Month: June 2016

What do we think of Hybrid Securities? Yesterday we saw NAB announce a new Hybrid Security in an effort to raise around $750m of tier 1 capital. This comes on the back of two successful deals from Westpac about a week ago, and Commonwealth Bank in early April. However, not all Hybrids have been successful as those holding the CBAPD, which was issued back in 2014, can attest. With over $900bn sitting on term deposit in Australia earning peanuts, and an aging population that requires income to sustain lifestyle, these securities can offer an attractive alternative, however they are not without risk. In today’s note we’ll give an overview of these securities in general terms, what we need to be conscious of, compare a few different issues and whether or not they’re worthwhile considering in a portfolio. What is a Hybrid? A hybrid is a security issued by a Bank or other corporate to raise capital. Unlike a straight equity or a straight bond, these securities combine a bit of both and as such fall somewhere in between on the risk/return spectrum. They trade on the ASX under five letter codes, can be bought/sold at any time (liquidity permitting), and can offer investors a very good yield (~6-7%) and generally have less volatility than the underlying equity. We think the best, practical way of providing insight here is to look at a number of different issues, outline their structures and whether or not we see any value. Capital Structure Firstly though, to give a basis for this discussion we need to understand a company’s capital structure.
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