Zero-capital amount
This term is used in the total debt amount calculation for financial entities to describe specific amounts that can be wholly funded by debt.
A zero-capital amount is relevant to calculating a financial entity's safe harbour debt amount. The zero-capital amount represents the value of the financial entity's assets that are low-margin, low-risk transactions.
A financial entity's zero capital amount is the sum of all of the following:
- the total value of all the entity's assets that represent debt interests that
- are of a kind commonly dealt in by entities that carry on a business of dealing in securities
- the entity has sold under a reciprocal purchase agreement, sell buy-back arrangement or securities loan arrangement
- the entity has not yet repurchased under the agreement or arrangement
- the total value of debt interests issued to the financial entity that remain on issue where the
- debt interests are loans of money for which no fees or charges or other consideration for the purpose of enhancing the credit rating of the issuer of the interest have been paid or are payable to the entity, any of the entity's associates or a foreign entity
- long-term foreign corporate credit rating of each entity that has issued the debt interests, at the time of issue or at any time within 6 months immediately preceding or immediately after issue, was rated at least BBB or equivalent by an internationally recognised credit agency. However, if the debt interest is a subordinated debt interest (see below), the long-term foreign currency corporate credit rating must be at least A or equivalent at the time of issue or at any time within the 6 months immediately preceding or immediately after issue
- the total value of the debt interests that are assets of the financial entity (whether or not the debt interests were issued to the financial entity) that remain on issue at that time, where the debt interests have risk-weighting of 0% or 20% under the prudential standards and do not satisfy all the conditions in the second dot point
- the total value of all the entity's assets to the extent that they are rights to the return of assets that
- the entity provided as security for the performance of its obligations in relation to securities it acquired under a reciprocal purchase agreement, sell-buyback arrangement or securities loan arrangement
- do not consist of shares
- are not covered by one of the amounts listed in the above dot points
- the total value of the entity's securitised assets if the entity is a securitisation vehicle.
A subordinated debt interest is a debt interest issued to either of the following:
- an unsecured creditor
- a secured creditor who, in the event of a liquidation of the issuer, can make a claim on that interest only after the claims of other secured creditors regarding their debt interests issued by the issuer have been met.
For more information, see section 820-942 of the ITAA 1997.