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What is a hybrid?

Hybrid securities are a broad classification of securities which combine both debt and equity characteristics to raise money. Hybrids pay a pre-determined (fixed or floating) rate of return or dividend until a certain date.

At the end date of the investment, the investor may have a number of options including converting the securities into the underlying ordinary shares of the issuer.

Therefore, a hybrid provides the opportunity for a ‘known’ cash flow as well as the opportunity for the issuer to convert the underlying equity.

Advantages

  • Wide variety of maturities and structures
  • Wide variety of issuers across the credit rating spectrum
  • Typically offer higher returns than those offered by more senior assets in the capital structure such as senior and subordinated debt.

Disadvantages

  • Varying liquidity
  • The highest risk fixed income security in terms of where it sits in the capital structure, although lower risk than equity
  • Have some equity characteristics which may add to the existing risk of a portfolio.

Suitable for

  • Investors seeking moderate to high risk levels
  • Wholesale and Retail investors.

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