Several large Australian companies have recently issued hybrid shares to the market. Companies including Westpac, ANZ, IAG, Tabcorp and AGL Energy are amongst the companies that have made hybrid shares available to investors.
What is a hybrid share?
Hybrid shares are still a security, a financial stake in a company. However, they are a cross between a loan and a share in the company. So, in short, they are a more complicated investment option in a company.
They are a complex investment choice and are not like traditional bonds or other more conservative investment options, and thus come with additional risks.
For starters, hybrid shares fluctuate in price more like shares than bonds.
What does this mean for investors?
One concern, in light of the recent raising from the issue of hybrid shares by these companies, is that investors may not have realised exactly what they have bought.
As with all investments, the higher the potential return, the higher the risk. Hybrid shares are no different. Some of the risks include being highly susceptible of market volatility. They are also unsecured debt; they are ranked behind bond holders if a claim were ever to be made against the company for the lost of the investment.
Plus, the issuing company can terminate hybrid shares early. Or interest payments can be suspended at the discretion of the company. Some are also extremely long term investments, with timeframes for returns running to 20 years.
Hybrid shares do not come with a government guarantee, thus it is the investor who wears the risk on these investments.
If your investment appetite is to have a stable investment with capital security that provides regular returns, hybrid shares may not be the right investment vehicle.
As with any investment, careful and thorough reading of the prospectus is advised to understand the nature and risk of what’s on offer. Independent financial advice on whether a hybrid share is the right kind of investment for you should be sought prior to purchase.