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Types of hybrids

There are three main types of hybrid securities traded on ASX. Understanding their characteristics can help you to select the right investments to achieve your objectives

Hybrid securities

"Hybrid security” is a generic term used to describe a security that combines elements of debt securities and equity securities. There are three broad types of hybrid securities – convertibles, preference shares and capital notes. The Guide to naming conventions and security descriptions will help you understand what the security description means.

A convertible debt security is one that gives either the investor or the issuer the option to convert it into another type of security at a specified date in the future. Often this will be ordinary shares in the issuer. Convertible securities have contained within them an embedded option. This embedded option has value, which from the holder’s point of view, may be positive (where the option is exercisable by the holder) or negative (where the option is exercisable by the issuer).

Securities that are convertible by the holder can be attractive to investors as they typically offer downside risk protection while having a potential ‘equity-kicker’ on the upside. They can be attractive to issuers as they can usually be issued at a lower interest rate than a standard bond due to the value of that potential equity-kicker. This makes them less costly for the issuer to service. These bonds also allow the issuer to raise capital without having to immediately add a large number of shares to their pool of ordinary shares. If the company issues shares rather than convertible notes the sudden addition of more new shares would result in a dilution of its equity. This can be unsettling for existing investors.

Some convertible and converting bonds contain anti-dilution provisions which protect the value of the right of conversion for the investor. If the security does not contain an anti-dilution provision, the value of the right of conversion may be materially affected, presenting a risk for investors.

Understanding hybrids

Security descriptions

A security's description provides information about some of the security's key features.

Naming conventions

Our guide can help you understand the naming conventions of ASX quoted hybrids.

ASX acknowledges the Traditional Owners of Country throughout Australia. We pay our respects to Elders past and present.


Artwork by: Lee Anne Hall, My Country, My People

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