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I have a few hybrids in my SMSF, mainly the banks and a couple of corporates, that I felt comfortable about. My Suncorp has recently been redeemed and my Westpac is about to be. I enquired with my stockbroker as to an alternative he would recommend. His response was that they are not recommending recent issues mainly because they now contain a mandatory conversion clause, and dividend/interest payments are not compulsory/cumulative.
This appears to me to mean that our regulator, in its wisdom, has actually made the very securities they are concerned about for us little retail investors who rush in where people with lots more capital available fear or don’t for whatever reason want to tread, more risky. Am I correct in this assumption?
Thank you,
Carol
A: Thanks for the question.
Your assumption is largely correct in that the newer “bank” issues (to qualify under the Basel III capital adequacy rules as either Additional Tier 1 Capital or Tier 2 Capital) do contain a provision for conversion into ordinary shares through the exercise of a ‘non-viability trigger’. This applies both to the Capital Note style issues and Subordinated Note style issues.
In relation to the payment of dividends/distributions, there haven’t been material changes – Capital Note/Convertible Preference Share type securities have always been issued on the basis that distributions may not be paid and are non-cumulative.
In relation to your comment about the “regulator”, it is not the same “regulator”. The driver for the adoption of the Basel III rules is APRA (whose job is to regulate financial institutions), the regulator warning you and I to be “careful” about investing in hybrids is of course ASIC. Both government bodies of course, however looking after different interests – the former issuers, the latter investors.
