Of late, I have been receiving a lot of enquiries from my clients about Hybrid Securities. As the name suggests, a Hybrid security is an investment that has a mixture of debt and equity characteristics. They are issued by companies wanting to raise capital. Each hybrid issue is unique. Some issues are more complicated than others while some display more equity like characteristics than others. The reason I am receiving a lot of enquires is because these securities generally offer much higher rates of return than cash accounts and term deposits.
Hybrids are an excellent investment provided the investor understands what they are getting and how it fits into a diversified investment portfolio. Notwithstanding this, the Australian Securities and Investments Commission has expressed concerns over the boom in hybrid securities being sold to unsophisticated investors.
In August, ASIC commissioner John Price urged investors not to be “dazzled” by the household names issuing hybrids (Woolworths and major banks have all done recent deals). Instead, investors should realise these investments involve “equity-like risk for bond-like returns”. According to a source close to ASIC, the regulator is particularly concerned about the sales volume of hybrids out of stockbroking firms. “There are a lot of stockbrokers who have been keeping themselves alive on commissions earned from shovelling hybrids towards retail customers without explaining what they are really getting,” the source says.
A recent article in the Australian Financial Review “PaperlinX Holders Pin Hope On AGM” highlights the possible pitfalls of Hybrids.
In 2007, PaperlinX sold $285 million worth of Hybrid securities. The Hybrids were supposed to pay a return of 2.4 per cent above the bank bill swap rate. The payments were stopped in 2009. Now, investors have no way of getting out of their investments, except to sell them on the open market where they are trading at just above 7¢ in the dollar.
Let this be a cautionary note, don’t be fooled by the yield.
Bye for now
Dan’s corner
Source: Australian Financial Review 14 November 2012 Paperlinx Hybrid Holders pin hopes on AGM
