Capital Securities (AT1/RT1)

Settlement calculations

Many convertibles, exchangeables and capital securities include flexible settlement alternatives for the issuer upon conversion and/redemption of the instrument, by delivering either cash, shares or a combination thereof
The determination of the relevant amount of shares and/or cash to be delivered to bondholders is based on complex price-setting processes and formulas
ConvEx provides a report to the issuer every time a calculation is required, ensuring the issuer is able to manage its delivery obligations
In hiring ConvEx to perform settlement calculations, issuers:
minimise the risk of errors by obtaining external, expert assistance from an independent third party drastically cut the time and internal resources
outsource responsibility for the calculations to ConvEx
have the support of a name trusted by the market

When ConvEx is named as Calculation Agent in the terms and conditions of the instrument, issuers benefit from our experience in ensuring their documentation avoids known problems, and we are also responsible for performing the calculations when needed
Being named up-front allows us to provide this service proactively and at a much lower cost than appointing an Independent Expert or adviser after problems have already arisen

If you have issued an instrument without naming a calculation agent in the documentation, ConvEx can be appointed after the fact as Calculations Adviser, to provide a similar level of service as we do to our Calculation Agency clients, providing the service proactively

In the event of a dispute or uncertainty as to a calculation, ConvEx can provide advice or independent expert support
Our extensive capital markets experience and knowledge of securities documentation allows us to consider the formulaic provisions, but also to put them into a market context to assist in clarifying the original intent to arrive at a fair solution
Where needed we can provide written opinions for the issuer’s reliance

Transition of LIBOR to Risk Free Benchmark Rates by end of 2021 is being seriously deliberated by several market groups
However, billions of dollars / pounds / euros of existing and still to be issued financings reference LIBOR beyond 2021
Fall-back methodologies in bond documentation
The fallback methodologies in most floating-rate bonds were designed to accommodate short term disruption in LIBOR, rather than permanent disappearance of the benchmark
For example, asking a selection of banks for a quasi-LIBOR quote and, failing this, taking last rate until resolved / maturity
Until a new standard is agreed, issuers are searching for solutions to ensure their instruments can continue to function as intended in an uncertain environment where we do not know what the replacement will look like
The most recent transactions have identified the key issues (e.g. is there a matching term successor rate, what is the correct margin impact?)
However, most current proposals require the issuer to hire an IFA in the future, once the benchmark no longer exists
We take a different approach. ConvEx believes benchmark replacement can be split into two scenarios, each with its own solution:

ConvEx is experienced at managing complex provisions and applying market knowledge to determinations that affect capital markets instruments
When named up-front to the role, we can handle all but the most remote outcomes, namely those situations where:
The benchmark is replaced by a direct successor (“new LIBOR”); or
The benchmark replacement methodology has been set into legislation; or
The benchmark replacement methodology has been recommended by a relevant body; or
The benchmark replacement has been adopted as a market standard for derivative transactions

For pre-existing instruments, we will review the fall-back mechanisms in the documentation, advise issuers on potential approaches, and can even provide Independent Expert opinions to support consent solicitation and liability management exercises