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Risks and benefits 

An investment in hybrids can generate regular income with some equity-like benefits and risks. Hybrid securities are generally complex in nature with potentially higher risks than other forms of investment. Investors should obtain independent advice before making any investment decisions.

Potential benefits of investing in hybrids

Some of the reasons investors may choose to invest in hybrid securities include:

  • the potential to receive an income stream for a pre-determined period, although the certainty of cash flows varies depending upon the hybrid structure
  • typically higher interest rates than paid on bonds, with the higher interest rate reflecting the higher risk profile of hybrids
  • diversification, and
  • the potential to benefit from anticipated movements in interest rates or equity prices

Potential risks of investing in hybrids

Generally, hybrid securities pay higher returns than bonds because there is usually a higher level of risk attached to a hybrid security than to a bond. Special care should be taken when assessing the risk of hybrid securities due to the blend of equity and debt characteristics, as the price may behave quite differently in different market scenarios. Hybrid securities are generally complex in nature with potentially higher risks than other forms of investment. Investors should obtain independent advice before making any investment decisions.

The potential for the issuer to default on payment obligations. Hybrids may also include structural features that allow the withholding of distributions without triggering default on other debit instruments higher in the capital structure.

Hybrids are typically less liquid than ordinary shares and their liquidity is also determined by issue size and the credit worthiness of the issuer. 

To be compliant with the international banking regulatory framework, hybrids issued by banks may contain trigger clauses with regards to capital levels and viability tests which can result in conversion into ordinary equity. 

The domestic and global regulations that Australian banks must comply with have changed considerably in the 25 years that they have been issuing hybrids. As such, older issues may have features that are quite different to more recently issued hybrids and therefore extra care must be taken into considering the relative risks of each security.

The Australian Securities and Investments Commission (ASIC) has produced a short guide to hybrid securities, emphasising that hybrid securities are complex products with higher risks than other types of securities. For more information from ASIC on hybrid securities and other investing topics, please see ASIC's MoneySmart website.