Hybrids - wolves in sheeps' clothing?

throughawindshield.wordpress.com

In ancient times, the mythological hybrid was a creature combining the body parts of two or more species. Now the financial product bearing this name is also a beast of varied parts. Some important hybrid instruments are preference shares, convertible/exchangeable debentures/bonds and debt with attached warrants.

From an issuer perspective, hybrid securities may allow the issuer to raise capital while achieving a particular accounting, tax, credit rating or regulatory capital outcome. Following reduced activity during and immediately after the GFC, hybrid securities have recently been used for significant capital raising by both banks and well-known corporate entities.

Did you know there has been more than $18 billion of hybrids issued by banks and companies in Australia since November 2011?  There were approximately 75,000 investors in hybrid securities last year, two thirds of whom were self-managed superannuation funds (SMSFs).  

Hybrid securities often promise ‘high yields’ and are issued by well-known companies with trusted brands, but investors need to very carefully consider the features and risks before investing. Some hybrid securities make investors take on 'equity-like' risks but only give them at best, 'bond-like' returns. Some also have terms and conditions that allow the issuer to exit the deal or suspend interest payments when they choose. Some are very long-term investments (for example, more than 20 years).

ASIC is concerned about the marketing and promotion of these products. It released a report on 20 August 2013 dealing with this issue.  Why?

The issues are:

• inappropriate labelling of hybrids and unwarranted comparison of hybrids to different, less risky products eg covered bonds or senior debt
• advisers spruiking potential higher returns and using the brand name or reputation of the issuer without identifying the higher risks attached to that specific product
• investor education - do you know what a hybrid is and how it works?  Can you assess its risk profile?

Terms and conditions of each hybrid issue vary and in some cases they include features that mean they rank closer to equity than debt. Many involve heightened risks for retail investors, such as risks deriving from long maturities and more complex features such as interest deferral or potential conversion into ordinary shares. 

The overall complexity of hybrid securities makes clear, concise and effective disclosure to investors in a prospectus more difficult. 

All investors including SMSF trustees have a duty to understand their investments and ASIC has said it expects issuers, brokers and advisers to take particular care to promote clear communication to investors about the nature of an investment in these securities.  

You can download the ASIC report here: REP 365 or read more about hybrids on ASIC's moneysmart website here.  Call Sage Advisers if you have any questions about hybrids.

Superannuation - campaign convergence

abc.net.au

We have been keeping you abreast of political announcements on the superannuation front since February this year: see Super Update and Super Election.

With 10 days to go before the Federal Election to be held on 7 September, it's timely to revisit the major parties' policies.

1. The 5 April 2013 statement by then treasurer Swan and superannuation minister Shorten put an end to much speculation that the tax breaks on super would be cut. Superannuation as a short term revenue fix was largely off the agenda.
2. Treasurer Chris Bowen announced on 6 August 2013 that the ALP government would not make any "major changes to superannuation tax policy" for five years.
3. The Coalition Liberal/National Opposition has met this with a pledge not to implement any "detrimental changes" to superannuation.

This means:-

1. The increase in Superannuation Guarantee to 12% will continue (the first increase began 1 July 2013) under the ALP but would be frozen at 9.25% for two years by the Coalition if elected, then the increase to 12% would be delayed by two years.
2. The Liberals have said they will wind back the Low Income Super Contribution (LISC) which refunded the 15% contributions tax for Australians who earn less than $37,000 a year. At the time this was introduced in 2012 by the ALP government, it was to be funded by the mining tax revenues, which, as we now know, have not eventuated.
3. The higher concessional caps will remain in place under the ALP and are likely to remain under the Coalition (as yet silent on the issue).
4. If the ALP is re-elected, legislation to establish its proposed Super Council will be brought forward so any future changes to legislation are consistent with an agreed Charter of Superannuation Adequacy and Sustainability. We don't know the attitude of the Coalition to the enabling legislation for the Super Council.

The Coalition intends to conduct a tax review in its first term but details are not yet available.