Suncorp has launched the first Basel III compliant tier-two capital issue by an Australian authorised deposit-taking institution, and seems to have found some novel solutions to anticipated problems. At the same time, the structure of the notes has some interesting twists. Suncorp is seeking to raise A$500 million, and the proceeds will be used, at least in part, to redeem the A$740 million of convertible preference shares callable on June 14. Holders of the convertible preference shares are being invited to roll over their investment into the subordinated notes.     As is typical of subordinated note issues, the notes have a set maturity date, which, in this case, is 22 November 2023, and they are callable five years earlier. The notes are not perpetual like hybrid tier-one capital issues. The notes will pay cumulative cash coupons (interest payments), rather than non-cumulative franked coupons, and the coupon is pitched at 285 to 310 basis points to over the 90-day bank bill rate. The margin will be determined in a bookbuild next Wednesday. The Suncorp subordinated notes will be listed on the ASX and are being marketed to the public at large. However, Suncorp is hoping to attract significant institutional investor interest, even though the notes are convertible into ordinary equity upon the occurrence of a non-viability trigger event.The bond portfolios of most institutional investors are governed by investment mandates that prohibit the holding of convertible notes. As institutional investors have been the main buyers of tier-two capital in the past, this had led many market participants to speculate that the issuers of Basel III compliant tier-two capital will opt for a complete write-off of the capital upon non-viability.However, tax lawyers have subsequently pointed out that any issuer of debt that is written off will incur a tax liability for the effective capital gain realised on the write-off of the debt. This assumes, of course, that the issuer is not wound up in the interim and survives, say, under public ownership.Suncorp has avoided the problem of a potential tax liability upon write off of the notes by making the notes convertible into equity. And it has addressed the problem of restrictive institutional investor mandates by providing for the shares allocated upon conversion to be assigned to a trustee for sale on the market. The proceeds from such a sale would be returned to the affected investors. To activate this provision, investors need to notify Suncorp of their inability to accept shares upon receiving the subordinated notes. As for the interesting twists, coupons must not be paid if Suncorp is insolvent, but the coupons are cumulative and will be paid when the bank is solvent again. So, how does this work?Solvency has the usual definition of being able to meet liabilities as and when they fall due, and assets must exceed liabilities. Therefore, if Suncorp is no longer solvent, it is insolvent and certainly not viable. In which case, there will be no coupons to accrue as the bank will be wound up.For the