The Newcastle Building Society has announced a conversion of some capital instruments into contingent capital:
Newcastle Building Society (the “Society”) today announces that it has reached an agreement with holders of certain classes of the Society’s existing subordinated debt and permanent interest bearing shares (“PIBS”) which will lead to a material strengthening of the Society’s capital position (the “Capital Agreement”).
The Capital Agreement reflects a proactive initiative by the Society to underpin its financial strength and further enhance its standing as a marketcounterparty. Under the Capital Agreement, the Society has agreed with holders of certain classes of its subordinated debt and PIBS to add, in return for an uplift in coupon, a conversion feature such that those instruments would convert into profit participating deferred shares (“PPDS”), a core tier 1 capital instrument, should the Society’s core tier 1 capital ratio fall below 5%. The Capital Agreement applies to £46 million in total of the Society’s subordinated debt and PIBS.
As a result of the Capital Agreement therefore, in addition to the £179 million of core tier 1 capital held by the Society as at 31 December 2009, the Society will also have £46 million of contingent core tier 1 capital (such contingent core tier 1 capital being equivalent to 2.2% of the Society’s risk weighted assets). As at 31 December 2009, the Society had a core tier 1 capital ratio of 8.7% (up from 7.8% at the prior year end). The Capital Agreement will therefore further strengthen the Society’s capital position, providing 2.2% of contingent core tier 1 capital in addition to the existing 8.7% core tier 1 capital ratio as at 31 December 2009.
Additionally, the Society has introduced an innovative feature which means that the relevant instruments would cease to be convertible and the coupon uplift would fall away if the Society’s core tier 1 capital ratio exceeds 12%. This feature has helped minimise the level of coupon uplift necessary to secure the agreement of the investors who are a party to the Capital Agreement.
Assiduous Readers will remember that I consider conversion triggers based on Regulatory Capital Ratios to be completely insane. What if the rules change? How do you price it?