Hybrids continue to be actively issued by financial institutions and keenly sought by investors, but it’s important to know the structure as every transaction has some unique feature.
The term hybrid is a broad classification for a group of securities used by Australian companies to raise money, referred to as capital, that combine both debt and equity characteristics.
These securities sit below senior debt and above shares in the capital structure. They pay a predetermined (fixed or floating) rate of return or distribution until a certain date. Some hybrids are ‘non cumulative’ which means that the issuer can miss distribution payments, while others are deemed ‘cumulative’ where distributions may be deferred but must be made up at a later date. Many securities have call dates; these are a date/s prior to maturity where the issuer may have a number of options including:
° converting the hybrids into the underlying ordinary shares of the issuer
° redeeming the hybrids for cash
° leaving the hybrids outstanding
As the hybrid market has evolved in Australia, the options now sit entirely with the issuer who determines what happens to the hybrid securities in accordance with the terms and conditions set out in the initial prospectus. Therefore, unlike a share, the holder has a ‘known’ cashflow assuming no deferral and, unlike a fixed income security, the timing of final maturity and method of repayment is uncertain.
No two hybrids are the same and some are very complex. It is important to assess each security individually to weigh the risks against the return being offered.
The full White Paper, Hybrids – Delve deeper into the asset class, is available here.