The Australian Securities and Investments Commission (ASIC) has warned of the risks and complexities of hybrid securities following a number of offers to have hit the market recently.
While not commenting on individual offers, ASIC commissioner John Price warned consumers to be wary of these complex products, which can be issued as subordinated notes or convertible preference shares.
“Despite household-name companies and trusted brands being linked to certain offers and promises of ‘high yields’, consumers should be very careful,” Price said.
High-yield or high risk?
“Some hybrid securities and notes are highly risky investments. Hybrids need to be closely reviewed. Consumers should think hard about whether hybrids are suitable for them and read and understand the prospectus.
“If they are still in doubt, they should get some unbiased financial advice before parting with their money.”
Earlier this week Michael Karagianis, a senior investment strategist at MLC Investment Management, argued the case for hybrid securities but warned that they also carry higher risks.
“Similar to shareholders, investors in hybrids may be one of the last groups of investors to receive their capital back in the case of bankruptcy or default by the issuing company,” he said.
“Therefore, default risk is potentially much higher than for a term deposit or conventional bond.”
Last in line
In an ASIC statement, Price noted there have been some cases where hybrids have not been paid back when investors expected because the company had a choice about when to redeem those investments.
“An expectation that at the end of a set period an issuer will definitely redeem the hybrid so that investors get repaid in full is very dangerous,” he said.
The risk to consumers is at its greatest when hybrid securities are viewed as defensive assets similar to term deposits or government bonds.
Karagianis makes the point that they are considered hybrid investments for good reason, as they potentially contain varying degrees of default or credit, market, convertibility and liquidity risk.
However, as the appetite for these products grows amid investor unwillingness to part with their cash unless a product is pitched as ‘safe’, Price reminded issuers their disclosure documents should be clear, concise and effective.
‘They should communicate the key features and risks of these products so retail investors can understand what they are buying,’ he said.
‘With complex products like these, issuers need to really focus on how information can be best presented to assist investors to make an informed investment decision.
“In particular, issuers should make sure these products are true to label. For example it may be more appropriate for these products to be called capital notes to reflect the nature and features of the product. Any advertising for these products should also be appropriately balanced.”
