Corporate action events
CAPI: Capitalisation
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CAPI announces that the outstanding principal of a debt instrument goes up without any change in its nominal value, usually because interest that was due but not paid is added to the principal. It is normally reflected by an increase in the pool factor.
- Code
- CAPI
- Usually announced as
- MAND
What CAPI means
Some debt instruments, such as certain structured, asset-backed or restructured bonds, allow interest to be capitalised: instead of paying the coupon in cash, the issuer adds it to the amount it owes. This is sometimes called negative amortisation. The holder’s nominal (original face) amount stays the same, but the current principal, and so the amount on which future interest is calculated, rises.
For pool factor instruments the change is shown by a new factor higher than the previous one. Nothing is credited to the account: the holder’s claim grows inside the security. Income may still be recognised for accounting or tax purposes even though no cash arrives.
When you see it
- An MT564 with
:22F::CAEV//CAPIand:22F::CAMV//MAND, with the previous factor (:92A::PRFC) and the new factor (:92A::NWFC). The SMPG redemption matrix describes CAPI as neither a full nor a partial redemption: no securities or cash move, only the factor changes. - Opposite direction: PRED and PRII lower the factor and pay out principal. PINK pays interest in the form of additional securities, which does move securities into the account. INCR increases the face value of a security.
What to do next
- No instruction. Update the factor in the security master from the effective date so that the current face value, valuations and accrued interest are calculated on the new principal.
- Check with accounting whether the capitalised interest must be recognised as income for the period, and keep the factor history for audit.