Hybrid Securities

[Beez]

Lately I have been thinking of another way to squeeze a few bucks out of our hybrids. I have some carry over losses from the GFC that I can use any time in the future.

I have noticed that when a hybrid goes ex dividend it seems to drop well in excess of the dividend. For example lets say the divi is $3 per share, it is not uncommon for the stock to drop say $4 or $4.50 a share.

I have been watching it for quite a while, a stock comes up to a week before ex divi and the price gets to it's highest ever. Then it drops just a bit before ex divi (a few cents) and then at ex divi it does the big plunge.

I will use SVWPA as my example as I hold them. The price now is around $92, lets say it creeps up to $96 and there is a $3 per share divi due. I could sell it at $96 and buy it back for say $92 after ex divi and pay no tax as I have previous losses. If I collect the $3 divi then I would be taxed (I know it is franked but you still get taxed) and I would cop a $4 capital drop. What do you guys think of this strategy? Cheers.

Just remember to read the prospectus for each hybrid you look at to see whether it is treated like a regular security (and gains/losses are CGT events) or if it is treated as a convertible note or debenture (where gains/losses are treated as "other income" and you cannot use CGT losses to offset those gains - I believe the Elders hybrids fall into this camp ELDPA, as did the Myer notes). The section you want will be usually have tax or taxation in the title.

 

[Bill M]

Thanks for the suggestion Beez. I did a script for script rollover, from TELYS3 to TELYS4. This is what the prospectus says:

The first element of the cost base and reduced cost base for an investor in each TELYS4 acquired under the TELYS3 scheme should be equal to the cost base and reduced cost base the investor had in each TELYS3 exchanged plus any incidental costs incurred on acquisition.

To me that reads that if you paid $10,000 for TELYS3 then rolled them over to TELYS4 as I did under the scheme then your TELYS4 cost base would be $10,000 also. It then says:

If an investor disposes of it's TELYS4 in the course of trading on the ASX, a CGT event will occur. This will give rise to a capital gain or loss.

I understand that to mean that if I sell and make a capital gain then I can use previous tax years capital losses to offset any gains. Is that how you guys understand it?

 

[Bill M]

Bought some more CBAPA today on a down spike. Someone had to offload in a hurry, they sold cheap. Bought at $207.50, watch where it will be in 2 Months time.

SVWPA creeping up as I thought they would. When they converted people were selling at $85, gee I love doom and gloom. Today finished up at $93.40.

CBAHA the Commonwealth Bank Bonds a dud, just like I thought they would be, didn't touch them. Closed at $100.50

 

[prawn_86]

Ok so i am starting to seriously look at hybrids as a better way of gaining cashflow over my 'cash' proportion of my portfolio.

So far, i can see that yeilds will generally be higher than an online saver, but you need to take company and market risk into account, and there could be a possible capital loss if i was forced to sell for unforseen circumstances.

Im wondering what those posters who do currently invest in hybrids are liking at the moment as i'm just looking at a place to start researching actual products, as i think i understand the basics of how the product class works, now i need to research details of each actual security.

One question i had was do members use leverage when purchasing hybrids? Or is it possible?

Any help appreciated.

 

[Bill M]

One question i had was do members use leverage when purchasing hybrids? Or is it possible?

Any help appreciated.

Hello prawny, yes you can borrow on margin to buy hybrids, I just don't do it though. When I clock into Commsec and do a quote for say SVWPA it will give me the quote plus the margin LVR (in this case 65%). The only thing is, is it worth borrowing at a 10% cost in interest to get a 10% dividend? The only reason I would think anyone would do that is if the hybrid is undervalued.

Lets use GMPPA (I hold these). They are selling at around $76 right now. Their face value is $100, looks like a nice capital gain coming up doesn't it? But they may not convert at maturity. GMPPA has a step up if they don't convert. It means instead of the interest rate on top of the swap rate being 1.9% it will jump to 2.9% (percentages might be slightly out). But you are still holding that stock and the price after step up may still trade under face value. In this case borrowing to buy that stock may see your net winnings heads south.

If you knew a hybrid was going to be redeemed for sure and it is paying dividends and it is under face value then you stand to make a good profit, but, by the time you know this so will everyone else and it will be trading close to face value anyway.

My favourite hybrid right now is SVWPA (Telys4) Seven Group. They are paying the 4.5% on top of the 6 month swap rate. So at face value (swap 5% + 4.5%) you will get 9.5%. But in my case my average buying price was $88 so in fact my interest rate will be closer to 11%. The catch with SVWPA is that it is perpetual and in theory may not be redeemed for a very long time. That's why it is under face value. If Seven Group made an announcement tomorrow saying that they were going to redeem it the price will jump to almost face Value overnight.

They are good dividend streams, you just need to know the rules for each hybrid. When the dividend drops into my bank account it makes it all well worth it.

 

[prawn_86]

Thanks Bill,

Much appreciated.

I notice that quite a few hybrids tend to 'build up' in anticipation of the dividend. Do you ever sell and just take a capital gain or usually hold for longer term div stream?

 

[Bill M]

Because I have those carried forward losses from the GFC I might sell this time around. SVWPA goes ex dividend around May, the price might climb to around $96 by then, and an $8 capital gain per share looks pretty good and I won't pay tax on it. But if it hangs around the present $94 I would rather take the dividends.

I did sell BOQPC and TAHHA after listing. I bought the IPO's. 2.5% profit only on BOQPC but a nice 6% on TAHHA. Not big but I was only holding them a short time.

 

[Calliope]

Im wondering what those posters who do currently invest in hybrids are liking at the moment as i'm just looking at a place to start researching actual products, as i think i understand the basics of how the product class works, now i need to research details of each actual security.

Have a look at http://www.fiig.com.au/, You have to register though. Their Hybrid Summary sheets give buy, hold and sell recommendations. Their risk assessments (high, medium or low) are usually spot on. Usually the cheaper the hybrid, the higher the risk. Look at the running yield if it is dividend that interests you.

My portfolio consistently averages around 10%, even during the GFC.

 

[prawn_86]

My favourite hybrid right now is SVWPA (Telys4) Seven Group. They are paying the 4.5% on top of the 6 month swap rate. So at face value (swap 5% + 4.5%) you will get 9.5%. But in my case my average buying price was $88 so in fact my interest rate will be closer to 11%. The catch with SVWPA is that it is perpetual and in theory may not be redeemed for a very long time. That's why it is under face value. If Seven Group made an announcement tomorrow saying that they were going to redeem it the price will jump to almost face Value overnight.

So essentially, a perpetual security will generally always trade below face value, as there is no set date (if ever) that they will be redeemed? I also assume that perpetuals tend to get hit harder in a downturn?

I read earlier in the thread that you tend to try and avoid perpetuals, what made you choose this one? And what would you say the likelihood of them being bought back are, in your experience?

Have a look at http://www.fiig.com.au/, You have to register though. Their Hybrid Summary sheets give buy, hold and sell recommendations. Their risk assessments (high, medium or low) are usually spot on. Usually the cheaper the hybrid, the higher the risk. Look at the running yield if it is dividend that interests you.

My portfolio consistently averages around 10%, even during the GFC.

Thanks Calliope.

Do you mind if i ask what hybrids you're currently holding?

 

[boofhead]

Many perpetuals also have lower margins which pushes down price.

Depending on the company the hybrid/perpetual is associated with it may have smaller drops than the share price of the company.

 

[Bill M]

So essentially, a perpetual security will generally always trade below face value, as there is no set date (if ever) that they will be redeemed? I also assume that perpetuals tend to get hit harder in a downturn?

Not always. I own SBKHB formerly SUNHB. I bought it well before the GFC. It pays a measly .75% above the 3 Month BBSW. When I bought it, it was trading at around $99. There wasn't that much about then and I thought oh well it will always pay that .75% above the BBSW. At one time before the GFC it hit $102, I had a sell on them at that but it never got executed. Then it just went down a bit and kept on paying it's interest. Then the GFC hit, oh man it just went down like the Zeppelin. It think it got down to about $50 at one stage. Suncorp had a massive cloud around it, speculation it could collapse, nothing will save a stock with that hanging over it. Anyhow it didn't collapse and it always paid it's interest. SBKHB also pays what they call a cumulative interest rate. It means that if for any reason they don't pay their due interest it will accumulate and eventually they have to pay out all the accumulated interest. In a downturn the most risky get hit hardest. In my case in was SUNHB and GMPPA and both were the riskiest at the time.

I read earlier in the thread that you tend to try and avoid perpetuals, what made you choose this one? And what would you say the likelihood of them being bought back are, in your experience?

I bought this one because the original TELYS3 had a step up/conversion date. It's interest rate was going to jump from 2.5% to 4.5% on top of the BBSW. Originally I thought Channel 7 would convert them. I thought Stokes had plenty of cash and didn't need these to step up at such high interest rates. Blow me down he decided to convert, that caught everyone by surprise (he is known for this) and the price headed down as everyone was banking on the buy back. I didn't sell however, I bought more. I thought hang on, they are going to pay me much more but the price is going down? Anyhow now it is in my favour, I will continue to hold and collect a gross dividend of 11% however I might pull the plug come dividend at $96 as it still is perpetual.

About them being bought back, I think that if interest rates keep going up they will get bought back. Lets say the BBSW goes to 8% then they will have to pay 12.5% in interest. I reckon they would refinance and get a cheaper loan rather than pay us so much. It is a gamble but to me it's like this, get good dividends in the meantime with a probability of a buy back. They have the right to buy back at any dividend time. Seeing as our rates haven't moved up I don't think they will buy back in May this year.

Apologies for not returning the PM as I only noticed it there this morning, cheers.

 

[Bill M]

Just as a side note, SBKHB went ex interest today. They dumped the stock big time and it's down 3.5% or in this case $2.60. The actual payment is $1.46. Just goes to show that at ex dividend/interest they usually dump bigger than neccessary. If you was to buy this stock today your running interest rate would be around 8.1%, not all that bad.

 

[Calliope]

Thanks Calliope.

Do you mind if i ask what hybrids you're currently holding?

AAZPB 400, MXUPA 400, SVWPA 400, IANG.300, HLNG 300, IMFG 20,000

Medium...... Medium ...... Medium.......Low.........High..........?....... FIIG Risk Ratings

 

[So_Cynical]

For anyone interested, i bumped into a LIC the other day that has a reasonably large exposure to Aussie listed Hybrid's.

IBC - Ironbark Capital is an absolute return focused LIC with about a third of there money in Hybrids....so could be a simple, low cost per share alternative for anyone wanting just a little exposure to Hybrids.

http://www.asx.com.au/asxpdf/20101125/pdf/31v4c6jp3zhtl2.pdf

 

[prawn_86]

Any thoughts on PXUPA? Looks to be fairly risky hence the current price. And i noticed in one of the announcements they said that the 2009 distribution will lapse.

Distributions: Unfranked, semi-annual, floating rate (2.25% at the moment above 180 day rate), discretionary and non-cumulative

Why would anyone want to own these?

 

[skc]

Any thoughts on PXUPA? Looks to be fairly risky hence the current price. And i noticed in one of the announcements they said that the 2009 distribution will lapse.

Why would anyone want to own these?

Looked at these some time ago but didn't pull the trigger...

According to Iress the last 2 dividends were paid out
$3.7128 on 20 Dec (ex)
$3.2655 on 17 Jun (ex)

If you bought say start of year at ~$55 you've got 12.5% yield (and 25% capital gain).

Meanwhile the share price of PPX is still languishing at 90% below their 2007 peak.

It may be possible to play this arbitrage - buy PXUPA and short PPX. But not sure you can easily short PPX and you are toasted if they get a takeover or something like that.

 

[prawn_86]

After help from SKC, Calliope and Bill and my own research i think i'm going to have a dabble and buy some AAZPB.

Currently paying >10% yield, quarterly distributions. And potential of an approx 7% gain if they decide to buy them back if IR continue higher. Anything i've missed?

 

[awg]

Hi prawn,

I strongly agree fiig as a resource...absolute must..I think you in particular will see the usefulness

They have a buy on MXUPA

good coupon, running yield 11%, 25% cap gain on possible conversion

This is my biggest hybrid holding

negative is non-cumulative, discretionary distribution

but backed by Brookfield, so this is deemed to be very unlikely

these type get crunched in GFCs tho, went down to $13 ($100 issuance)

 

[prawn_86]

Yeh signed up to FIIG yesterday and got their sheet.

So many options, wish i had more cash to allocate...

 

[sinner]

these type get crunched in GFCs tho, went down to $13 ($100 issuance)

Long USTs (or JGBs)+Long Aussie hybrids?

Might smooth the curve a little.