Hybrid securities are typically complex instruments often with unique features such as potential interest deferral or potential conversion. A full glossary and more information can be found in the ASX booklet 'Understanding hybrid securities'. Here are some of the more common characteristics.
A provision in the terms of a hybrid security that gives the issuer the right, but not the obligation, to buy back the security from you at a particular point in time, typically at par or issue price.
A hybrid security that gives the holder or the issuer the option to convert the security into a different type of security (eg to convert a debt security to a share or a preference share to an ordinary share) usually at a specified time or times (such as on a ‘reset’ date or maturity date).
A hybrid security that automatically converts into a different type of security at a specified time.
The frequency with which coupon (interest) payments are made throughout the life of a hybrid security. Usually this will be quarterly, semi-annually or annually.
Discount at conversion date
A convertible hybrid security that gives the holder the right to convert the security into another form of security at a discount to the prevailing market price of that other form of security at the date of conversion.
The principal amount of a hybrid security and the base value used to calculate interest or dividend payments on the security.
The market price of a hybrid security typically has two components:
1. Capital amount – the underlying value of the security ascribed by the market. It is based on a number of variables including current market interest rates relative to the coupon rate, time to maturity, ranking and credit quality. This value may usually remain relatively stable from one day to the next, unless general ‘market’ interest rates move or the credit quality of the issuer changes; and
2. Accrued interest – the amount of interest accumulated on a security since the last coupon payment or the security’s original issuance date, whichever occurred last. The market price of a hybrid security can generally be expected to increase daily by the amount of interest accrued. For example, a security with a $100 face value and 6.5% coupon accrues interest at $6.50 per annum or 1.78 cents per day. You can expect the market price of the security to increase by around 1.78 cents per day until the next ex-interest date, when the accrued interest value will fall to zero.
The date on which the final coupon and the face value of a hybrid security is paid to investors. The time to maturity can vary greatly from short term (up to four years) to medium term (five to 10 years) or long term (10 or more years). Convertible or converting hybrid securities may be converted into shares in the issuing company on maturity rather than paying you the face value. Perpetual hybrid securities have no maturity date but you can recoup your investment by selling them on the ASX.
A security with no stated maturity date.
Redeemable: a hybrid security that gives the holder the right to have the securities redeemed, or the issuer the option to redeem the securities, for a specified amount.
Non-redeemable: a hybrid security that cannot be redeemed under any circumstances.
A hybrid security that allows the issuer to re-set the terms (eg by setting a new interest or dividend rate) after a specified period. Often the holder of the security will have certain options available to them on the re-set date, such as to accept the new terms, redeem, or in the case of convertible hybrid securities, to convert into the underlying security.
An debt which ranks below another liability on order of prioorty for payment of interest or principal. In the case of a hybrid security which is subordinated to an issuer’s other debt securities, investors would only be paid income or principal once interest or principal have been paid to holders of the more senior ranked debt.
The expected return on your investment. It can be measured in different ways:
• Nominal yield – the return based on the annual coupon payments as a percentage of the face value of the security (also referred to as the coupon rate). For a fixed rate hybrid security, this does not change throughout the life of the security.
• Running yield – the return divided by the current market price. It is a simple measure of the return the holder can receive at current market prices.
• Yield to maturity (YTM) – the rate of return anticipated on a hybrid security if it is held to maturity, expressed as an annual rate (some securities which have a re-set date or call date also measure yield to re-set or yield to call). The calculation of YTM takes into account the current market price, par value, coupon rate and time to maturity.
Learn more about hybrids by doing the free online course.