We often come across the term hybrid securities. Australia’s leading Common Wealth Bank recently plotted $1 billion hybrid offer. The hybrid securities are financial instruments possessing the characteristics of equity as well as of debt.
Debt versus Equity versus Hybrid securities: The deployments into the equities are generally termed as the risky investments by the investors largely because of the volatility to which these instruments are exposed to. As the market players might already know, the equity markets are exposed to numerous risks which include the macroeconomic risks as well as geopolitical risks. Even, considering the present scenario, the equity market participants might be in the dicey position as the global markets are witnessing the impacts of the macro-economic disturbances. Investing in Debt exposes investors to Interest Rate Risk (change in investment value due to interest rate fluctuations) and Credit Risk (risk of default by borrower). Hybrid securities combine the features of both debt and equity and thereby provide enhanced risk cushion, less volatility and better returns to investors.
Significance of bank hybrid securities: The hybrid securities can be used by the corporations to garner the funds which they might require for the business-related activities. These instruments are also used by the banks for the same purpose i.e. to gather the funds for the bank-related activities.
The bank hybrid securities are given to the investors so that the required capital can be garnered. They are issued by the insurers as well as by the banks. The investors also need to know that the garnered capital could also be regarded by them as the “regulatory capital.” This regulatory capital would be with respect to the principles which are for the insurers as well as banks. The market participants need to know that the trading of the hybrid securities could also be done on secondary market.
However, there are certain parameters which the investors need to be well-versed with before they decide to make deployments in the bank hybrid securities. Before considering investing into the bank hybrid securities, they need to know that in the case of loss, the investors would be facing the loss.
Types of bank hybrid securities: The convertible preference shares as well as capital notes happen to be those bank hybrid instruments which have the characteristic of giving the interest on the regular basis. However, it needs to be understood that, sometimes, the payments of the interest might not be disbursed on these types of bank hybrid securities and it is important to understand that the payments which have been missed would not be accumulated. The another type of bank hybrid securities are the subordinated notes which happens to possess fixed maturity date. However, these securities do not have any conversion time period as to when it can be converted to shares.
It is imperative for investors to evaluate bank performance based on their annual financial results and Pillar 3 reports, before investing in hybrid securities. While hybrids are considered as safe investments providing higher returns, it cannot be ignored that they are much more complex than bank’s savings or fixed deposit. The recently proposed regulatory changes (The Treasury Laws Amendment Bill 2018) in Australian economy is expected to impact retail investors access to hybrid instruments in future.
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