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11-270MR ASIC warns consumers about hybrid securities and notes

Thursday 24 November 2011


ASIC today urged consumers to ensure they understand the conditions and risks of hybrid securities and unsecured notes before committing their money.

With considerable volatility in equity markets, many investors are looking for alternative investments, including debt and fixed interest securities. However, some of these alternatives need close scrutiny before the decision to invest is made.

ASIC Chairman Greg Medcraft said: ‘Retail investors may be attracted by the interest rates offered by household name companies and trusted brands, but hybrid securities should not be confused with government bonds or ‘vanilla’ corporate debt. In some cases investors are taking on equity-like risks but only receiving bond-like returns.

‘Investors need to understand the conditions of these offers, such as terms and conditions that allow the issuer to exit the deal or suspend interest payments, and long term maturity dates of several decades. We want to ensure consumers are fully informed before they invest,’ Mr Medcraft said.


Consumer tips


ASIC advises consumers and retail investors who are thinking about investing in a corporate hybrid security to compare offers, read and understand prospectuses, and pay particular attention to the risks.

Most hybrid securities are likely to be sold or recommended to consumers by brokers and financial advisers. ASIC expects these gatekeepers to clearly explain the features and risks of the investments to their clients. Below are five important issues that prospective investors should make sure their broker or adviser explains:

  1. What are the risks of investing in this hybrid security?
  2. Will the returns offered adequately compensate me for the investment risks?
  3. How does the interest rate compare with other investments on a 'risk adjusted' basis? Can other less complex, risky or long-term investments provide a similar or better return?
  4. Will this product help the investor achieve their personal goals and objectives, and does it suit their investment timeframe and risk profile?
  5. Can investors exit the investment if their circumstances change?

Consumers should always make sure their adviser is licensed to provide financial advice, and get personal advice in writing (a Statement of Advice).

For information about other types of fixed interest investments and to download ASIC’s guide to investing in corporate bonds, visit www.moneysmart.gov.au.


Background


Hybrid securities are one way for companies to borrow money from investors, while paying interest in return. They blend some of the features of debt and equity (shares), and can often be traded on a secondary market such as the ASX. However, hybrid securities have higher risks than most types of corporate bonds. While the conditions, timeframe, risks and interest rates (coupons) of each hybrid offer differ, some recent offers have particularly complex features and risks, including:

Note 1: This simple calculation assumes no time value of money.




































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