Hybrid Securities

[Warren Greenspan]

Howdy all
I've become interested in interest rate securities esp some of the hybrids.
I've been accumulating BEPPA (plenty of helpful info here on ASF, thanks BB) and am interested in GNSPA.

BUT

I can't find anything. (and am sick of visiting across the road)

Are there any threads on hybrids in general or GNSPA in particular that I've missed?
I need discussion both for and against from people more knowledgeable than me. (That would be most of you!)

In particular I'm wondering where to view the original prospectus. The Gunns site seems to have deleted it.

Also keen to find out if it's a "perpetual" or not.

Others of interest to me are AAZPB TTXPA RHCPA

Thanks, wazza.

[Warren Greenspan]

I probably should have added to the above post, or its heading, about the juicy returns on offer with GNSPA at $54. Are they too good to be true?

approx 15% pa return and If they convert then that figure goes to over 40%

(I'm "paraphrasing" figures and assumptions from a HC poster here)

I don't hold but I'm sure thinkin about it!!!!!!!!!!!

[freddy2]

In particular I'm wondering where to view the original prospectus. The Gunns site seems to have deleted it.

Look at previous announcements at ASX (http://www.asx.com.au/asx/statistics/announcements.do) for Gunns (GNS). I believe I found the prospectus under an announcement 12/09/2005 "Replacement FORESTS Prospectus "

[Warren Greenspan]

Thanks Freddy,
Much appreciated.

Are you a holder of these?

[Julia]

Warren, is there any particular reason you're attracted to these, rather than an ordinary share?

They're currently trading at around half their original face value so I'm sure you know that there's a possibility (likelihood?) of further capital loss. The underlying GNS shares aren't exactly setting the world on fire and are pretty sensitive to political factors.

Plenty of shares also offering similar yield.

Not being anti the hybrids, no strong feelings for or against.

[Warren Greenspan]

Hello Julia
After being glued to the Briscon thread I feel I kinda know you (in an internet forum, non creepy kind of way) Loved your posts and the compassion shown for the unlucky holders. Would love to see a royal commission.

In answer to your question "why i"m interested in hybrids" I'll try and articulate a few points. I'm still very much in the learning and investigating stage.

*I like the fact that for some (non perpetual?) hybrids they must be redeemed at face value in either cash or scrip at some prescribed future date. If the comp survives etc etc. For GNSPA = $54 and FACE VAL = $100 that's a nice cap. gain even if the price drops in the interim.

*GNSPA in particular is now paying BBSW + 5% so that's 15 or 16%pa at sp of $54.
As I watch many of my other holdings reducing or suspending divs it seems attractive and a more certain payment.


*Any money I invest will be modest and come from that part of my portfolio that is set aside for gambling, sorry, speculating. (From the same part which I bought AFG, gambling, sorry speculating, that they would rise like a phoenix....)

*I'm only really interested in hybrids that are not perpetual ie have some guarantee of redemption so that their current discount to face value can be later realised as cap gain. (that's why I've stopped looking at AAZPB)

some other points

-I,ve recently picked up 40 000 BEPPA at about 8c, definitely a gamble. There is a great thread on them here at ASF.

-I'm a HUGE fan of ASF and its stopping me getting the pavers finished...BUT..there doesn't seem to be as much discussion here on hybrids as over at HC (which I'm not a huge fan of) so I was hoping my first post might prompt someone who could contribute answers as opposed to my questions and maybe an ongoing thread on hybrids.

-2 weeks ago I didn't know what a "hybrid security" was.

-Ethically, I still don't know how I feel about investing in Gunns after some of the things they've done in Tassie....'spose it's better than woodchip from S E Asia


Thanks for your interest Julia,
sorry about the lengthy response
Cats to beat Adelaide this Sat!!!!!!

[freddy2]

Thanks Freddy,
Much appreciated.

Are you a holder of these?

No, just wanted to find out about some other similar securities (eg SEVPC) and had trouble finding the prospectuses until I worked out the best way was to look under the issuing company announcements at the ASX.

[drsmith]

The Financial Review povides a complete listing of interest rate securities daily. There's plenty to choose from depending on one's risk tolerance.

[Warren Greenspan]

Thanks Doctor Smith

The AFR tables are interesting and I think the last column "YTM Conv" is telling me whether or not a particular hyb sec is perpetual or not.
I'm assuming n/a in this column means theres no compulsory redemption ie its perpetual. This is one of the main pieces of info I've been seeking.

Learning is good. Knowledge is power. Back to the jupiter 2 for some more research.

Regards to young Will and that bubble headed booby

Warren

[hardyakka]

No, just wanted to find out about some other similar securities (eg SEVPC) and had trouble finding the prospectuses until I worked out the best way was to look under the issuing company announcements at the ASX.

Here's a pretty useful listing of hybrids that is updated daily. It links to explanations and have a look at the footnotes, it gives explanations of the yields.

http://www.macquarie.com.au/macsecmc...e_security_doc

I was having a look at a number of hybrids only a few days ago and IMO GNSPA is a good buy. The only reason I did not acquire a small holding of about 500 was because I decided instead to increase my holding in BEPPA, cant have my cake and eat it.

Cheers

[Warren Greenspan]

Thanks HY
I was off to bed but now must check it out.

I know what you mean about BEPPA.
The 2 threads on BEPPA and BRISCON have had me riveted for days and I'll soon be in the divorce courts!!!!

Are you going to keep loading up on Beppa or do you a see a small correction soon (before any ann. on DBCT)?

[Julia]

*I like the fact that for some (non perpetual?) hybrids they must be redeemed at face value in either cash or scrip at some prescribed future date. If the comp survives etc etc. For GNSPA = $54 and FACE VAL = $100 that's a nice cap. gain even if the price drops in the interim.

*I'm only really interested in hybrids that are not perpetual ie have some guarantee of redemption so that their current discount to face value can be later realised as cap gain. (that's why I've stopped looking at AAZPB)

Warren, I haven't used any hybrid securities so may have a faulty understanding of how they work, and I've only had a quick look at the prospectus but gather from this that GNSPA are perpetual.

Re your sentence above

"If the comp (?) survives. For GNSPA =$54 and Face Value = $100 that's a nice cap gain even if the price drops in the interim, "

can you explain how you anticipate this will happen?

[nathanblack]

i'd like to find some more beppa style hybrids too. ie hybrids with an agreed maturity date and value. in beppa's case $1 in 2012.

its then up to individual company analysis to determine if we believe the company will be in existence at maturity date. if so we are guaranteed the face value regardless of what they are currently trading at.

[nathanblack]

Warren, I haven't used any hybrid securities so may have a faulty understanding of how they work, and I've only had a quick look at the prospectus but gather from this that GNSPA are perpetual.

Re your sentence above

"If the COMPANY (?) survives. For GNSPA =$54 and Face Value = $100 that's a nice cap gain even if the price drops in the interim, "

can you explain how you anticipate this will happen?

in the case of BEPPA, the issuing company agrees to pay interest quarterly on the FACE VALUE($1) and agrees to buy back the share at FACE VALUE on maturity. The fact the share is trading below FACE VALUE at this point in time in inconsequential. In BEPPA case its trading substantially below face value because of real/percieved risks that the company will not survive due to debt and therefor cannot buyback share at agreed face value. they have already suspended interest payments, althought they are accumulating the interest to pay in future. And BEPPA is a preferance share above ordinary share in ranking.

SO IF GNSPS operates the same it is trading at $54 presently but may have an agreed value of $100 at maturity. When is maturity and is it an agreed face value is the answers we want

[Julia]

Thank you, Nathan.

[Warren Greenspan]

Nathan,
There is a great thread here on ASF on BEPPA.
There's loads of researched based info largely thanks to poster Banks Bystrica.


Julia, Nathan's answer sums it up nicely.

HOWEVER
In the case of GNSPA I now realise they are perpetual so in theory there may never be any cap gain although everyone (other posters) seem to think they'll be redeemed at face value eventually.
This makes them riskier but the return of approx 15%pa with sp of about $54 has its attractions
warren

[nathanblack]

Thanks Warren. Love the BBI thread. BB has really put in the hard yards. i really hope it pays off for him and anyone that has taken the plunge into BEPPA.

Sorry for the newbie question, but what is perpetual in this context? im thinking that it never matures and therefor is never bought back? only the term of interest are renewed periodically and obviously at some point they will be bought out but at any time and at market value?
even if this is the case it makes sense that the stock will trend towards face value if the company fundumentals and global economy improve. just means theres no real timeline. could be next year or 5years.

please if you find any beppa structured stock, post here or PM me. im very interested.

thanks

[Bill M]

Sorry for the newbie question, but what is perpetual in this context? im thinking that it never matures and therefor is never bought back? only the term of interest are renewed periodically and obviously at some point they will be bought out but at any time and at market value?
even if this is the case it makes sense that the stock will trend towards face value if the company fundumentals and global economy improve. just means theres no real timeline. could be next year or 5years.

Hello Nathan and others, I am a investor of hybrids and floating rate notes. Perpetual indeed does mean the issuing company may never buy it back. I hold one called SUNHB, this was issued in 1999 and it is still on market. In those days spreads were minor, in this case only .75% above the bank bill rate. Because of such a low spread I doubt Suncorp will ever buy them back. In my case I hope Suncorp will be taken over and the buying company is forced to redeem those notes at face value. My opinion is to stay away from perpetual securities, I only have one like that. It's current face value is $53 so if you paid $100 per security then you have lost 47% of your capital, it is a disaster for those who want their money back.

The thing to remember is how can can it go back to $100 if there is so much more out there offering more interest? It can't and wont as long as you can buy stuff like Tabcorp Bonds with a sure maturity and a spread of 4.25% above the bank bill rate. This doesn't mean that such stocks are complete basket cases, you can still make good interest income from them at current prices because you can buy twice as many. In SUNHB's case it is 3.75% x 2 = 7.5% income and you still have the remote chance of getting face value back.

If I have to make a choice right now of buying SUNHB at 7.5% income compared to Tabcorp Bonds at 7.5% income I would choice the Tabcorp Bonds for sure. The reason being it will convert to cash for sure in 5 years and if interest rates go up so will your income. Of course SUNHB has that remote chance of being bought back but there lies the risks. Both scenarios assumes neither company goes broke, hope that helps.

[Calliope]

Hybrid securities offer a much better return than term deposits and are often fully franked. On a risk level they rate lower than equities. As with shares, with careful selection the risk can be lowered substantially. In Macquarie's suggested hybrid portfolio they are all rated. (see link)

http://www.macquarie.com.au/newslett...nvertibles.pdf

Those unrated hybrids (and by definition, riskier) often offer better returns opportunities. Many of them went into freefall along with their underlying stocks during the downturn.

Two of the securities Warren mentioned (Hastings TAPS and Ramsays CARES) are in my portfolio. Each has attractive features.

[Julia]

Warren, I haven't used any hybrid securities so may have a faulty understanding of how they work, and I've only had a quick look at the prospectus but gather from this that GNSPA are perpetual.

Re your sentence above

"If the comp (?) survives. For GNSPA =$54 and Face Value = $100 that's a nice cap gain even if the price drops in the interim, "

can you explain how you anticipate this will happen?

Hello Nathan and others, I am a investor of hybrids and floating rate notes. Perpetual indeed does mean the issuing company may never buy it back. I hold one called SUNHB, this was issued in 1999 and it is still on market. In those days spreads were minor, in this case only .75% above the bank bill rate. Because of such a low spread I doubt Suncorp will ever buy them back. In my case I hope Suncorp will be taken over and the buying company is forced to redeem those notes at face value. My opinion is to stay away from perpetual securities, I only have one like that. It's current face value is $53 so if you paid $100 per security then you have lost 47% of your capital, it is a disaster for those who want their money back.

The thing to remember is how can can it go back to $100 if there is so much more out there offering more interest? It can't and wont as long as you can buy stuff like Tabcorp Bonds with a sure maturity and a spread of 4.25% above the bank bill rate. This doesn't mean that such stocks are complete basket cases, you can still make good interest income from them at current prices because you can buy twice as many. In SUNHB's case it is 3.75% x 2 = 7.5% income and you still have the remote chance of getting face value back.

If I have to make a choice right now of buying SUNHB at 7.5% income compared to Tabcorp Bonds at 7.5% income I would choice the Tabcorp Bonds for sure. The reason being it will convert to cash for sure in 5 years and if interest rates go up so will your income. Of course SUNHB has that remote chance of being bought back but there lies the risks. Both scenarios assumes neither company goes broke, hope that helps.

Thanks, Bill. Helpful reply.
So, Warren, is it clear now why I was questioning your assumption of the built in capital gain on GNSPA?