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Monday 27 August 2012

12-207MR ASIC’S hybrids warning: don’t be dazzled, be wary of the risks

ASIC today reiterated its advice to consumers to be aware of the risks and complexities of hybrid securities following a number of offers to have hit the market recently.

While not commenting on individual offers, ASIC Commissioner John Price warned consumers to be wary of these complex products, which can be issued as subordinated notes or convertible preference shares.

‘Despite household name companies and trusted brands being linked to certain offers and promises of ‘high yields’, consumers should be very careful,’ Mr Price said.

‘Some hybrid securities and notes are highly risky investments. Hybrids need to be closely reviewed. Consumers should think hard about whether hybrids are suitable for them , and read and understand the prospectus.

‘If they are still in doubt, they should get some unbiased financial advice before parting with their money.’

Mr Price noted there have been some cases where hybrids had not been paid back when investors expected because the company had a choice about when to redeem those investments.

‘An expectation that at the end of a set period an issuer will definitely redeem the hybrid so that investors get repaid in full is very dangerous.’, Mr Price said

Other risks include:

  • Some hybrids have investment terms lasting several decades if they are not redeemed earlier. For example, with a 60-year term, a 40 year-old investing today would need to live to 100 to see their investment mature.

  • The price of hybrids can drop below what you originally paid, making it hard to get out of your investment at the price you want.

  • Despite the advertised high interest rates, some companies will stop paying interest if their financial position deteriorates.

  • Hybrids are generally subordinated. This mean if the bank or company which has issued the securities fails, you have to line up at the back of the queue behind other creditors.

As the appetite for these products grow amid investor unwillingness to depart with their cash unless a product is pitched as ‘safe’, Mr Price reminded issuers their disclosure documents should be clear, concise and effective.

‘They should communicate the key features and risks of these products so retail investors can understand what they are buying,’ Mr Price said.

‘With complex products like these, issuers need to really focus on how information can be best presented to assist investors to make an informed investment decision. In particular, issuers should make sure these products are true to label. For example it may be more appropriate for these products to be called capital notes to reflect the nature and features of the product. Any advertising for these products should also be appropriately balanced.’

Background

Hybrid securities are one way for companies to borrow money from investors, while paying interest in return. They blend some of the features of debt and equity (shares), and can often be traded on a secondary market such as the ASX. However, hybrid securities have higher risks than most types of corporate bonds. While the conditions, timeframe, risks and interest rates (coupons) of each hybrid offer differ, some recent offers have particularly complex features and risks (refer 11-270MR).

More information on hybrid securites on MoneySmart

Last updated: 27/08/2012 12:00