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 firstname.lastname@example.org 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 www.austrliaratings.com 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.
If all the above factors are satisfied, the capital instruments will receive full equity credit in the rating analysis conducted by Australia Ratings.