understanding hybrid securities

7/24/2019 Understanding Hybrid Securities

1/20

Understanding Hybrid Securities

ASX.

The Australian Marketplace


2/20

Disclaimer of Liability

Information provided is for educational purposes and does not constitute nancial product advice. You should obtain independent advice from an Australian nancial services licensee before making anynancial decisions. Although ASX Limited ABN 98 008 624 691 and its related bodies corporate (ASX)has made every effort to ensure the accuracy of the information as at the date of publication, ASX doesnot give any warranty or representation as to the accuracy, reliability or completeness of the information.To the extent permitted by law, ASX and its employees, ofcers and contractors shall not be liable forany loss or damage arising in any way (including by way of negligence) from or in connection with anyinformation provided or omitted or from any one acting or refraining to act in reliance on this information.

Edition 1 printed April 2014.

Copyright 2014 ASX Limited ABN 98 008 624 691. All rights reserved 2014.

Exchange Centre, 20 Bridge Street, Sydney NSW 2000 Telephone: 131 279 www.asx.com.au


3/20

1

Contents

Introduction 2

What is a hybrid security?About ASX Hybrids quoted on ASX

Why invest in hybrid securities 3

Using hybrid securities to diversify your portfolio

Risk and return the trade-off 4

Comparing hybrids to other investments 5

The different types of hybrid securitiesComparing hybrid securities to bonds generallyComparing hybrid securities to ordinary shares and simple bonds

Types of hybrid securities traded on ASX 7

Risks associated with hybrid securities 9

Hybrid securities examples 10

Buying and selling hybrid securities on ASX 12

ASX codesSettlementPrice information

Glossary 13


4/20

2

Introduction

Australian investors looking to receive a steadystream of income have often only consideredbank term deposits. Hybrid securities traded onASX can present an attractive alternative.

What is a hybrid security?Hybrid security is a generic term used todescribe a security that combines elements ofdebt securities and equity securities.

Hybrid securities typically promise to pay arate of return (xed or oating) until a certaindate, in the same way debt securities do.However, they also have equity-like features

that can mean they provide a higher rate ofreturn than regular debt securities. In somecases, this is because they give the holderan option to convert the hybrid securities intoequity securities (typically ordinary shares),which will give the holder an equity-kickerif the underlying equity securities performwell. In other cases, it may be that the hybridsecurities have equity-like risks attached and

the issuer has to pay a higher rate of return tocompensate investors for those risks.

About ASX ASX is one of the worlds top-10 listedexchange groups and quotes a broad arrayof products including shares, bonds, hybridsecurities, exchange traded funds, options,warrants, futures and other derivativeproducts. This provides investors and riskmanagers the opportunity to access a broadrange of asset classes, including domestic andinternational equities, debt, commodities andforeign exchange.

Hybrids quoted on ASX Just as you would instruct your broker to buyor sell shares in a company quoted on ASX, youcan instruct your broker to buy or sell hybridsecurities quoted on ASX.

There are a variety of hybrid securities quotedon ASX. They can be broadly split into threecategories convertible/converting debtsecurities (debt securities that convert intoequity securities), preference shares (equitysecurities with debt-like features) and capital

notes (debt securities with equity-like features).Examples of the last category include perpetualbonds (bonds which dont have a maturitydate), subordinated bonds (bonds that aresubordinated to the claims of other creditors)and knock-out bonds (bonds that give the issueror a third party a right to extinguish themunder certain conditions).

Some hybrids combine elements of thesedifferent categories for example subordinatedconvertible debt securities or convertiblepreference shares. Sound complicated? Well,

the hybrids market is rife with jargon and it isnot always used consistently. For example, the

term note is often used to describe ashort-term debt security but a capital notecan be a very long-dated security. To help

you understand some of the jargon, we haveincluded a glossary of some of the morecommon terms used in the hybrids market onpage 13.

This booklet will help you to understand hybridsecurities traded on ASX, the risks associatedwith them and how they may be used within

your investment portfolio. The informationin this booklet is necessarily general innature, and you should take care to inform

yourself about the specic characteristics ofa particular hybrid security before making adecision to invest in it.

Hybrid securities are generally complex innature with potentially higher risks thanother forms of investment. Investors need

to understand the conditions of theseoffers. Investors should obtain advice from aprofessional nancial adviser prior to makingany nal investment decision.


5/20

3

Why invest in hybrid securities

There are a variety of reasons investors maychoose to invest in hybrid securities, including

the potential to:

receive a steady and dened income streamfor a pre-determined period;

improve the return on your capital theincome from hybrid securities is typicallyhigher than interest paid on simple bondsreecting their higher risk;

diversify the risk of your overall portfolio; and

prot from anticipated movements ininterest rates or equity prices.

Using hybrid securities to diversify your portfolioDiversifying your investment portfolio with a

variety of ASX listed products can help reducerisk and protect returns over the longer term.

Diversifying involves: spreading your investments across different

asset types such as shares (both Australianand international), REITs (listed commercialproperty), bonds, hybrid securities,currencies and commodities;

spreading your investments within eachasset type so, for example, you hold a rangeof shares across different sectors, a spreadof bonds and hybrid securities of different

types with different issuers and maturity

dates; and spreading your investments across assets

that have low correlation with each other,recognising that the value of investmentsin different asset classes can vary throughdifferent cycles.

Hybrid securities are a good way to introducediversication into an investment portfoliobecause their regular income stream generallyprovides more stable returns.


6/20

4

Risk and return the trade off

It is important to understand the degree of riskassociated with different types of investmentsand how that affects their expected return.Generally speaking there is a trade-off betweenrisk and return. Assets with a higher level ofrisk will generally have a higher potential rateof return attached and vice versa. That is whymost hybrid securities pay higher returns thanregular bonds there is usually a higher level

or risk attached to a hybrid security than to aregular bond.

The diagram below illustrates how a portfolio that includes a balance of shares, hybridsecurities and bonds may have a lower riskprole and more stable returns than a portfolioof shares only. This may suit investors with adesire for greater certainty of income rather

than potential capital growth.

Risk versus return

High

Returns

Low

Low Risk/Volatility High

Cash

Bonds

Shares

Shares + Bonds


7/20

5

Comparing hybrids to other investments

The different types of hybridsecuritiesHybrid securities include a very broad array ofdifferent products that have markedly different

terms and conditions. They range fromrelatively simple convertible debt securities tosome very complex nancial instruments.

Thats why its so important to read theprospectus or product disclosure statement(PDS) for a hybrid security and to understand

the particular terms and conditions that apply to that security before investing.

Comparing hybrid securities tobonds generally Comparing a hybrid security to bonds is a bit likecomparing one type of apple with a basket fullof different types of apples and other fruit. The

term bond also describes a very broad arrayof different products, ranging from so-calledsimple bonds (such as most government bonds)

to some very complex debt securities. In fact,a number of hybrid securities use the termbond as part of their name or are referred

to as bonds (for example, perpetual bondsand subordinated bonds), which can make acomparison even more confusing.

A bond is regarded as a simple bond if:

it has a xed or oating coupon rate thatdoes not change for the life of the security;

interest payments under the security arepaid periodically and cannot be deferred orcapitalised by the issuer;

it has a xed maturity date which is notmore than 10 years after its date of issue;

it is not subordinated to other debts owed tounsecured creditors generally; and

it does not attach any options to convert it to equity or to extinguish it (so-called knock-out options).

Examples of more complex bonds include:

bonds that allow the issuer to defer orcapitalise interest payments under certainconditions;

bonds that provide for the coupon rate to bere-set at certain times (often called re-setor re-settable bonds); and

bonds that give the issuer the option to extend them but at the price of paying a highercoupon rate (typically called step-up bonds).

These more complex bonds are still regarded asdebt securities rather than hybrid securities, as

they do not have any equity-like features attached.

Hybrid securities, on the other hand, are calledhybrid because they combine features of debtsecurities and equity securities. Examples includeconvertible/converting bonds (bonds that convertinto shares or other securities under certain

conditions), perpetual bonds (bonds that donthave a maturity date), subordinated bonds (bonds

that are subordinated to the claims of othercreditors) and knock-out bonds (bonds that give

the issuer or a third party a right to extinguish them under certain conditions).

To compare a hybrid security with a regular bond(that is, a bond without any hybrid features) youneed to compare the debt-like features of the twosecurities and then factor in the particularequity-like features attached to the hybrid security.

Take, for example, a simple convertible bond a hybrid security that effectively combines thefeatures of a simple bond (a debt security) with anoption to convert it to a share (an equity security)at some point in the future. In this comparison,

the relationship of the hybrid security to the simplebond can be thought of as follows:

Bond

Bond

Hybrid

Option

Hybrid

Bond

Hybrid

Option

Option

+

=

=

=


8/20

6

You can see from the above formulas that a bond with an option to convert it to a share at somepoint in the future intrinsically has a different value than a simple bond. The option itself has

value, which from the holders point of view may be positive (where the option is exercisable by theholder) or negative (where the option is exercisable by the issuer). The convertible bonds price willreect this embedded option value. Whilst the option is well out of the money, the market priceof the convertible bond can be expected to perform similarly to a simple bond paying an equivalentreturn. However, as the option gets closer to being in the money, the value of the option is likelyreect more closely the market price of the convertible bond.

For more information about simple bonds, please consult the ASX website and the UnderstandingBonds booklet.

Comparing hybrid securities to ordinary shares and simple bondsThe table below compares hybrid securities with ordinary shares and simple bonds.

DISTINGUISHINGFEATURES

ORDINARYSHARES

SIMPLEBONDS

HYBRID SECURITIES

Category - - Convertible bonds Preference shares Capital notes

Legal form Ordinary share Debt obligation Debt obligation Preferred share Debt obligation

Par value N/A Fixed or indexedto CPI

Fixed Fixed Fixed

Coupon rate N/A Fixed or oating Fixed or oating Fixed or oating Fixed or oating

Payment frequency Typically semi-annual

Varies buttypically quarterlyor semi-annual

Varies buttypically quarterly



Income Variable dividends Coupon rate paidas interest.

Coupon rate paidas interest.

Coupon rate paidas a dividend

Coupon rate paidas a dividend or

interest.Possible frankingcredits

Yes No No Yes Sometimes

Discretionarydistributions

Yes No No Usually no No

Term Perpetual Fixed Usually xed Usually xed Usually xedexcept forperpetuals, whichhave no specicmaturity date

Convertible No No Yes Sometimes Sometimes

Callable No No Sometimes Sometimes Sometimes

Putable No No Sometimes Sometimes Sometimes

Resettable No No Sometimes Sometimes Sometimes

Step-up No No Sometimes Sometimes Sometimes

The table above illustrates that hybrid securities have more complex and varying features thaneither ordinary shares or simple bonds. When comparing hybrid securities to other forms ofinvestment, remember that you must carefully read the prospectus or PDS for the security tounderstand the particular features of that security. If you have any doubt about a hybrid securitys

terms and conditions, or whether it is the right investment for you, you should consult yournancial adviser.


9/20

7

Types of hybrid securities traded on ASX

As mentioned previously, there are three broadcategories of hybrid securities traded on ASX:

1. Convertible/converting debt securities;

2. Preference shares; and

3. Capital notes.

1. Convertible/converting debtsecurities

A convertible debt security is one that giveseither the investor or the issuer the option

to convert it into another type of security ata specied date in the future. Often this willbe ordinary shares in the issuer. Convertiblesecurities therefore have contained within theman embedded option. As mentioned previously,

that embedded option has value, which from the holders point of view may be positive(where the option is exercisable by the holder)or negative (where the option is exercisable by

the issuer).

Securities that are convertible by the holderare attractive to investors because they

typically offer downside risk protection whilehaving a potential equity-kicker on the upside.They are attractive to issuers because theycan usually be issued at a lower interest rate

than a standard bond, due to the value of thatpotential equity-kicker. This makes them lesscostly for the issuer to service. These bondsalso allow the issuer to raise capital withouthaving to immediately add a large number ofshares to their pool of ordinary shares. If the

company issues shares rather than convertiblenotes, the sudden addition of more new shareswould result in a dilution of its equity. This canbe unsettling for investors who see their pieceof the pie shrinking.

Some convertible and converting bonds containanti-dilution provisions which protect the valueof the right of conversion for the investor. If notit can materially affect the value of the right ofconversion and present a risk for investors.

2. Preference sharesUnlike ordinary shares, which pay a variabledividend rate as determined by the directors of

the company, preference shares usually carry aspecied dividend rate. It may be a xed rate ora oating rate. They also usually carry a right

to be redeemed for cash at maturity, much likea bond. It is these features that make themhybrid securities they are equity securities

that pay debt-like returns.

A preference share is given that name becauseholders of a preference share rank ahead ofholders of ordinary shares for the payment ofdividends and recovery of capital. That is holdersof preference shares typically have priority overdividend payments to ordinary shareholders andpreference shareholders typically are entitled toa payment of the face value of the preferenceshares ahead of any distribution of surplusassets to ordinary shareholders in a winding up.

The holders of preference shares generally donot have voting rights except in certain limitedand exceptional circumstances.

Some preference shares may be issued withouta maturity date. This type of preference shareis referred to as a non-redeemable or perpetualpreference share.

Some preference shares, called convertiblepreference shares, may give the holder or theissuer the option to convert the preferenceshares into ordinary shares at a specied dateor dates in the future. Others, called convertingpreference shares, may automatically convertinto ordinary shares at a specied date in thefuture.


10/20

8

3. Capital notesCapital notes are debt securities that have

equity-like features attached. Examples include: perpetual debt securities these are debt

securities with no xed maturity date. Theyare regarded as hybrid securities because

they are a debt security with equity-likefeatures (like a share, they dont mature).

subordinated debt securities these aredebt securities whose rights with respect

to payment of interest and repayment ofprincipal rank behind (are subordinated

to) another class or classes of debt.

The subordination may be in favour of the holders of senior debt or to ordinarycreditors generally. Again, they are regardedas hybrid securities because they are adebt security with equity-like features (like ashare, they rank behind certain debts in awinding up).

knock-out debt securities these are debtsecurities that give the issuer or a thirdparty (such as a prudential regulator like theAustralian Prudential Regulation Authority,or APRA) a right to extinguish them undercertain conditions. They are typically issuedby banks or other prudentially-regulatedcompanies and have terms and conditionsattached so that they are treated likecapital, or given a particular risk weighting,by prudential regulators, Again, they areregarded as hybrid securities because theyare a debt security with equity-like features(in certain circumstances, like a share, theyhave no right to a return of capital).


11/20

9

Risks associated with hybrid securities

Any investment carries with it some risk. Thisapplies to hybrid securities as it does to otherinvestment types. Usually the greater theperceived risk, the higher the anticipated returnrequired to compensate investors for that risk.Accordingly hybrid securities that are perceived

to have higher risk attached to them will generallyattract a potential higher rate of return, whereashybrid securities that are perceived to have a

lower risk will generally attract a lower return.

Some key risks to consider when investing inhybrid securities are interest rate risk, creditrisk and liquidity risk. Each of these risks arecovered in more detail below.

Interest rate risk the effect ofchanging interest rates on yieldsand pricesIf the coupon rate on a hybrid security is oating,

the yield on the security can usually be expected

to stay in line with short-term interest rates, somovements in interest rates should have verylittle impact on its price. However, if the couponrate is xed, the yield on the security can onlykeep pace with changing interest rates if theprice of the security changes.

INTEREST HYBRID FIXED-RATE

RATES* YIELDS HYBRID PRICES

Rise Rise Fall

Fall Fall Rise

* There is an inverse relationship between the market price of a xed-rate hybrid security and expected yields the market price will go up ifexpected yields fall and will go down if expected yields rise. The samething happens to share prices share prices go up if expected dividendyields fall and go down if expected dividend yields rise.

There is an inverse relationship between the marketprice of a xed-rate hybrid security and expected

yields the market price will go up if expected yieldsfall and will go down if expected yields rise. Thesame thing happens to share prices share pricesgo up if expected dividend yields fall and go down ifexpected dividend yields rise.

Credit risk Credit risk is related to the nancial strength of

the issuer. A hybrid issuer falling into difcultiescould result in the issuer defaulting on paymentsie not being able to pay promised distributions on

the face value on maturity. Generally, the higher

the credit quality of the issuer, the lower the riskassociated with the security and therefore thelower the yield required by investors.

Credit risk also includes credit spread risk. Thisarises when investors demand a higher spreadfor securities with higher credit risks compared

to lower risk debt securities, such as governmentbonds. This is often associated with a downturn in

economic conditions, leading to an expectation ofhigher levels of default on higher risk securities.

Liquidity or marketability risk Liquidity risk is the risk of not being able to sell

your investment quickly and easily, or for a fairprice, in the market if you need to. For somehybrid securities, particularly those with smallamounts on issue, liquidity may be poor.

Complexity risk As stated throughout this booklet, hybrid

securities may contain features that are complexand impact signicantly on the future value of

the security. While these risks are required bylaw to be disclosed in a prospectus or PDS fullyunderstanding them, especially for investorsnot familiar with complex nancial instruments,is critical. It is very important, therefore, that

you read the prospectus or PDS for a hybridsecurity carefully and if you have any doubt about

the terms of the security, and/or whether it is the right investment for you, to consult with anancial adviser before deciding to invest.

Share price risk (for convertibleand converting securities)As mentioned previously, a convertible securityeffectively has an embedded option. The valueof that option will rise and fall as the price of

the underlying security (usually an ordinaryshare in the issuer) rises and falls. This willbe reected in the market price of the hybridsecurity. Hence, there is a risk that the marketprice of a convertible security will fall if themarket price of the underlying security falls.

For converting hybrid securities, the relationshipbetween the market price of the hybrid securityand the market price of the underlying security iseven more direct. Again there is a risk that themarket price of a converting security will fall if themarket price of the underlying security falls.


12/20

10

Convertible debt security Example: XYZ Company convertible note

In June 2013, XYZ Company issued convertiblenotes with a face value of $100, maturing inJune 2018. The securities pay a quarterlycoupon set at 5%. The coupon is in the formof interest and thus no franking credits areavailable. The share price at the time of

issuance was $2.20. Each note gives theholder the right to convert on maturity 1 noteinto 40 ordinary shares giving a conversionprice of $2.50 (that is $100/40).

Assume that the share price at maturity of the convertible note is $4.10. The holderof the convertible notes will have the choice

to either convert each note into 40 sharesworth $164 or receive the note face value($100). Given the conversion value is higher,

the more protable strategy for holders will be to convert into shares. Investors who bought

the notes on the original issue date and held to maturity would therefore have earned 5%p.a. and received a capital gain on the notesof $64 a total return of $89 or 17.8% p.a.(not including any return from reinvestment ofincome received).

Assume instead that the share price atmaturity of the convertible note is $2.40.The holder of the convertible notes will have

the choice to either convert each note into40 shares worth $96 or receive the noteface value ($100). Given the conversion valueis lower, the more protable strategy forholders will be to be paid the notes face value.Investors who bought the notes on the originalissue date and held to maturity would thereforehave earned 5% p.a. and made no capital gainor loss on the notes a total return of 5% p.a.(not including any return from reinvestment ofincome received).

Preference shareExample: ABC Bank Converting PreferenceShares

In March 2014, ABC Bank issued hybridsecurities called converting preference shares,maturing in March 2020. The shares have aface value (issue price) of $100 and pay a 5%per annum fully franked dividend in semi-annual

instalments. The terms provided that the face value of each converting preference share willautomatically convert into ordinary ABC shareson the conversion date, at a 1% discount

to the volume weighted average share price(VWAP) of those shares over the last 20 daysof trading up to the conversion date.

Suppose you purchase 50 ABC Bank convertingpreference shares at the issue date for$5,000. If held to maturity, you would receive afully franked dividend of $125 on each dividendpayment date and if the 20 day VWAP at the

conversion date was $25.00, then you wouldreceive at the conversion date in 2020:

Number of shares = [number of hybridsecurities x face value] / [(1 discount rate) x20 day VWAP]

= 50 x 100 / 0.99 x 25.00

= 202 ABC ordinary shares

Hybrid securities examples


13/20

11

Capital notesExample: ABC Bank Capital Notes

In December 2013, ABC Bank issued hybridsecurities called ABC Capital Notes. The notesare perpetual and pay a discretionary oatingrate distribution that is in the form of a dividendand thus are expected to be fully franked. Theoating rate distribution is paid quarterly and

is a margin of 3.20% over the benchmarkinterest rate, being the 90 day bank bill rate.The bank has certain redemption rightsincluding that of redeeming the securities incash for their face value on a xed date in thefuture. It also has the right to withhold interestpayments and/or to convert the notes intoordinary shares in ABC in certain speciedcircumstances. In any winding up of ABC, thenotes rank ahead of ordinary shares but behindbond holders and depositors.

Suppose you purchase 500 ABC Capital Notes

at the issue date for $100 each.

The distribution being variable will bedetermined by the prevailing 90 day BBSWrate each distribution date. The distribution ispaid quarterly so the amount you are due toreceive four times a year will be:

(number of bonds x face value) x (distributionrate / distribution frequency)

= (500 x $100) x (distribution rate / 4)

If the 90 day bank bill rate applicable for a

distribution is 3.05%, the distribution will be3.05% plus the margin of 3.20% equalling6.25%. Therefore the distribution for thisparticular payment date would be:

= (500 x $100) x (6.25 / 4)

= $781.20

Note that each distribution payment date wouldhave a different distribution depending on the90 day BBSW rate at the time. Distributionswould continue in perpetuity unless the notewas redeemed, converted, or an event was

triggered that meant the bank was entitled to withhold the distribution. If you wanted toexit your investment in the notes at any time,

you would have to sell them on ASX for theprevailing market price.


14/20

Buying and selling hybrid securities on ASX

There are two main ways in which you can buyhybrid securities. They are on the:

primary market; or

secondary market.

When you buy a hybrid security on the primarymarket, you buy it directly from the issuer. Ifit is an ASX quoted security, once the primary

issue period has nished, the hybrid will start trading on ASX (the secondary market).

If you buy a hybrid security on ASX, you arebuying it from another investor and not from

the issuer.

In order to buy or sell hybrid securities on ASX you will need to use a broker. The ASX websitecan help you to locate a broker in your area

that may be able to assist. Visit www.asx.com.au/ndabroker

ASX CodesASX hybrid securities trade in the same way asshares listed on ASX. Each security is identiedby an ASX code that is six alpha characterslong.

The rst three characters identify the issuer,for example, WBC for Westpac.

The fourth character identies the type ofsecurity. For example:

G indicates a convertible note

P indicates a preference share.

The fth character, if any, is known as thesequence code. It indicates the number of thatparticular security within a series of securitiesfor that issuer. For example, WBCPD indicates

the fourth Westpac Capital Note on issue byWestpac Banking Corporation.

SettlementSettlement of hybrid securities bought or soldon ASX takes place in CHESS (Clearing HouseElectronic Sub-registry System). You may holdhybrid securities in CHESS either as brokersponsored holdings or on the issuers registeras issuer sponsored holdings.

CHESS settlements normally occur on a trade

day plus three (T+3) basis and the quotedprices for hybrid securities reect this.

Price information

You can get information about current tradingprices through a number of channels including:

Financial websites such as the ASX websitewww.asx.com.au

Your broker who should be able to provide the current market price for any ASX quotedsecurity.

The nancial press which carry a list of theprevious days market action and closingprices.12


15/20

13

Glossary

Accrued interestThe amount of interest that has accrued ona hybrid security from the securitys originalissuance date or the last coupon date to thedate when the security is bought or sold.

The market price of a hybrid security cangenerally be expected to increase daily by theamount of interest accrued. For example, a

security with a $100 face value and 6.5%coupon accrues interest at $6.50 per annum,or 1.78 cents per day. You can expect themarket price of the security to increase byaround 1.78 cents per day until the nextex-interest date, when the accrued interest

value will fall to zero.

Annual couponA coupon that is paid once a year.

Bank bill swap rate (BBSW)A compilation and average of market ratessupplied by nominated domestic banks inregard to the specic maturities of bankbills. The purpose of BBSW is to provide anindependent and transparent reference rate for

the setting of interest rates and the pricing of various interest rate derivatives.

Basis pointOne hundredth of a percentage point (0.01%).100 basis points equals 1%. If a hybridsecuritys yield has gone up by 50 basis points,it has gone up by 0.50% (eg from 4.00% to4.50%).

Bid priceThe price a buyer is offering.

Call dateA date prior to maturity on which a callprovision may be exercised by the issuer.

Call provision

A provision in the terms of a hybrid securitygiving the issuer the right, but not theobligation, to buy back the securities from

the holder at a particular date or dates in thefuture at a specied price.

CallableA hybrid security with a call provision.

Capital noteA hybrid security that is essentially a debtsecurity but with equity-like features. Examplesinclude perpetual bonds, subordinated bondsand knock-out bonds.

Capital priceGross price less accrued interest.

CHESSThe Clearing House Electronic SubregisterSystem, a system for clearing and settling

trades executed on the ASX market and certainother markets in Australia.

ConvertibleA hybrid security that gives the holder or theissuer the option to convert the security intoanother type of security (often ordinary shares)at a specied date or dates in the future.

ConvertingA hybrid security that automatically convertsinto another type of security (often ordinaryshares) at a specied date in the future.

CouponThe interest amount paid on the specied

date to an investor in a hybrid security. It iscommonly expressed as a percentage rate.Coupons can be paid annually, semi-annuallyor quarterly or as agreed in the terms of thesecurity.

Coupon dateThe date on which the coupon interest is paid

to an investor of a hybrid security.

Coupon frequency The frequency with which coupon (interest)

payments are made throughout the life of ahybrid security. Usually this will be quar terly,semi-annually or annually.


16/20

14

Coupon rate

The nominal interest rate a hybrid security pay(ie annual income dividend by the face value of

the security).

Credit risk The risk that an issuer may be unable to meet

the interest or capital repayments on a hybridsecurity when they fall due. Generally, thehigher the credit r isk of the issuer, the higher

the interest rate that investors will expect inorder to risk providing funds to the issuer.

CumulativeA preference share where missed dividendpayments are added to the next (or a future)dividend payment.

DefaultWhen an issuer cannot meet the paymentobligations on a hybrid security.

Dirty priceThe price of a hybrid security that includes the

interest or dividend that has accrued and isdue for payment on the next coupon payment.Dirty price is also known as the gross price ofa hybrid security. See also clean price.

Discounted priceWhen the clean price or capital price of ahybrid security is less than its face value.

Ex interest date or ex dividend dateThe date at which an exchange traded hybridsecurity starts trading ex the entitlement

to receive the current interest or dividendpayment. This is usually two business daysbefore the record date for the interest ordividend distribution.

Exchange-tradedA security or other instrument traded on anexchange.

Face value

The amount on which interest or dividends arecalculated over the life of a hybrid security. In

the case of a hybrid security that provides fora return of principal at maturity, this will usuallybe the amount of principal that the investor isdue to receive at maturity. This is also referred

to as the par value or nominal value.

Fixed rateA hybrid security that pays a xed rate ofinterest over the life of the security.

Floating rateA hybrid security that pays a oating rate ofinterest by reference to a variable benchmarkinterest rate, such as the 90 day BBSW rate.

Floating rate note (FRN)Another term for a bond that pays a oatingrate of interest.

Gross priceThe price an investor pays to buy a hybrid

security, which is made up of its capital priceplus accrued interest.

Hybrid security A security that has both debt and equitycharacteristics.

IssuerThe entity that issues the hybrid security toraise money from investors.

Knock-out bondA bond that give the issuer or a third partya right to extinguish the bond under certainconditions.

Liquidity The ease with which a hybrid security can bereadily converted into cash.


17/20

15

Maturity date

The date on which a hybrid security matures.What happens at the maturity of a hybridsecurity depends on its particular terms andconditions. In some cases, this will be the dateon which the nal coupon and the face valueof a hybrid security are paid to investors. Inother cases, the holder or the issuer may havean option to convert the hybrid security intoanother security (most typically, ordinary sharesin the issuer). In yet some other cases, thehybrid security might automatically convert intoanother security. A hybrid security effectively

expires once the obligations at maturity havebeen met.

Nominal valueThe face value of a hybrid security.

Nominal yieldA measure of the return on a hybrid securitybased on the annual coupon paymentsexpressed as a percentage of the face valueof the hybrid security. It takes no account of

the current market price of the security or any

future capital gain or loss on the security. Fora xed rate hybrid security, the nominal yield isequal to the coupon rate.

Non-cumulativeA preference share where missed dividendpayments are forgone. The issuer of the shareis not obliged to pay the unpaid amount to theholder.

Offer priceThe price a seller is asking.

Over the counterA security or other instrument that is not

traded on an exchange such as ASX but transacted between buyers and sellersoff-market.

Par valueThe face value of a hybrid security.

Perpetual bond

A bond with no maturity date.

Premium priceWhen the clean price or capital price of ahybrid security exceeds its face value.

PrincipalThe face value of a hybrid debt security onwhich interest is calculated.

Purchase price

The dollar amount paid to purchase a hybridsecurity.

Put dateA date prior to maturity on which a putprovision may be exercised by the holder.

Put provisionA provision in the terms of a hybrid securitygiving the holder the right, but not theobligation, to require the issuer to buy back

the security at a particular date or dates in the

future at a specied price.

PutableA hybrid security with a put provision.

Quarterly couponA coupon that is paid four times a year.

Record dateThe date at which an investor needs to beregistered as the holder of a hybrid security

in order to receive the current interest ordividend distribution.

RedeemableUsed mainly in the context of preferenceshares to indicate that the holder has a right

to have the share redeemed for a cash amount(usually its face value) and/or that the issuerhas a right to redeem the share for a cashamount. This is in contrast to ordinary shares,which are not redeemable.


18/20

16

Resettable

A hybrid security that allows the issuer tore-set the terms (eg by setting a new interestor dividend rate) after a specied period. Often

the holder of the security will have certainoptions available to them on the re-set date,such as to accept the new terms, redeem, orin the case of convertible securities, to convertinto the underlying security.

Running yieldA measure of the return on a hybrid securitybased on the annual coupon payments

expressed as a percentage of its currentmarket price. It takes no account of any futurecapital gain or loss on the security.

Secured hybrid security A hybrid security backed by a charge over anasset of the issuer.

Senior debtA class of corporate debt whose r ights withrespect to payment of interest and repaymentof principal rank ahead of (are senior to) otherclasses of debt and over all classes of equityissued by the same issuer. Senior debt is

typically backed by a charge over various assetsof the debtor.

Semi-annual couponA coupon that is paid twice a year.

Step-up security A hybrid security where the coupon is steppedup, that is increased by a nominated margin,

upon a specic trigger happening. Often the trigger will be the issuer not exercising anoption to repay the security at a particulardate.

Subordinated bondA bond whose rights with respect to paymentof interest and repayment of principal rankbehind (are subordinated to) another classor classes of debt. The subordination may bein favour of the holders of senior debt or toordinary creditors generally.

Term

The period from the issue date of a hybridsecurity to its maturity. The term of a hybridsecurity can vary greatly, from short term (up

to ve years) to medium term (ve to 10 years) to long term (10 or more years).

Time to maturity The number of days until a hybrid securitymatures.

Unsecured hybrid security A hybrid security that is not backed by a chargeover an asset.

YieldThe annual return on a hybrid securityexpressed as a percentage. There are differentmeasures of yield: nominal yield, running yieldand yield to maturity.

Yield curveA graph showing the relationship between yield

to maturity and time to maturity.

Yield to maturity The average annual return an investor shouldreceive if they buy a hybrid security for itscurrent market value and hold the hybridsecurity to maturity. The calculation factors incoupon payments, the time to and amount dueat maturity, and the capital gain or loss that willbe made on maturity. It also assumes that thecoupon payments are reinvested in the hybridsecurity.


19/20


20/20

Exchange Centre, 20 Bridge Street, Sydney NSW 2000.

Telephone: 131 279 www asx com au

understanding hybrid securities

Documents