What is a Hybrid?

The term Hybrid is generally used to describe securities that have features of both debt instruments (fixed income) and equity instruments (shares).

Although the terms may vary considerably from one Hybrid to another, Hybrids are generally issued by well-known companies and banks, like Westpac. In addition, Hybrids tend to have complex terms and, due to the higher risks associated with an investment in Hybrids, generally pay higher rates of interest or distributions than bank deposits (savings accounts and term deposits) and vanilla corporate bonds. (See Bank Hybrids for further details on the features and risks of Bank Hybrids).

Bank Hybrids are not guaranteed by the issuing bank or the government whereas bank deposits may be protected by a government guarantee under the Australian Government's Financial Claims Scheme Financial Claims Scheme A government guarantee for deposits up to an amount per account holder per ADI of $250,000. . An investment in Bank Hybrids is generally considered to have less risk than an investment in a bank’s ordinary shares (although unlike ordinary shares, they can be written-off Write-off If Bank Hybrids are written-off, investors will lose all of the value of their investment and they will not receive any compensation or unpaid distributions or interest. ) but more risk than a bank deposit or other forms of senior unsecured bank lending (e.g., bank bonds).

Another feature that adds to the complexity of Bank Hybrids is that they may be converted into ordinary shares or written-off Write-off If Bank Hybrids are written-off, investors will lose all of the value of their investment and they will not receive any compensation or unpaid distributions or interest. in certain circumstances (see Conversion events). This can lead to a change in the ranking of a holder's investment:

  • If Bank Hybrids are converted into ordinary shares, on any subsequent winding-up Bank Hybrid holders will rank equally with ordinary shareholders. The value of ordinary shares an investor receives may be significantly less than the face value of their Bank Hybrid.
  • If Bank Hybrids are written-off, Bank Hybrid holders will lose all of the value of their investment and will not receive any compensation or unpaid distributions (including in a winding-up).
  • If Bank Hybrids are not converted or written-off prior to a winding-up, Bank Hybrid holders will typically rank ahead of ordinary shareholders but behind bank deposit holders.

Why do companies issue Hybrids?

Companies issue Hybrids to diversify their sources of funding and capital. In addition, banks need to ensure that they are well capitalised to support their lending activities and meet regulatory capital requirements set by APRA APRA The Australian Prudential Regulation Authority. , the prudential regulator of the Australian financial services industry.

See Bank Hybrids for a brief overview of the typical features and risks associated with an investment in Bank Hybrids. For a complete description of the features and risks associated with an investment in a particular Hybrid, you should read the prospectus and review other information (including financial information) relating to the issuer. In the event you need further information, you should seek professional guidance from your stockbroker, solicitor, accountant or other independent and qualified professional adviser.