On September 30, 2013, Commonwealth Bank will redeem $50 million of its $85 million preferred stock. This is in response to the international accord known as Basel III, which is a set of standards issued by the Basel Committee on Banking Supervision, whose purpose is to strengthen global capital rules to promote more resilient banks and banking systems.
One of the standards causes all of Commonwealth Bank’s current structure of preference shares to lose their status as regulatory capital by the year 2023. The Central Bank of The Bahamas, in support of these standards, gave Bahamian banks more stringent implementation guidelines by adding that non-qualifying preference shares, as in the case of Commonwealth Bank, are not allowed to recognize 10% of their non-qualifying preference shares each year starting January 1, 2013.
Commonwealth Bank began its response to the changing regulatory requirement at their Annual General Meeting (AGM) held in May 2013. At the AGM, the Bank’s shareholders approved management’s recommendations to create new rights for unissued classes of preference shares that will qualify as regulatory capital under Basel III. The new qualifying classes J, K, L, M and N will replace the existing non-qualifying classes E, F, G, H and I.
Shareholders of classes E through I will be afforded the option to convert, $1 for $1, to classes J through N, which offer the same investment rate of Bahamian Prime rate plus 1.5%. With Prime rate being 4.75%, the current rate on the preference shares is 6.25%.
Shareholders will also be allowed the choice to redeem, i.e. require the Bank to repay to the shareholder, all or part of their shares in cash. The Bank is hopeful that all shareholders would elect to convert, which will mean the Bank’s regulatory capital will be strengthened. However, the Bank’s Executive Chairman has confirmed that it has “the capacity and willingness to redeem any or all shares as individual shareholders desire”.
The effective date of the private offering is October 1, 2013. Documents outlining the offer and confirming the deadline of September 16, 2013 have been sent by mail to all shareholders. Shareholders should advise the Bank of their choice (i.e. conversion, partial redemption or full redemption) on or before this date.
According to the offering documents, the only differences between the new and old classes of preference shares are the cumulative and early redemption features. The new shares are non-cumulative, whereas the old shares are cumulative. Also, the new shares, while retaining the option for early redemption, as do the old shares, make it harder for the Bank to redeem them because, in addition to Board approval, they now have to wait 5 years from the issue date and also obtain prior approval from The Central Bank of The Bahamas. The old shares did not have the latter two stipulations.
According to the Bank’s Executive Chairman, “based on historical performance, it is anticipated that the new classes of shares should provide Shareholders the same returns as the existing shares.” Mr. Sands added “The Bank has never missed a quarterly dividend payment in its history and with the high rate of return on the shares compared to those coming to market today, these new classes are an attractive issue for our shareholders to keep in their portfolio”.
Source: Tanya Hutchinson
Commonwealth Bank
