Skip to main content

Hybrid securities and notes

Complex investments issued by banks and companies

Page reading time: 3 minutes

Hybrid securities are a way for banks and companies to borrow money from investors. They are complex investments that can be very risky. Get financial advice before investing in hybrids.

How hybrid securities and notes work

Companies, banks and insurers issue hybrid securities and notes. They are complex financial products that combine the features of bonds and shares. They can provide income, like a bond, but their value can fall dramatically, like shares.

Hybrids can also have features that impact the future value of your investment. Even experienced investors can struggle to understand the risks and features of some hybrids.

Hybrids generally pay a fixed or floating rate of return until a specified date. However there's no guarantee on the amount and timing of interest payments.

Each hybrid is unique and the names used to describe them may not be consistent. It's important to read the prospectus to check the specific features of each hybrid before investing.

Hybrids may not be suitable for you if you need steady returns or capital security.

Take the Australian Securities Exchange (ASX) online hybrids course to learn more about hybrid securities.

The difference between bank and corporate hybrids

Bank hybrids

Banks issue hybrids that are 'loss absorbing'. If the bank has financial difficulties, they can convert the hybrids to bank shares. The shares may be worth less than your initial investment, or written off completely.

This means investors, not the bank, are at risk of suffering a loss. This protects the bank's depositors, at the expense of hybrid investors.

Corporate hybrids

When you buy a corporate hybrid you lend money to a company in return for regular interest payments. But the company can defer interest payments for years and may not repay your capital for decades.

Corporate hybrids are also known as 'subordinated notes'. This means corporate hybrid investors get paid last if the company becomes insolvent. Interest payments may also be held back until other debts are paid.

Listed and unlisted companies can issue corporate hybrids. You can:

The risks of hybrid securities and notes

Hybrids have different levels of risk, which depend on the features of the individual hybrid.

Here are some of the most common risks.

What to check before investing in a hybrid security

Understand the features and risks of any hybrid before investing. You can get these details from the prospectus.

Make sure you can answer the following questions: