The securities watchdog has stepped up warnings over hybrid-share issues, saying investors can sometimes be lured into "complex" and "dangerous" instruments by companies that are trusted household names.
The Australian Securities and Investments Commission's warning follows more than $8 billion in subordinated debt and hybrid securities sold since the start of the year by Insurance Australia Group, the big banks, Caltex and Tabcorp.
The notes generally offer investors bond-like returns but carry equity-like risks.
The ASIC warning - which did not mention any specific issues - comes as casino operator Crown has opened its subordinated note issue to the general public.
Crown on Friday raised its offer to $525 million from its initial target of $400 million following strong interest from institutions.
ASIC commissioner John Price said consumers needed to be aware of the risks and complexities of hybrid securities.
"Despite household-name companies and trusted brands being linked to certain offers and promises of 'high yields', consumers should be very careful," Mr Price said this morning, declining to be specific.
"Some hybrid securities and notes are highly risky investments," Mr Price said. "Hybrids need to be closely reviewed".
He said consumers should consider whether hybrids are suitable for them and seek unbiased financial advice on the notes.
Broker boon
The hybrid notes have been a boon for the stockbroking industry, which is battling slowing volumes as investors steer clear of traditional equities.
Among the risks are cases where hybrids have not been paid back when investors expected because the company had a choice about the timing they redeem the specified investments.
"An expectation that at the end of a set period an issuer will definitely redeem the hybrid so that investors get repaid in full is very dangerous", Mr Price said.
Other risks include hybrids having investment terms lasting several decades. The price of hybrids can also drop below what investors originally paid. Elsewhere, some companies will stop paying interest on the notes if their financial position deteriorates.
The Crown notes, for instance, have attracted attention given the 60-year maturity of the notes. A key feature of the Crown notes, which rank below bonds should the company fold, are that the interest payments can be deferred until maturity at the discretion of the casino operator.
Westpac completed its $1.68 billion ASX-listed subordinated note issue last Thursday. The issue, which was only limited to existing Westpac shareholders had been increased in size from the initial $1.5 billion target.
Mr Price reminded issuers their disclosure documents should be clear, concise and effective.
BusinessDay