Hybrid securities are those securities which contain the features of both equity and debt. Like any other debt security, many hybrid securities also get matured on a specified date called Maturity Date. It is very important for investors to know what will happen to the security on the maturity date.
Usually, on the maturity date of a security, the principal amount which is invested by the investor is paid back to him, and with maturity date onwards investors stop receiving any interest if they were receiving any. However in the case of Hybrid securities, what happens at the maturity date depends on the particular terms and conditions that are associated with the type of the Hybrid Security.
Let us take a quick look at the different types of Hybrid securities and their maturity dates.
Convertible/converting debt securities ? Convertible or converting debt securities are those securities in which the investors are having an option to convert the securities into another type of security at a pre-determined date. These securities usually have a fixed maturity date.
Preference shares- Preference shares are those shares which pay specified dividend rate, and they contain a right to be redeemed for cash at maturity. Usually, Preference shares have maturity dates but there may be cases where they are issued without a maturity date, those without maturity dates are known as a non-redeemable or perpetual preference share. Like Convertible debt securities, there are also convertible preference shares which may be converted into ordinary shares at the will of the holder of those shares at a specified date.
Capital notes- Capital notes are those debt securities which possess characteristics like equity. Hybrid securities like perpetual debt securities have no fixed Maturity date whereas other securities like subordinated debt securities and knock-out debt securities have fixed maturity date.
In Australia, hybrid securities are issued by either corporates or banks and insurance companies, aimed to borrow money from other investors. Bank hybrids that meet Australian Prudential Regulation Authority?s prudential standards are divided into two types- Tier 1 bank hybrids and Tier 2 bank hybrids.
Tier 1 bank hybrids are those securities which have a fixed maturity date, and they are generally converted into ordinary shares on a fixed date. On the other hand, Tier 2 bank hybrids do not have a fixed maturity date, but they can be converted into ordinary shares if the bank becomes non-viable. Further, they can only be converted once the Tier 1 bank hybrids have been converted.
Investors can enjoy the benefits of a diversified portfolio by holding hybrid securities of different types with different maturity dates. Understanding how the securities are going to mature, helps investors to take better-investing decisions aimed at securing financial gains. Market participants can enjoy capital growth as well as regular income depending on their exposure to different kinds of hybrids.
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