The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Commonwealth Bank yesterday said it wants to make all its $85 million preference share capital Basel III-compliant before year-end 2014, with major shareholders in the first conversion expected to reject a payout.

Ian Jennings, the BISX-listed institution’s managing director, told Tribune Business it was “confident” that most investors would choose to convert their existing preference shares into new securities compliant with international capital requirements.

Commonwealth Bank is converting $50 million worth of preference shares into securities that will comply with the new requirements Basel III will introduce in 2023, and Mr Jennings said the remaining $35 million balance would be dealt with in similar fashion next year.

Emphasising that Commonwealth Bank was “being prudent” by making the switch “as quickly as we can”, Mr Jennings said the plan was for it to be “as administratively easily as possible”.

And, acknowledging that the conversion would be completed well within the timetables set by the Central Bank of the Bahamas and Basel III committee, he added that Commonwealth Bank would seek to do this in “two shots” - subject to shareholder and regulatory approvals.

Via a private placement, which is set to close on September 16, the BISX-listed institution is withdrawing five preference share classes - E, F, G, H and I - that do not comply with the global capital standards set by Basel III.

It is issuing five new classes to replace them, and offering existing preference share holders a $1:$1 conversion at the same interest rate (rate of return) they enjoy now.

While Commonwealth Bank is offering preference shareholders in the affected classes the option of either a full or partial redemption of their holdings, Mr Jennings expressed optimism that most would elect to retain their investment.

“I think we’re confident that a significant amount will be taken up,” Mr Jennings told Tribune Business. “Initial indications are that all the major shareholders in those classes will convert.

“If there is anybody that needs cash at this time, the bank is in position to redeem their preference shares, but the initial indications are that the majority are converting.”

The relevant documents were sent to affected preference shareholders last week, and the new securities will be issued to ‘converts’ come October 1, 2013.

Mr Jennings explained that this timetable was chosen to ensure that the existing quarterly dividend, payable to holders of the five affected classes, could be paid as normal by the Bahamas Central Securities Depository (BCSD) on September 30.

“It’s just an administrative issue. By doing it on September 30, there’s no calculation of partial dividends to pay or accrued dividends,” Mr Jennings said.

He explained that Commonwealth Bank elected to redeem the five non-compliant classes, and replace them with unissued shares that have the correct terms, because any other form of capital replacement/share issuance would have attracted Stamp Duty.

“The whole basis of this is to keep it as administratively easy as possible,” Mr Jennings told Tribune Business.

“In these times we have to watch every penny and be as prudent as we can. There’s no urgency to get it done in one shot, when it’s better to get it done in two manageable goes.”

Emphasising that he could not speak for Commonwealth Bank’s shareholders, Mr Jennings said “the plan” was for the institution to seek permission to redeem the remaining $35 million worth of non-qualifying preference shares at next year’s annual general meeting (AGM).

The same procedure had to be followed for the first $50 million, and Mr Jennings explained that the five classes currently being redeemed would go back into Commonwealth Bank’s Treasury as unissued shares.

The bank, subject to shareholder approval, would then change the terms of these share classes to ensure they complied with Basel III.

And, with these preference shares in hand, Commonwealth Bank would “go back, and take out and redeem, the remaining classes worth $35 million”.

“Once we’ve done these $50 million, the intention is to go back to the AGM next year,” Mr Jennings confirmed to Tribune Business.

“The bank’s being prudent in making these changes as quickly as we can.”

The Central Bank’s Basel III compliance guidelines require Bahamas-based banks to ‘not recognise’ 10 per cent of their non-qualifying preference share capital every year for the next 10 years, up to 2023.

This explains Commonwealth Bank’s urgency in moving decisively on the needed capital base changes.

Its new preference shares have two different features from the ones they have replaced - they are non-cumulative, and have early redemption restrictions.

The new shares are harder to redeem because such a move requires Board and Central Bank approval. And no redemptions can occur within five years of issuance.