New listed subordinated bonds – “new-style” versus “old-style”

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Last week Suncorp came to the market with a Basel III compliant ASX-listed sub debt deal (see Paul Rickard’s analysis of that issue here), but investors need to be aware of the key differences between this new structure and those that came before, as the changes are significant. There are three key differences between “new-style” and “old-style” subordinated debt and investors need to be aware of the differences :

1.    Step-up clause

New Basel III rules explicitly prevent the use of step-up margins on any new regulatory capital instrument, such as subordinated debt or Tier 1 hybrids. Step-up clauses were seen to be “incentives to call” by the Basel Committee and have been outlawed. “Old-style” step-up securities issued have been given grandfathering relief to still count towards the capital calculations, however only until the first call date, after that date their contribution to capital immediately falls to zero.

The existence of a step-up clause is an important differentiation in a subordinated debt (or Tier 1 hybrid) security; a step-up provides a strong incentive for the issuer to call at first opportunity. No such incentive exists for “new-style” subordinated debt.

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