Hybrid securities are a class of securities that have both debt and equity characteristics. These securities usually pay fixed or floating interest payments (or ‘dividend payments’) over a defined period. After this period they may be either redeemed, the interest margin is reset for a further set time period, or converted into equity (shares).
These securities often contain provisions that allow for the issuer (of the hybrid) the right to buy the security within a defined period, as well as other features that may impact the payment of interest (or dividends).
The most important aspect of hybrid securities for investors to understand is the credit/financial strength of the underlying issuer, and the ability of the issuer to meet its ongoing interest payments and capital repayments.
Learn more about hybrids with NAB's expert Mark Todd, Director Sub-Institutional Fixed Income Distribution.
Hybrids tend to pay regular income, and their coupon rate can be fixed or floating.
Some hybrid securities offer franking credits. The availability and level of franking credits may vary depending on the security and the ability of the issuer to pay franked distributions.
You may be able to generate a regular dividend income stream as cash or opt to reinvest distributions in more shares via a company Dividend Reinvestment Plan (DRP).
In some cases you are taking on equity-like risks but only receiving bond-like returns.
The coupon (interest payment) is generally at the discretion of the issuer, so the issuer can make a decision not to pay coupons.
The issuer may have the option to delay redemption for a longer period than initially defined or indefinitely.
Hybrids lie at the riskier end of a company’s capital structure – normally ranking just above equity, but below secured debt, senior debt and subordinated debt.
Trade size | $1,000 | $5,000 | $10,000 | $20,000 | Over $20,000 |
Brokerage | $9.95 | $14.95 | $19.95 | $19.95 | 0.11% of trade value |
There are two ways to fund your investment: