I’m confused by Hybrids

Hi Shane,

The distribution paid is the cash component excluding the franking. To marry up the cash distribution with the nameplate yield to maturity (technically first call date for hybrids) we need to add in the franking benefit (which equates to 42.8c every $1 fully franked distribution) and apply the future interest rate curve i.e. where interest rates are expected to be over the life of the security.

The below table looks are various reference rates. Assuming we buy a Hybrid with 5 years to run we can use the 5 year swap rate and add the margin to get the expected return. For example: 5 year swap is 3.88% and if the margin is 3% then the expected return would be 6.88% per annum over the 5 years.  While you are right in saying that Hybrids are priced off the 90-day bank bill, that only encapsulates the next 3 months of interest rates which could understate or overstate expected returns depending if interest rates are going up or down. In this case, it is understating the likely returns. I hope that helps?

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Reference Rates

LAST UPDATED 07/09/2022 10:52

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chart

Reference Rates

LAST UPDATED 07/09/2022 10:52