Thursday 11 June 2015 by Craig Swanger Opinion

A word of warning about hybrids

Despite repeated warnings from ASIC, fund managers and fixed income specialists such as FIIG, new style “bail-in” hybrids like CBA’s PERLS VII continue to be promoted as fixed income.  They are not fixed income in our view

warning signs nature

The new breed of bank issued hybrids such as CBA’s PERLS VII, are not fixed income.  The problem is that’s the view of some of the investment industry, but not all.  Fund managers won’t include them in fixed interest funds and most simply won’t invest in them at all.  Australia’s corporate regulator, ASIC issued a specific warning highlighting that they would investigate “misleading promotion of hybrid securities as fixed income products”.  But there are still a lot of promoters of bank hybrids that continue to present them as fixed income products in recommended lists and other research. 

Tuesday’s AFR did a great job providing much needed education on the under-represented bonds asset class.  In interviewing the various parts of the industry, it highlighted the polarised views of these new hybrids.  Senior fund managers were clearly opposed to the hybrids, with one bank owned fund manager stating: “…with hybrids being the worst as they…look like bonds in the good times and equities in the bad times.” This is very similar to our view. But on the facing page, one financial advice firm posts its “fixed income portfolio” that includes PERLS VII and several other new style hybrids, despite ASIC’s warning. 

We continue to hold our view on this topic – these hybrids are not fixed income.  In 2014, we ran a series of articles on hybrids (see the article, FIIG Securities says new "bail-in" hybrids are equity risk, not fixed income and others in the related articles section.)

The point of the series was to highlight:

  1. That new style bank hybrids are not fixed income, but equity as return of capital and the “interest” payments are not legally required to be repaid. Further, the banking regulator (APRA) insists that distributions are purely at the issuer’s discretion and not legal liabilities.
  2. That these “bail-in hybrids” were being sold to retail investors in Australia, despite bans in Europe and the UK.
  3. That the income offered on Australian hybrids at the time, such as on CBA PERLS VII, was far lower than equivalent hybrids offered by European banks, and that because of this PERLS VII was likely to fall to $95-96 after the IPO, and that several of the other hybrids were likely to struggle to stay above their $100 issue prices.

CBA Perls VII (CBAPD) Share Price since IPO (to 10 June 2015)
cba perls since IPO
Source: FIIG Securities, ASX

By the time of the PERLS VII listing date, the other major banks’ “new style” hybrids, were below their issue price. PERLS VII came on to the market at $97 and never recovered to its $100 issue price, falling by more than 6% since its IPO. 

Several of the promoters of the PERLS VII issue were quoted in the media around the time of PERLS VII’s IPO saying that “the recent price falls were liquidity driven”; “window is closing soon – prices will rebound” and “the recent fall in hybrid prices presents clients with a buying opportunity”.  However, sellers continued to dump their stock and now, despite far lower yields on other shares compared to that time, PERLS VII is trading at $93.00. While that is far better than CBA shares have fared in 2015, the point is that CBA shares aren’t sold as “fixed income” and they have the potential to rise dramatically in good times as we’ve seen in the last few years.

Repeating our warning of August 2014, prior to the PERLS VII IPO:

“We do not believe that there is a large risk of one of Australia’s major banks requiring a bail out. The issue is that we don’t consider these securities to be bonds, but instead far more like equities. History has shown us that they won’t rise as much as shares in the good times, but will fall in line with equities in the bad times. Investors are getting the worst of both worlds, and should consider shifting their money to either pure bonds or equities instead.”

Investors seeking yield have choices and do not have to accept poor value securities simply because they are popular.  If you are going to take on the price volatility risk of hybrids, you need to be rewarded for that risk.  If you want genuine fixed income in which the issuer is obliged to pay you your income and to repay a fixed capital amount at a fixed date, use bonds or term deposits.  

Please note, pricing accurate as at 11 June 2015 and subject to change.


The contents of this document are copyright. Other than under the Copyright Act 1968 (Cth), no part of it may be reproduced or  distributed to a third party without FIIG’s prior written permission other than to the recipient’s accountants, tax advisors and lawyers for the purpose of the recipient obtaining advice prior to making any investment decision. FIIG asserts all of its intellectual property rights in relation to this document and reserves its rights to prosecute for breaches of those rights.

Certain statements contained in the information may be statements of future expectations and other forward-looking statements. These statements involve subjective judgement and analysis and may be based on third party sources and are subject to significant known and unknown uncertainties, risks and contingencies outside the control of the company which may cause actual results to vary materially from those expressed or implied by these forward looking statements. Forward-looking statements contained in the information regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. You should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Opinions expressed are present opinions only and are subject to change without further notice.

No representation or warranty is given as to the accuracy or completeness of the information contained herein. There is no obligation to update, modify or amend the information or to otherwise notify the recipient if information, opinion, projection, forward-looking statement, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

FIIG shall not have any liability, contingent or otherwise, to any user of the information or to third parties, or any responsibility whatsoever, for the correctness, quality, accuracy, timeliness, pricing, reliability, performance or completeness of the information. In no event will FIIG be liable for any special, indirect, incidental or consequential damages which may be incurred or experienced on account of the user using information even if it has been advised of the possibility of such damages.

FIIG provides general financial product advice only. As a result, this document, and any information or advice, has been provided by FIIG without taking account of your objectives, financial situation and needs. Because of this, you should, before acting on any advice from FIIG, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If this document, or any advice, relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a product disclosure statement relating to the product and consider the statement before making any decision about whether to acquire the product. Neither FIIG, nor any of its directors, authorised representatives, employees, or agents, makes any representation or warranty as to the reliability, accuracy, or completeness, of this document or any advice. Nor do they accept any liability or responsibility arising in any way (including negligence) for errors in, or omissions from, this document or advice. Any reference to credit ratings of companies, entities or financial products must only be relied upon by a ‘wholesale client’ as that term is defined in section 761G of the Corporations Act 2001 (Cth). FIIG strongly recommends that you seek independent accounting, financial, taxation, and legal advice, tailored to your specific objectives, financial situation or needs, prior to making any investment decision. FIIG does not provide tax advice and is not a registered tax agent or tax (financial) advisor, nor are any of FIIG’s staff or authorised representatives. FIIG does not make a market in the securities or products that may be referred to in this document. A copy of FIIG’s current Financial Services Guide is available at

An investment in notes or corporate bonds should not be compared to a bank deposit. Notes and corporate bonds have a greater risk of loss of some or all of an investor’s capital when compared to bank deposits. Past performance of any product described on any communication from FIIG is not a reliable indication of future performance. Forecasts contained in this document are predictive in character and based on assumptions such as a 2.5% p.a. assumed rate of inflation, foreign exchange rates or forward interest rate curves generally available at the time and no reliance should be placed on the accuracy of any forecast information. The actual results may differ substantially from the forecasts and are subject to change without further notice. FIIG is not licensed to provide foreign exchange hedging or deal in foreign exchange contracts services. The information in this document is strictly confidential. If you are not the intended recipient of the information contained in this document, you may not disclose or use the information in any way. No liability is accepted for any unauthorised use of the information contained in this document. FIIG is the owner of the copyright material in this document unless otherwise specified.

The FIIG research analyst certifies that any views expressed in this document accurately reflect their views about the companies and financial products referred to in this document and that their remuneration is not directly or indirectly related to the views of the research analyst. This document is not available for distribution outside Australia and New Zealand and may not be passed on to any third party without the prior written consent of FIIG. FIIG, its directors and employees and related parties may have an interest in the company and any securities issued by the company and earn fees or revenue in relation to dealing in those securities.