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.
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
Australian Securities and Investments Commission