Investors who are looking for alternatives to hybrid securities should consider “making their own” by investing in both the debt and equity of listed companies, says FIIG.
Fixed income provider FIIG has backed calls by ASIC chairman Greg Medcraft for hybrid securities to be banned for sale to retail investors.
Mr Medcraft told the Australian Financial Review last month that hybrids are "ridiculous" for retail investors, prompting a bemused reaction from Morningstar analyst John Likos.
Speaking to InvestorDaily, FIIG director of education and research Elizabeth Moran agreed with the outgoing ASIC chairman that hybrids should be banned for retail investors given their "very complex terms and conditions set out in long, 100-plus page prospectuses".
The typical hybrid security prospectus contains a plethora of arcane terms, Ms Moran said, not limited to: 'non-cumulative', 'convertible', 'redeemable', 'perpetual', 'unsecured', 'subordinated', 'regulatory capital', 'loss absorbing', 'additional Tier 1 capital', 'capital trigger event' and 'non-viability trigger event'.
Hybrids lost about 30 per cent of their value during the GFC, she said – and they can convert to equity and "never be repaid" if the issuing bank gets into trouble.
The stark reality of hybrids was laid bare for investors in June 2017 when Spanish bank Banco Popular Espanol was deemed 'non-viable' by the regulator, Ms Moran said.
"Shareholders and hybrid investors lost everything when they were 'bailed-in' to protect the bank’s survivability. In contrast, the most senior bond holders and deposit investors did not lose any funds," she said.
"So if hybrids are ‘ridiculous’, what are the alternative fixed income options for investors in the current market?
"Investors should consider making their own hybrid by investing in the shares and bonds of the same banks.
"You get the assurity of the bond and the face value repaid to you at maturity. But you also get the possible increase in share price and dividends if the bank performs well."
Wealth management relationships are under threat as clients look to switch providers driven by the impact of the royal commission. ...
S&P Dow Jones has announced a new addition to its global ESG index using enhanced ESG scores and granular data. ...
Investor confidence is on the rebound and the ASX hit a 12-year high on Monday. But it’s not all good news for the Australian economy. ...