# NAB Convertible Preference Shares



## MrBurns (18 February 2013)

Anyone going for it ?

http://privatewealth.nab.com.au/nab...ralia_bank_convertible_preference_share_offer


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## prawn_86 (18 February 2013)

Lots of details about various hybrids can be found in the Hybrid Securities thread also if anyone is interested:
https://www.aussiestockforums.com/forums/showthread.php?t=15124


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## MrBurns (18 February 2013)

prawn_86 said:


> Lots of details about various hybrids can be found in the Hybrid Securities thread also if anyone is interested:
> https://www.aussiestockforums.com/forums/showthread.php?t=15124




Sorry wasn't sure where to put that.


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## prawn_86 (18 February 2013)

MrBurns said:


> Sorry wasn't sure where to put that.




No worries, i'll leave this thread active for those that specifically want to talk about this offer as it is a offer from one of the bigger companies in Australia


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## McLovin (18 February 2013)

I think Ben Graham nailed it in the Intelligent Investor when it comes to prefs...



> Certain general observations should be made here on the subject of preferred stocks. Really good preferred stocks can and do exist, but they are good in spite of their investment form, which is an inherently bad one. The typical preferred shareholder is dependent for his safety on the ability and desire of the company to pay dividends on its common stock. Once the common dividends are omitted, or even in danger, his own position becomes precarious, for the directors are under no obligation to continue paying him unless they also pay on the common. On the other hand, the typical preferred stock carries no share in the company’s profits beyond the fixed dividend rate. *Thus the preferred holder lacks both the legal claim of the bondholder (or creditor) and the profit possibilities of a common shareholder (or partner)*.
> 
> *These weaknesses in the legal position of preferred stocks tend to come to the fore recurrently in periods of depression. Only a small percentage of all preferred issues are so strongly entrenched as to maintain an unquestioned investment status through all vicissitudes.
> *
> Experience teaches that the time to buy preferred stocks is when their price is unduly depressed by temporary adversity. (At such times they may be well suited to the aggressive investor but too unconventional for the defensive investor.)




(bolding mine)

The salient point to takeaway (IMHO) is that people buy prefs/hybrids etc because of the percieved safety above the common equity but in the event of something like the GFC, the pref holder will find him/herself in the exact same position as the common equity.


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## MrBurns (18 February 2013)

McLovin said:


> I think Ben Graham nailed it in the Intelligent Investor when it comes to prefs...
> (bolding mine)
> The salient point to takeaway (IMHO) is that people buy prefs/hybrids etc because of the percieved safety above the common equity but in the event of something like the GFC, the pref holder will find him/herself in the exact same position as the common equity.




I just see it as a vehicle to put some money into that will return more than a TD, spread it around if you like.

I'm not so concerned with the safety angle though we could be headed for troubled times.....but who knows


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## McLovin (18 February 2013)

MrBurns said:


> I just see it as a vehicle to put some money into that will return more than a TD, spread it around if you like.
> 
> I'm not so concerned with the safety angle though we could be headed for troubled times.....but who knows




No worries Burnsie, just adding my .

There's probably a reason why the debt offerings go to the instos but these sort of debt return/equity risk things end up being sold primarily retail.


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## MrBurns (18 February 2013)

McLovin said:


> No worries Burnsie, just adding my .
> 
> There's probably a reason why the debt offerings go to the instos but these sort of debt return/equity risk things end up being sold primarily retail.




I'm not very schooled in all things investment, only real estate, so I try to keep it simple


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## Bill M (18 February 2013)

Mr Burns I invest in these kind of securities.

During the GFC banks shares lost about 50% of their share price. CBA hit $25 at one stage. On the other hand their PERLS hybrids only went down slightly, nothing like the ordinary stocks. So in my opinion they are more stable with the share price than ordinary shares.

During the GFC all of these issues were tested, they came under pressure simply because people needed the money and they panicked. This caused the price to fall below face value (usually $100 or $200). If you needed to sell at this time you would have lost capital. If you didn't need to sell then you could sit tight and collect the dividends, this is what I did. I lost nothing by holding my portfolio of hybrids, convertible preference shares and floating rate notes. 

As with all of these offers you need to read the PDS. The NAB CPS is one step above (in security) fully paid ordinary shares as far as a wind up of the company is concerned if it ever happened. These offers are only as good as the parent company, do you think NAB would ever go broke? If you do then you could lose some or all of your capital if such an event happens.

I do not think NAB will go broke. It is a sound AA rated company and I am a shareholder. I will be subscribing to the offer simply for the dividend and because if another GFC type of event comes along it won't lose share price anything like the banks did during that time. In short, they are not guaranteed but to me it is worth the investment, I want that income and I am willing to take minor risk to get it.

Just remember this, there are some issues out there right now that have spreads of only .75% (SBKHB) and 1.25% (NABHA) above the 90 day BBSW rate. These securities have been around for many years. The people who bought those are now suffering 28 to 38% capital losses now. The reason being is that these new offers are coming out with spreads of 3 to 4% above the BBSW and people want that. If spreads were to get even higher, say 5% then these NAB CPS could drop below face value also. I personally don't think spreads will get much higher, I could be wrong though.

Plenty to think about, let us know what you will do.


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## MrBurns (18 February 2013)

Bill M said:


> Plenty to think about, let us know what you will do.




Many thanks for your insights Bill ........not sure what to do, but this is attractive from the security side.


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## So_Cynical (18 February 2013)

McLovin said:


> I think Ben Graham nailed it in the Intelligent Investor when it comes to prefs...




Don't want to side track this thread, BUT would like to mention that i listened to the Intelligent Investor (Audio Book) last week and came away with the feeling that the author was what i would call a super conservative, concentrating on capital preservation and low yield.

And who the hell uses words like vicissitudes.  

Nothing wrong with a few Aussie Bank Hybrids in a balanced portfolio.... wouldn't put the house on them though.


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## sydboy007 (18 February 2013)

The major banks hybrids are reasonable investments.

Just have to be careful of the clauses.

I cannot believe anyone bought the Crown Hybrids.  The company could stop paying interest yet still pay dividends.  Sorry, but if you can afford to pay dividends then you should have been able to afford to pay all you other obligations before.

The only thing that annoys me with these and the new Westpac CPS is they have franking credits.  I'd prefer the full yield each quarter so I have more money to reinvest


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## sptrawler (19 February 2013)

If dividends and or interest rates rise, do the returns rise equally on the preference shares?
Or are they tied to a fixed base with regard to rate of return?


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## Bill M (19 February 2013)

sptrawler said:


> If dividends and or interest rates rise, do the returns rise equally on the preference shares?
> Or are they tied to a fixed base with regard to rate of return?




Most of them are pegged to the 90 day or 180 day BBSW rate. Generally speaking, if the RBA raises rates then the BBSW rises also. So if rates rise so will your income. 

Today's 90 day BBSW is around 2.9% + NAB CPS spread say 3.2% = 6.1% gross income.

If rates say climbed up to 5% then it will look something like this.

90 BBSW 5% + NAB CPS spread 3.2% = 8.2% gross income.

The opposite can happen if the BBSW rate goes down.


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## Bill M (19 February 2013)

sydboy007 said:


> The only thing that annoys me with these and the new Westpac CPS is they have franking credits.  I'd prefer the full yield each quarter so I have more money to reinvest




Yes, a lot of people say this and I agree. I'd rather the money up front too, but in this case we can use the franking credits at tax time against our other income and hopefully get some back too.


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## sptrawler (19 February 2013)

Bill M said:


> Most of them are pegged to the 90 day or 180 day BBSW rate. Generally speaking, if the RBA raises rates then the BBSW rises also. So if rates rise so will your income.
> 
> Today's 90 day BBSW is around 2.9% + NAB CPS spread say 3.2% = 6.1% gross income.
> 
> ...




Thanks for that Bill.

How is it better than just buying NAB shares, with 5% div + franking. 
It seems that the return from the preference shares would be less than the ordinary shares, is it that they will be less volatile, that makes them attractive?


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## Bill M (19 February 2013)

sptrawler said:


> Thanks for that Bill.
> 
> How is it better than just buying NAB shares, with 5% div + franking.
> It seems that the return from the preference shares would be less than the ordinary shares, *is it that they will be less volatile, that makes them attractive?*




Yes, that is exactly it. If Europe collapses overnight and we see markets plummeting then no amount of NAB dividends will save the common stock collapsing, just like it did during the GFC. 

Lets use 2 real examples. During the GFC ANZ collapsed from $31+ to only $11. That's a massive 60 to 70% capital loss. On the other hand a similar stock to the new NAB CPS offer "ANZPA" only  went from $106 down to $96.80 at it's worse. (slightly different times)

During that blow off flash crash when the all ords hit 3,900 back around July 2011 the CBAPA (a similar product) only went down 10% from it's highs. The normal CBA stock went down around 30% from it's highs.

The less volatility coupled with the bank buying them back for face value at some time in the future makes them that little more safer than ordinary stock.

Everything is a risk, it's up to you how you want to play it, cheers.


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## McLovin (19 February 2013)

So_Cynical said:
			
		

> Don't want to side track this thread, BUT would like to mention that i listened to the Intelligent Investor (Audio Book) last week and came away with the feeling that the author was what i would call a super conservative, concentrating on capital preservation and low yield.




There's plenty about Ben Graham that is pretty dated. If you read the II or Security Analysis. But there are some themes that still ring true, IMO, today. His discussion around prefs resonates with me. 

I understand some people, like Bill, buy them knowing the risks, but I've heard so many talking heads on TV discussing prefs as though they contained a gauranteed income stream like a bond, which they don't. Banks like RBS and Citi never missed a bond payment but they sure as hell stopped paying on their prefs. It's just something to keep in mind.


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## sydboy007 (19 February 2013)

Be aware that the bank CPS and Hybrids fared fairly well durign the GFC

Others like the multiplex sites, Macqaurie perpetuals and Australand Trust all fell dramatically.  Still they all continued to pay their quarterly distributions and some people were able to buy the MXUPA for $18 which now sits around $85 and MBLHB was down to mid $30s and sits around the $69 mark now.

Oh the pains of 20:20 vision

The recent NAB and WBC offers are providing 3.5% to 4% real yields which in a SMSF is a pretty good compound return.  Most balanced fund attempt to provide that over the longer term, so to get that with a lot lower risk and volatility is a big +++++ in my book


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## Bill M (23 February 2013)

Seems to be plenty of money around.

---
NATIONAL AUSTRALIA BANK INCREASES CONVERTIBLE PREFERENCE SHARE OFFER TO $1.4 BILLION AND SETS THE MARGIN AT 3.20%

National Australia Bank (NAB) today announced that, following the successful completion of the Bookbuild,[1] it will increase the size of its offer of NAB Convertible Preference Shares (NAB CPS) from $750 million to at least $1.4 billion. 

Link: http://announce.ft.com/Detail/?DocKey=1323-11495037-30EQQ8BTLM4GCB9R3VES51427G
---


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## Sardine (24 February 2013)

The prospectus, 6.1.2, says "The payment of Dividends on NAB CPS is subject to the discretion of the Directors".
Can somebody explain to me what this means? The whims of the directors or what?


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## sydboy007 (24 February 2013)

Sardine said:


> The prospectus, 6.1.2, says "The payment of Dividends on NAB CPS is subject to the discretion of the Directors".
> Can somebody explain to me what this means? The whims of the directors or what?




To a degree.  It would be more about profitability and capital adequacy ratios.

The important thing to look at is if there is a clause that stops dividends if they don't make a dividend payment.  Some of the more recent offerings - here's looking at you CROWN - allow dividends to be paid while interest payments are not made.


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## kid hustlr (24 February 2013)

Kind of Off Topic and I'm just spit balling a bit but it blows me away how many of these flaoting rate note offerings have come to market over the last 18 months. From a long term perspective it just makes me feel like these things aren't the best thing to be investing in from a return basis.

I mean if all the bankers are flogging these things at swap + 3% or w/e its because they are thinking thats cheap funding and they can use the funds for better purposes. As usual retail will jump all over these things and then watch equities greatly outperform for the next 10 years


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## sydboy007 (24 February 2013)

kid hustlr said:


> Kind of Off Topic and I'm just spit balling a bit but it blows me away how many of these flaoting rate note offerings have come to market over the last 18 months. From a long term perspective it just makes me feel like these things aren't the best thing to be investing in from a return basis.
> 
> I mean if all the bankers are flogging these things at swap + 3% or w/e its because they are thinking thats cheap funding and they can use the funds for better purposes. As usual retail will jump all over these things and then watch equities greatly outperform for the next 10 years




To a degree.

But there is a good case to have some of these in your investment portfolio.

They pay a reasonable and reliable income stream, have less volatility that shares, and for a lot of retirees are a good fit to provide the income stream you need to live on.

Would I say have 100% of you money in them.  Definitely not, but I'd say 20-30% of your capital in these is prob not a bad thing to do.  They provide a reasonable hedge against inflation.


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## McLovin (24 February 2013)

sydboy007 said:


> They pay a reasonable and reliable income stream, have less volatility that shares, and for a lot of retirees are a good fit to provide the income stream you need to live on.




This doesn't really hold water. Most of these hybrids pay a floating rate above BBSW. If interest rates fall then the income stream falls too. It shouldn't be sold as a reliable income stream because it's no more reliable than an at call deposit. Personally, I find it easier to find stable well run companies that pay dividends than I do trying to predict where interest rates are going. Buy bonds if you want a reliable income stream. There's still some decent corporates offering 5-6%, fixed.

Like I said, there's a reason this sort of equity is sold primarily to retail investors.


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## ROE (24 February 2013)

McLovin said:


> This doesn't really hold water. Most of these hybrids pay a floating rate above BBSW. If interest rates fall then the income stream falls too. It shouldn't be sold as a reliable income stream because it's no more reliable than an at call deposit. Personally, I find it easier to find stable well run companies that pay dividends than I do trying to predict where interest rates are going. Buy bonds if you want a reliable income stream. There's still some decent corporates offering 5-6%, fixed.
> 
> Like I said, there's a reason this sort of equity is sold primarily to retail investors.




It hold water, it's very good hedge against inflation, 90-Day Bank Bills always track around inflation rate or higher
and then you get 3.2% on top...dividend is not hedge against anything, it dependent on company profit and at the board discretion..

Now unless the company goes belly up, they have to pay these interest payment...company can lower dividend payment but they can not lower hybrid rate ....your payment varies according to 90-Day Bank Bills...

buying solid companies hybrid is a very secure way of getting good income and your notes would not drop in value but have a decent chance of trades above face value...

There are various articles pumping out by regulators in the last couples of year warning people about these type of products but they lump everyone into the same baskets...

buying hybrid of solid companies like CBA, WOW, WES, WBC you make some decent money there..

Obvious there is always risks but be disciplined and buy solid companies hybrid and you will be rewarded just like invest in solid companies


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## McLovin (24 February 2013)

ROE said:


> It hold water, it's very good hedge against inflation, 90-Day Bank Bills always track around inflation rate or higher
> and then you get 3.2% on top...dividend is not hedge against anything, it dependent on company profit and at the board discretion..




My reply was to the assertion that it provides stable income, that is not true. It provides as variable an income as an at call deposit. Perhaps even more. Considering it trades at a margin to a variable rate, there's little chance of IR based price appreciation so unless you buy when the price is severely depressed capital gains are pretty limited but then I guess at that point it might be better to take a punt on the common.

In a high inflation environment it's debatable whether or not they would continue to make payments, depending on the sort of business.



			
				ROE said:
			
		

> Now unless the company goes belly up, they have to pay these interest payment...company can lower dividend payment but they can not lower hybrid rate ....your payment varies according to 90-Day Bank Bills...




There's no obligation to make the payment, all they are not allowed to do is pay a dividend if they don't make the "interest" payment. In many instances they're non-cumulative either. Don't pay a divvie, don't pay the interest. So, as long as the company is healthy enough to pay a dividend you get your interest payment. Sound a little like equity risk/debt return?

Like I said in an earlier post, there's guys like Bill and yourself who understand the risks but there seems to be quite a lot of misconceptions about what hybrids actually are.


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## ROE (24 February 2013)

stable income is true in a sense as it cant not goes below 3.2%....
deposit rate can go to zero % like in the US 

90 days bank bill at 0% you get guarantee 3.2%....

obviously you lose money if the company went belly up...you rank 1 rank higher than shareholder
but I wouldn't hold out for any cash back  that why it's paramount you only invest in solid business
and don't be tempted to go a bit higher for dodgy business....


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## ROE (24 February 2013)

this is a good place for those who want to see hybrid, look at all the good companies their hybrid all trades above 
face value or around face value.....

WOWHC trades close to $105, decent income plus 4% extra if you want to offload for cash just like
cash at call but better ...WOW has this thing going for decades now they roll over when the time is up
the one before this is WOWHB

http://www.morningstar.com.au/Hybrids/HybridsLatestPrices


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## sydboy007 (26 February 2013)

McLovin said:


> This doesn't really hold water. Most of these hybrids pay a floating rate above BBSW. If interest rates fall then the income stream falls too. It shouldn't be sold as a reliable income stream because it's no more reliable than an at call deposit. Personally, I find it easier to find stable well run companies that pay dividends than I do trying to predict where interest rates are going. Buy bonds if you want a reliable income stream. There's still some decent corporates offering 5-6%, fixed.
> 
> Like I said, there's a reason this sort of equity is sold primarily to retail investors.




I would argue they were more stable during the GFC than dividends were.

Unless you're looking to hold a fixed interest bond till maturity you're pretty much going to take a capital loss buying now, unless the world goes to poo over the next 6 - 12 months.


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## sptrawler (26 February 2013)

McLovin said:


> This doesn't really hold water. Most of these hybrids pay a floating rate above BBSW. If interest rates fall then the income stream falls too. It shouldn't be sold as a reliable income stream because it's no more reliable than an at call deposit. Personally, I find it easier to find stable well run companies that pay dividends than I do trying to predict where interest rates are going. Buy bonds if you want a reliable income stream. There's still some decent corporates offering 5-6%, fixed.
> 
> Like I said, there's a reason this sort of equity is sold primarily to retail investors.




I rang my mentor,lol, he said what you are saying.
The reason I rang him was, I remembered he bought converting preference shares years ago.
His take on it was, there was no capital gain and dividends weren't any better than the ordinary shares.
He sold them after three years and still doesn't regret it.


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## McLovin (26 February 2013)

sydboy007 said:


> I would argue they were more stable during the GFC than dividends were.




That's a tough argument to make considering the BBSW fell from near 8% to 3% during the GFC then went back up to ~5% and now is back down at ~3%. All that in a five year period. Stable income, I think not!

Bank dividends by comparison had a had a brief blip before resuming their upward trajectory. 

Fair enough, hindsight is 20/20 but again the point remains if AU banks were in as bad shape as their European or American equivalents the hybrids would have been just as done over as the common equity.


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## tinhat (27 February 2013)

Preference shares, hybrids, convertible notes, etc are just a form of debt. They are a debt obligation that the borrower takes on with their lenders.

The whole purpose of a publicly listed company is to raise working capital from the stock market and use that working capital to carry out business to create profit. Businesses take on debt because it can be a cheaper means of raising money than a capital raising and furthermore, if used sensibly and put to use in expanding the production and marketing capacity of a company it should result in the company increasing profits thus increasing the rate of return to equity holders (share holders).

So, in the case of a well managed company, all other things being equal, it should generally be the case that the returns to an equity holder should be greater than the returns to the lender (preference share holder). Therefore in theory, preference shares and other corporate debt products in general seem to be an inferior investment vehicle to me.

A profitable company that has some competitive advantage in the market with either normal or inelastic demand should be a hedge to inflation anyway, which is why consumer staples and utilities are often considered defensive income stocks.


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## tinhat (1 March 2013)

At the risk of having a conversation with myself, and without getting biblical about it, it seems that that equity investor versus lender argument has been brewing in away in the less oxygen fed regions of my mind.

To my feeble mind there is something slightly more noble about being on the equity end of financing. Taking a stake in a business and being rewarded for the risk. There is something less exciting and less noble in my mind to just lending money. You lend money to your drunk buddy so he can catch a taxi home. You take equity in a business to seek a return based on the prosperity of the venture.

An insurance broker has most probably never been to sea. I on the other hand enjoy sailing.


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## craft (1 March 2013)

I reckon a lot of these things are being bought by people that are simply chasing yield and don’t understand the product and in doing so they are pushing themselves dangerously up the risk curve.

If you do a yield to maturity and then subtract the floating interest rate on current issues you will see that the risk margin (ie the fixed margin) is being priced very cheaply by the market at the moment.

Take TAHHA – original risk margin 4.25% market currently pricing it at 1.6%.

The risk margins are incredibly sensitive to market changes against face value – yet these things are all being bid up – either risk aversion is dead or people don’t realise the lack of compensation they are getting for taking on the risk.

I haven’t looked to see what risk margin NAB is offering or if it is fair compensation for risk,  but whatever it is set at, the current mood will probably see the price bid up and hence risk premium bid down soon after listing – Hybrids seem to be the new stag floats. Hmmmm


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## skc (1 March 2013)

craft said:


> If you do a yield to maturity and then subtract the floating interest rate on current issues you will see that the risk margin (ie the fixed margin) is being priced very cheaply by the market at the moment.
> 
> Take TAHHA – original risk margin 4.25% market currently pricing it at 1.6%.




Are you sure about this calculation? It's only gone up to $103 from face value of $100.

If the original yield was 4.25% the current yield at market is 4.13%. So a 12bps difference.


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## craft (1 March 2013)

skc said:


> Are you sure about this calculation? It's only gone up to $103 from face value of $100.
> 
> If the original yield was 4.25% the current yield at market is 4.13%. So a 12bps difference.




Taking into account both accrued interest and a maturity date of 1/5/14 The IRR for yield to maturity is 4.6%. The BBSW is 3% therefore you are only getting 1.6% return for your risk component.

The original yield was 4.25%(risk margin) + BBSW.


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## skc (1 March 2013)

craft said:


> Taking into account both accrued interest and a maturity date of 1/5/14 The IRR for yield to maturity is 4.6%. The BBSW is 3% therefore you are only getting 1.6% return for your risk component.
> 
> The original yield was 4.25%(risk margin) + BBSW.




I see. I wasn't aware it's maturing so soon. Perhaps your average punter didn't bother reading about the expiry date, or forgot the fact that you only get paid face value on expiry.

On the other hand, the chance of TAH running into trouble between now and May 2014 is probably small enough to command a 1.6% margin?


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## craft (1 March 2013)

skc said:


> Perhaps your average punter didn't bother reading about the expiry date, or forgot the fact that you only get paid face value on expiry.






skc said:


> On the other hand, the chance of TAH running into trouble between now and May 2014 is probably small enough to command a 1.6% margin?





There’s the rub – clear understanding allows calculated risk taking. Lack of understanding makes any instrument risky.  

I would wager most people buying these things for yield don’t fully understand them.   They are a very sensitive instrument for views on solvency. They have very little risk mitigation against re-investment risk arising from changes in interest rates.


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## McLovin (1 March 2013)

This chart is pretty interesting. A comparison of debt/equity/hybrids pre and post GFC. Hybrids function like debt when times are good but like equity when times are bad...


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## skc (1 March 2013)

McLovin said:


> This chart is pretty interesting. A comparison of debt/equity/hybrids pre and post GFC. Hybrids function like debt when times are good but like equity when times are bad...




That's why they are called hybrids. Equity-like downside with debt-like upside (although the original intention of "hybrids" was meant to achieve the exact opposite).

In other words... Great for the issuing company and great for screwing investors.


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## prawn_86 (1 March 2013)

skc said:


> great for screwing investors.




On the primary issue yes, but can be good for investors if you are buying below face value etc (usual disclosure about risks/knowledge et al)


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## TPI (15 November 2013)

McLovin said:


> That's a tough argument to make considering the BBSW fell from near 8% to 3% during the GFC then went back up to ~5% and now is back down at ~3%. All that in a five year period. Stable income, I think not!
> 
> Bank dividends by comparison had a had a brief blip before resuming their upward trajectory.




+1.

I agree! 

Income from hybrids are tied to the BBSW and are thus inherently NOT "stable", it goes up and down like a yo-yo, and often far more than dividends.

So buying a hybrid with a grossed-up yield of say 9%, which may be higher than what you can get on fully-franked shares at the time, may see you fall into a classic "yield trap" when the BBSW starts to go down.

I think hybrids have a valid place in a portfolio, but only with a decent margin on top of the BBSW and only at the right time in the interest rate cycle (plus the other usual caveats).

That being said, it's not easy to predict what direction and to what extent interest rates will move over a given time period, thus increasing the risks inherent in any hybrid investment.

It may even be easier to predict the future direction of share dividends than interest rates.

In most cases I think when comparing hybrids to fully-franked shares, fully-franked shares will win - but, if the money to be allocated was going to go to cash/term deposits/bonds anyway, there may be a case to put some of this allocation to hybrids, and only very selectively.


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## TPI (15 November 2013)

Also, when banks lend you money and give you a loan they set the interest rate they are willing to lend to you at, but in the case of hybrids, you are lending a company money but they are (at least partly) setting the interest rate you receive according to the margin they are willing to set.

So you would think they are not going to screw themselves over by setting a margin that falls too far in your favour.


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## Wheels1974 (25 November 2013)

Bill M said:


> Mr Burns I invest in these kind of securities.
> 
> During the GFC banks shares lost about 50% of their share price. CBA hit $25 at one stage. On the other hand their PERLS hybrids only went down slightly, nothing like the ordinary stocks. So in my opinion they are more stable with the share price than ordinary shares.
> 
> ...






Most of what you wrote is correct.  Apart from forgetting a few CBA PERLS Hybrids hemorrhaged big time during the GFC.  (2009)
Such shares as the PERLS 3 (PCAPA) Hybrids went down significantly, face value of $200 however they hit a low of $125 - *Down 37.5%*
The same occurred with the now matured PERLS 4 (CBAPB) where they hit a low around $140 - *Down 30%*

As you pointed out though, only those that needed the cash immediately, or the vast majority who worried and got scarred are the ones that lost. 
If they had kept the stocks mentioned above, they would have received the face value of $200 when PERLS 4 (CBAPB) matured. 

As for the PERLS 3 (PCAPA) they rose again now trading around $190 and as high as $193 last week.
I quite like these stocks when the dropped because we know how strong CBA is. 
There is currently a 5% capital gain to be made from (PCAPA) still not enough for my liking but if they drop a further 5% around the $180 mark which is possible now that NAB have recently announced there latest Preference share NAB CPS II or stock code NABPB are due to float just prior to Christmas.

Are most Hybrids stable?  It's fair to say SOME are, however make sure to read the prospectus carefully.    

Happy Investing to ALL


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## Bill M (25 November 2013)

Wheels1974 said:


> As you pointed out though, only those that needed the cash immediately, or the vast majority who worried and got scarred are the ones that lost.
> If they had kept the stocks mentioned above, they would have received the face value of $200 when PERLS 4 (CBAPB) matured.





Hi Wheels1974 and welcome to the forum. I am still an investor of hybrids, convertible notes and floating rate notes. I still hold GMPPA, this was issued by the Goodman Group. Just to highlight the stress, panic and stupidity of investors I point out that at one stage GMPPA hit around $9 during the GFC. That's a whopping 91% loss if you sold.

I kept my original $100 per share parcel and watched the stock collapse. They were still paying full distributions and then it was step up time. The interest rate stepped up and it now paying 3.9% on top of the BBSW rate (around 6.5% gross). I still hold these after many many years and there was no need for all that panic. In fact I bought some at $49. Now it trades at around $100.

There is money to be made in hybrids just like any other stocks. I have traded some when they were miss-priced.

Just to get the thread back on track, there is a new offer of NAB CPS II. I won't be subscribing. They are offering 3.25% on top of the BBSW and it isn't enough for me. I prefer the NAB CPS I which is paying 3.4%, so I prefer them and they are going ex distribution at the end of this week, good luck.


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## Bill M (27 November 2013)

Bill M said:


> Just to get the thread back on track, there is a new offer of NAB CPS II. I won't be subscribing. They are offering 3.25% on top of the BBSW and it isn't enough for me. I prefer the NAB CPS I which is paying 3.4%, so I prefer them and they are going ex distribution at the end of this week, good luck.




NAB CPS 1 is actually paying 3.2% on top of the BBSW rate *and not 3.4%* as I wrote earlier, I apologise for the error.

NAB CPS 11 will be paying 3.25% on top of the BBSW so there isn't much in it. The advantage of buying this IPO is that you can buy these at face value for $100 per share and there could be a small capital gain in it.

NAB CPS 1 is trading at $100.74 right now with a distribution to come, cheers.


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## Wheels1974 (8 December 2013)

Bill M said:


> Hi Wheels1974 and welcome to the forum. I am still an investor of hybrids, convertible notes and floating rate notes. I still hold GMPPA, this was issued by the Goodman Group. Just to highlight the stress, panic and stupidity of investors I point out that at one stage GMPPA hit around $9 during the GFC. That's a whopping 91% loss if you sold.
> 
> I kept my original $100 per share parcel and watched the stock collapse. They were still paying full distributions and then it was step up time. The interest rate stepped up and it now paying 3.9% on top of the BBSW rate (around 6.5% gross). I still hold these after many many years and there was no need for all that panic. In fact I bought some at $49. Now it trades at around $100.
> 
> ...





Bill,
Thanks for the reply, as I mentioned in my first post I agree with you.  However I just wanted to point out that during the GFC most hybrids did drop in price like all stocks, just in case new investors read your post, thinking that they are bullet proof, they are NOT nothing is.   
It's also worth mentioning all quality ordinary shares that dropped between 30% to 60% also came back just as STRONG.  Those who didn't purchase the 4 big banks & the top resource stocks in 2009 would be kicking them selves, I know I am. 

I was lucky as I pulled 80% of my portfolio out of the markek in 2007 when the ASX reached its highest. 
However then due to the volatility in the markets I could not reinvest the large amounts that I did in the past.

I also am a investor in Hybrids however not just Hybrids, I purchased quite a few PCAPA shares when they bottomed out my average price on PCAPA is $131.33 
I just purchased many ANZPA after they went ex on the 25/11/2013 and dropped $1.50 odd to reach there face value of $100 these are quality stocks, granted they are not paying the highest margins but they are a SAFE & quality stock.
Better still are the Westpac's WBCPB which will be going Ex on the 17th, I can't see these shares coming back to face value of $100 but even if they drop to $101 I will be purchasing a heap of these as they are my favorite Hybrid.

Not a fan of the new NAB either, they said in there prospectus that the margin will be between 3.25% to 3.4% on top of the 90 day BB which is just absurd, I expected a minimum of 3.6% on top of the 90 day BB and when they confirmed the margin will be only 3.25% on top of the 90 day BB I couldn't believe it.  
On the flip side I thought about purchasing a few thousand of them, as all these quality hybrids slightly increase in price quite fast, im pretty sure they will be worth $102 within 2 to 6 months.     

Thankfully NAB ordinary shares hit a low of $32.90 so you know what I obviously done 
NAB yield almost 5.7% not to mention the capital gain aspect, shares like NAB will almost certainly reach $37 within the next 6 months, although it wouldn't surprise me if they went a little below $32 in the near future which I hope they do so I can purchase more.  
I also strongly believe the ASX200 will hit 6000 within the first half of 2014 and almost certainly by the end of 2014.  

Happy Investing to you ALL.


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## Bill M (9 December 2013)

Hi Wheels1974, just in case you may not know there is a very good thread on this forum for hybrid securities. It would be really good if you could join the discussion, your input would be great. It's gone a bit quiet over there of late, hope you can join in, link Below, cheers.


https://www.aussiestockforums.com/forums/showthread.php?t=15124


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