% (reflected as 0.99 in the formula below)
| Conversion number for each Bank Hybrid |
|---|
| Face Value 0.99 × VWAP |
| $100.00 0.99 × $12.00 |
| = 8.4175 ordinary shares |
The 1% discount on conversion is designed to compensate investors for transaction costs (i.e. brokerage costs) which may be incurred on the disposal of ordinary shares the investor receives on conversion.
Result
Under Step 1, both conversions conditions are met and conversion will occur on the Scheduled or Mandatory Conversion Date.
- Under Step 2, on the conversion date Shirley receives 841 ordinary shares (100 Bank Hybrids × 8.4175).
- As Shirley would like to realise her Bank Hybrid investment, she sells the 841 ordinary shares on the ASX at a net price of $12.00 per ordinary share, after brokerage costs:
- 841 ordinary shares × $12.00 = $10,092.00
- In this example Shirley receives $10,092.00 for her ordinary shares, which is a small profit on her original Bank Hybrid investment of $10,000.
If the market price for the ordinary shares is less than $11.89 at the time Shirley sells, she will incur a loss on her Bank Hybrid investment of $10,000.