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REQUEST FOR COMMENT - Equity capital treatment of Mutual Capital Instruments (MCI)

REQUEST FOR COMMENT - Equity capital treatment of Mutual Capital Instruments (MCI)

Australia Ratings invites comments and submissions on the following proposed new criteria to be used in evaluating if capital instruments issued by mutual institutions should be considered equivalent to ordinary equity in the credit risk analysis of the entity issuing the capital instruments.

Submissions on the proposed criteria should be sent to and be received by Monday 1 March 2021.  It is expected that Australia Ratings will publish a summary of any submissions received and final criteria on in March 2021.


In 2020 the Federal Parliament passed new legislation that formally recognised mutual organisations (often known as ‘member-based organisations’). The legislation allows for a mutual organisation to raise funds through the issue of a new specific financial instrument called a Mutual Capital Instrument (MCI). MCIs now provide a mutual organisation with a new source to raise additional capital other than through retained earnings or debt.

Proposed Criteria for the treatment of MCI

For incorporated entities who issue debt the amount of ordinary share capital and any retained earnings provide the ultimate basis to provide protection against default for creditors of the entity.  Other capital instruments can also provide protection for creditors.  MCIs are a new form of capital which mutual organisations can use to increase their capital base.


Australia Ratings will give full equity credit to MCIs where the following features are satisfied.

  • The final maturity date of the instrument (if the instrument is not perpetual) must exceed 25 years
  • The value of the MCIs either issued or to be issued is less than 15% of the total capital base of the organisation
  • The capital instruments are subordinated to all creditors of the issuer
  • The terms of the capital instruments do not contain any step-up provisions in circumstances where the credit rating of the issuer is downgraded or removed
  • The instrument does not allow for the issuer to call or redeem the instrument within five years of the original issue date
  • If the instrument contains conversion rights, conversion must be more than five years from issue date
  • The terms of the instrument must permit the issuer to have the discretion to defer a scheduled distribution or dividend payment
  • The maturity date (if any) of the instrument must be beyond the maturity dates of all other debt of the issuer
  • Issuers of MCI do not benefit from any financial guarantees or security


If all the above factors are satisfied, the capital instruments will receive full equity credit in the rating analysis conducted by Australia Ratings.