Hybrid sector – Weakness provides opportunity
02 Oct 2015
By Shadforth Financial Group
Hybrid securities earn their name from the fact that they possess characteristics of both equity (ownership) and debt (loan) investment. Most hybrids are listed on the ASX and can be bought and sold like any other listed investment. They pay interest on a regular basis (either half yearly or quarterly.) There are lower potential returns in hybrids compared to shares due to the repayment or conversion at the end of the term. As such, they are usually a lower risk investment than shares.
The hybrid sector has seen some selling pressure emerge in the past couple of months as investors cashed out of the sector to take up major equity raisings from ANZ and the Commonwealth Bank. During this time Westpac was raising capital via Westpac Capital Notes 3 (WBCPF).
The margin for Westpac Capital Notes 3 was set at 400 basis points above the 90 day bank bill rate, which was roughly in-line with the implied trading margins of similar securities listed on the ASX. Falling hybrid prices saw these implied margins approach 500 basis points at the time WBCPF was due to list, which resulted in WBCPF listing at a discount to its $100 offer price.
The recent price weakness has arguably resulted in a number of securities in the hybrid sector offering attractive yields, especially compared to current term deposit rates. Securities that represent good value at current prices include ANZ Convertible Preference Shares II (ANZPA) and Westpac Capital Notes (WBCPD). If you would like further information about hybrid securities, their risks and whether they may be appropriate for you, please contact your financial adviser.