Could you explain Hybrids to a beginner

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Question asked 11/06/2022

Could you explain Hybrids to a beginner

Hi James, Im a bit new to inviting in Hybrids, can you provide some clarification for me around the dividend paid for hybrids please? If the margin is set on a Hybrid at say 3.5%, then is the 90 day BBSW at the time the dividend is paid is what is used? eg 3.5% + 0.85% = 4.35% if the dividend was to be paid now since the latest cash rate increase ? Likewise, if the cash rate is increased in July by say another 0.5%, then the next dividend would be paid at 4.85% for the example above? Thanks

Answer

Hi Scott,

Yes, your view is correct. Using the recent NAB Hybrid that came to market last week, it was priced at 3.15% above the 90 day bank rate which currently sits at 1.49%. (the 30 day bill rate is 0.85%). Add 1.49% to 3.15% and you get the rate of distribution being 4.64%. As rates rise, this goes up and is priced at the time of the distribution and announced via the ASX. When quoting hybrid yields, we then apply the forward interest rate curve which encapsulates the current markets pricing of future rates. Hence, at time of issue , the new NABPI was being quoted on a yield of 6.95%. Importantly, this rate includes franking so it can be compared on a like for like basis with other fixed income securities that are unfranked.

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National Bank Hybrid (NABPI)

LAST UPDATED 08/06/2022 09:25

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