Hybrid securities are quite complex instruments and it is therefore crucial to understand some of the salient characteristics of this asset class before acquiring them. Further, there are many types of hybrids available in the listed arena and the key differences must be identified and understood.

“Hybrid securities” is a generic term used to describe an asset class which exhibit the characteristics of both debt and equity. These securities are often utilised by major corporations to raise capital or debt. Hybrid securities generally provide higher yields than pure redeemable secured or unsecured debt. As hybrid securities rank after secured and unsecured debt then this higher yield compensates investors for the higher investment risk.

In the past,hybrid securities have been structured to give investors equity movements generated by the moves in the ordinary shares. This is achieved by forcing conversion of the hybrid into the ordinary equity of the issuing company. You may recall the Transurban Group preference shares (known as “CARS”) which subsequently converted to Transurban units. Not only did the hybrid holders of these securities enjoy the higher regular dividend income, they also had the opportunity to benefit from a positive move in the ordinary securities of the issuing company.

More recently, the bulk of the hybrid securities have been issued with little or no equity upside. These securities had characteristics of debt rather than equity. These securities commonly have redemption or reset terms in perpetual debt securities.

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