Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 447

Is DDO change to hybrids a drawback for investors?

Editor's introduction: Banks are the major issuers of hybrids in Australia, and each is considering the implications of DDO regulations (explained below) on hybrid distribution. For example, ANZ Bank has decided it cannot offer hybrids to the general public and some investors may find it difficult to access new issues. ANZ sent a note to holders of its Series 2 that will be replaced by Series 7, advising:

"The Offer period is expected to open on 23 February 2022. The Reinvestment Offer closes at 5.00pm AEDT on 15 March 2022 and the New Money Offer closes at 10.00am AEDT on 22 March 2022."

 ... but also saying any applicant must apply through a broker. When I contacted my broker on 18 February, he replied:

"Both new money and rollover applications have closed for ANZ Capital Notes 7 (ANZPE). This was open to Sophisticated Investors (must be registered as SI) from Tuesday midday until yesterday 4pm (new money) and 12pm today (rollovers). Unfortunately bids/rollover requests for these notes are closed."

As far as my broker was concerned, the whole thing was finished even before the new offer opened while ANZ said it would close on 15 March. This is a big change in distribution.

This article explains some potential implications.


DDO stands for Design and Distribution Obligations, and it means that certain financial products can only be sold by initial public offering or IPO to appropriate consumers. For bank hybrid IPOs, this means wholesale investors or retail investors who receive the appropriate level of financial advice. We assume there will be material negative consequences for issuers who breach the rules by issuing to inappropriate investors.

So how does this affect banks and hybrids?

From ASIC’s perspective, investors in hybrid IPOs have traditionally fallen into five categories:

  1. Wholesale investors
  2. Investors who receive a high level of financial advice
  3. Investors who receive a lower level of financial advice
  4. Investors who receive no financial advice or are unadvised
  5. Investors who apply after receiving a shareholder offer

The last three categories will most likely be deemed inappropriate under DDO guidelines. 

Offers to shareholders/hybrid holders/unadvised Investors who elect to rollover

The typical bank hybrid issuance process is usually a bookbuild conducted by brokers. The investor cohort includes potential new investors and existing hybrid security holders that use an adviser and wish to roll their investment. Then there is a post bookbuild process which includes shareholders and unadvised security holders who did not participate in the bookbuild. This cohort is not immaterial. The chart below shows the level of uptake in shareholder/unadvised security holder offers since 2018.

For the average major bank issue, the shareholder/unadvised cohort constituted just over $300 million or typically 18% of the total issue size. Bank treasurers loved this method of raising money because they did not pay stamping (brokerage) fees.

It looks like this category of offer type is dead. There is no way that the issuer can determine if the hybrid is appropriate for the investor. ANZ's new issue includes no unadvised existing security holder offer.

Advised Investors with inappropriate levels of financial advice

This category is trickier to analyse. Different advisers and issuers will have different thresholds as to what is required to provide a recommendation. We understand that up to 30% of demand for hybrid issues for some advisers originates from investors who will be deemed to be not appropriate because they were not receiving the necessary level of financial advice.

We estimate that the 'roll' portion of bookbuilds is around 30%-50% of the new issue and unless these investors are receiving personal advice, they won’t be able to take part in the new issue.

That's 20% shortfall plus up to 30% shortfall ... maybe 50% of previous investors are cut out of IPOs? No one actually knows as this is new ground for everybody, but there will certainly be a smaller pool of investors who can buy new issues.

What does the demand/supply outlook look like?

The chart below shows issuance and maturities for the market in aggregate (which we calculate by considering the banks' current and targeted AT1/hybrid ratios and issuance/redemptions). We’ve also assumed in our 2022 and 2023 forecasts growth in risk weighted assets or RWA which will result in increased AT1 issuance (last year RWA grew by $100 billion resulting in a pro forma $2 billion of additional AT1 issuance).

Prima facie, it's not a big year of net demand for either the remainder of this year or next year, but it’s still a chunky gross amount to issue given that up to 50% of the market may have disappeared.

Why this might not be as bad as these numbers suggest

There are some potential mitigating factors:

  • Maybe some of the investors who do not receive personal advice or are investor in the shareholder/non-advised rollover categories are classified as wholesale investors (it’s relatively easy nowadays to be a wholesale investor) in which case they can invest as long as the qualification is held by the broker.
  • Typically, issues are heavily oversubscribed and that might be enough to fill any shortfalls. We’re sceptical about this as most oversubscription is an attempt to gain higher allocations.
  • All investors, including those locked out of the IPO process, can buy the same hybrid in the secondary market on the first day of trading. This may encourage ‘wholesalers’ who buy at IPO (if the yield is sufficiently good enough) and sell on the secondary market for a profit on day one. Of course, the secondary yield is unlikely to be as good as primary.

So, what happens now?

Our inclination is that banks will need to issue at a higher margin than they did prior to DDO, either to ensure sufficient demand from qualified investors or to encourage ‘wholesalers’.

We'll soon find out. ANZ and CBA both have around $1.6 billion in issues to refinance in March 2022 and both don’t have a lot of slack in terms of their capital positions. Neither bank is positioned to abandon the issues should there be insufficient demand.

Overall, we think hybrids at IPO will be cheaper. Spread margins and return outcomes will be determined by long-run supply and demand but there may be issuance spikes.

What does this mean for investors?

For some, nothing at all. They can still bid in IPOs and elect to roll existing issues. For others, it’s a big deal. They won’t be able to roll existing investments or buy new issues. There are alternatives. They can buy on the secondary market or (sales plug following) invest in a managed fund which provides a diversified and managed exposure to hybrids. Or they can wait for the redemption amount and invest in cash or other investments.


Norman Derham is Executive Director of Elstree Investment Management, a boutique fixed income fund manager. This article is general information and does not consider the circumstances of any individual investor. Elstree's listed hybrid fund trades under ticker EHF1.


John Napier
February 28, 2022

Totally agree with the BeenThereB4 response above. My wife and I have been seriously investing for over 40 years with excellent returns, our SMSF goes back to 1989. The only financial advice we have received over the years has been poor. We are able to be qualified as sophisticated investors but tire of repeating the process from time to time. I have been involved in bidding and evaluating bids up to billions of dollars during my working life yet find the DDO now considers us to be financial incompetents. I have read the ASIC documentation and find it a classic bureaucratic "nanny state" piece of nonsense.
We are retired and have used the bank hybrids as means of maintaining some liquidity with returns well exceeding bank deposit rates and without the volatility of shares and units. We fully understand the risks involved
We will not be participating in the ANZ offer, nor others, as we have no desire to add to the costs for the provision of financial products nor the proliferation of unnecessary regulation.
I would be very interested in any comments from Christopher Joye on the matter.

Malcolm Keynes
April 20, 2022

John could not agree with you more as we have had a SMSF since 1989 and find this change to be quite insulting. Who are they really protecting.

February 23, 2022

The Canberra apparatchiks have again shown they are not in real world.

I have encouraged my clients ... mostly retail ... to have some hybrids , and this goes back 20+ years to the (? infamous) NABHAs. These clients have not got rich holding hybrids, but they have not lost money !

When prompted, clients rollover their hybrids, at no cost to themselves. These folk are now disallowed to rollover and, as for the ANZPE their hybrids will be redeemed. As a broker I will assist them to reinvest, and earn a commission. So, is this in a client's best interest?

Norman, I think the managers for the new ANZ hybrids have acted shabbily in closing the issue before eligible wholesale clients had opportunity to participate. (This was my experience too).



Leave a Comment:



ASIC's yin and yang design rules need a rebalance

Share Purchase Plans brickbats and bouquets

Small investors miss out as institutions and banks cash in


Most viewed in recent weeks

16 ASX stocks to buy and hold forever

In his recent shareholder letter, Warren Buffett mentions several stocks he expects Berkshire Hathaway will own indefinitely, including Occidental Petroleum. We look at ASX stocks that investors could buy and hold forever.

The best strategy to build income for life

Owning quality, dividend-producing industrial shares is key to building a decent income stream. Here is an update on the long-term performance of industrial stocks against indices, listed property, and term deposits.

Are more taxes on super on the cards?

The Government's broken promise on tax cuts has prompted speculation about other promises that it may consider breaking. It's widely believed that super is lightly taxed and a prime candidate for special attention.

Lessons from the battery metals bust

The crash in lithium and nickel prices has left companies scrambling to cut production, billionaires red-faced, and investors wondering how a ‘sure thing’ went so wrong. There are plenty of lessons for everyone.

Welcome to Firstlinks Edition 545 with weekend update

It’s troubling that practical skills like investing aren’t taught at schools as it leaves our children ill-equipped to build wealth, and more vulnerable to bad advice. Here are some suggestions to address the issue.

  • 1 February 2024

For the younger generation, we need to get real on tax

The distortions in our tax system have been ignored for too long, and we're now paying the price. It's time Australia got real and addressed the problems to prevent an even greater intergenerational tragedy.

Latest Updates


16 ASX stocks to buy and hold forever

In his recent shareholder letter, Warren Buffett mentions several stocks he expects Berkshire Hathaway will own indefinitely, including Occidental Petroleum. We look at ASX stocks that investors could buy and hold forever.

Investment strategies

Clime time: 10 charts on the outlook for major asset classes

The charts reveal that interest rates can't rise much further as Australian mortgage holders are under stress, bank dividends look solid, and the bond market is in flux because yields are being manipulated.


Phasing out cheques, and what will happen to cash?

Cheques and bank service, or the lack of, were major topics when I addressed a seniors’ group recently. The word had got out that the government was phasing out cheques, and many in the audience were feeling abandoned.


What financial risks do retirees face?

Treasury's consultation into the retirement phase of superannuation is generating a lot of interest. This submission to the consultation outlines the key financial risks to an individual’s standard of living in retirement.


Recession surprise may be in store for the US stock market

Markets are partying like it's 1999, but history suggests that US earnings and economic growth are vulnerable following an interest rate tightening cycle. Investors should prepare their portfolios accordingly.

Investment strategies

3 under the radar investment opportunities

The Magnificent Seven are hogging the headlines, yet there are plenty of growth opportunities elsewhere, at a fraction of the cost. Here are three stock ideas riding key areas of structural and cyclical change.


Why a quant approach can thrive in the age of passive investing

The rise of passive investing is unlikely to derail the value of quantitative strategies. Passive investing hasn’t eradicated the irrationality of crowds, leaving pockets of opportunity to outperform indices.



© 2024 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.