Hybrids issued by financial institutions have been back in the news recently, for two conflicting reasons.
On the one hand, we have seen a flurry of new offers in the market, with CBA, Challenger and Bendigo all issuing new hybrid stock. The market’s response to these has been enthusiastic, to say the least, with all of the offers closing early and oversubscribed, as investors hunt for yield.
On the other hand there have been calls for restricting retail investor access to these new issues on the back of a move by UK regulators to restrict retail access to the structurally similar “CoCos” in that market.
Hybrids clearly have plenty of appeal to investors in a low interest environment. The key question is whether retail investors are reasonably likely to be able to fully understand the risks associated with hybrids, and whether this assessment is significantly more complex or difficult than assessing the risks associated with an investment in ordinary shares in the same company. Each in turn requires understanding the overarching risk associated with an investment in a company, as well as matters such the company’s dividend policy and outlook, liquidity, and volatility.