NEWS

Your Money & You

February 2012

Hybrid securities and notes - understand the risks

You may be attracted to hybrid securities and notes offered by household name companies and trusted brands – but be aware that hybrids are very different from ‘normal’ corporate bonds. Make sure you understand the conditions and risks before committing your money.

Some hybrid securities ask you to take on ‘equity-like’ risks but only give you at best, ‘bond-like’ returns. Some also have terms and conditions that allow the issuer to exit the deal or suspend interest payments when they choose.

Hybrid securities may not suit you if you need steady returns or capital security.

What are hybrid securities?

Hybrid securities are one way companies can borrow money from investors, while paying interest. They are offered by well-known companies and are generally traded on a secondary market such as ASX.

The risks

Hybrid securities have higher risks than most types of corporate bonds. While the conditions, timeframe, risks and interest rates of each hybrid offer differ, some have particularly complex features and risks:

  • Market price volatility – Like company shares, the market price of listed hybrid securities may fall below the price you originally paid, especially if the company suspends or defers interest payments, or if performance declines.
  • Subordinated ranking – Hybrid securities are generally unsecured, meaning repayment is not secured by a security over any asset. If the company you bought them from becomes insolvent, you will generally rank behind other bondholders.
  • Deferral of interest payments – Some offers allow the company to suspend interest payments for a number of years. While the interest owing may be cumulative, this could leave you temporarily out of pocket.
  • Early termination – Some hybrid offers allow the company to terminate or ‘buy back’ the investment early, but don’t give you that same right.
  • Extremely long timeframes – Some hybrids have terms lasting decades. With a 60 year term, a 40 year-old investing today needs to live to 100 to see their investment mature. You may be able to sell the security on a secondary market such as ASX, but only if there is a demand for that security.

Questions to ask

Here are some questions to ask before you invest. You can get these details from your financial adviser or by thoroughly reading the prospectus.

  • What are the risks of investing now and in the future?
  • Will the returns offered adequately compensate for the investment risks?
  • How does the interest rate compare with other investments on a ‘risk adjusted’ basis? Can other less complex, risky or long-term investments provide a similar return?
  • When is the issuer allowed to exit the deal or suspend interest payments?
  • What are the maturity dates?
  • Will this product help achieve your personal goals and objectives, and does it suit your personal investment timeframe and risk profile?
  • Can you exit this investment if your circumstances change?

For more information about investing visit ASIC’s consumer website, MoneySmart at www.moneysmart.gov.au

Greg Medcraft
Chairman
Australian Securities and Investments Commission

What Caused the Global Financial Crisis?

At our Symposium held in September 2011 (refer to this link for more details about this event – http://www.adfconsumer.gov.au/news/2011-11.html#article3) at ADFA, the Midshipmen and Officer Cadets attending the symposium were invited to ask questions.

The first question was, “We’re constantly told by that we should become investors. How do I go about doing that? Are there a few simple steps to get started? Why shouldn’t I just rely on my superannuation and the aged pension to look after me in my old age?”

How did our panellists respond?

Claire Mackay, Senior Principal Adviser from Quantum Wealth Advisers, said that it’s important for young people to control what they can control. She said one obvious area was to make sure they have an income and expense budget. She also said they needed to set some savings goals and when they invest, to make sure they fully understand the nature of those investments.

Hamish Douglas, CEO of Magellan Financial Group, said he thought that at the start of their careers the Midshipmen and Officer Cadets should invest in themselves by going the extra yard in their studies and duties.

Scott Pape, the Barefoot Investor, said all investors could either choose to be prudent or imprudent. He said that if someone saved $50 per week for ten years between age of 21 and 31 and then left the money to earn an average return until they turned 65, the amount would have grown to $1.4 million. He then used this simple lesson to say that they should start saving for retirement as soon as possible.

Financial Rip-off Merchants Target Our Ally’s Military

Defence is recognised as a leading employer in the provision of workplace-based independent financial education.

Financially sound employees are happier, secure and more productive and stable leading to more cohesive families and a stronger Australian community.

You might be unsurprised that the armed forces of our allies are also beginning to educate serving members. Last year the media reported that the US military were conducting seminars for its military personnel similar to the seminars and education programs that the ADF Financial Services Consumer Council runs here in Australia.

The US Military has identified that because many military recruits are young and move around a lot there are many organisations and scammers that seek to take advantage of them.

The biggest issues for the US Military are houses, cars and general indebtedness which also cause problems here for ADF Members.

If you’ve been caught by a scam or lost money through poor advice then we encourage you to report them to us via our website.