Who does not want to invest in an asset promising higher return? There are various financial instruments in the market such as hybrid securities which attract you but the underlying features should be well understood to avoid any financial distress later on. You may get attracted by such securities but you should never invest in any of those unless you understand the features deeply.

These hybrid securities are issued by large companies, well-known financial institutes and banks, and are advertised heavily. You might be one of those tempted to invest in these securities.  Before you invest or plan to invest, make sure you understand the underlying risks and clauses associated with the hybrid securities as these are quite different from common corporate bonds traded in the market.

Companies and banks issue hybrid securities (including capital notes, subordinated notes, and convertible preference shares) in an attempt to borrow funds from the investors and pay interest in return. Hybrid securities include the features of both equity and bonds, and are mostly traded on the Australian Stock Exchange.

There are various types of the hybrid securities; few with bond-like return but security-like risk, few are long terms and few are convertible. Most of the hybrid securities have higher risks than the bonds due to their complex nature. The underlying clauses, risks, and complex features make the hybrid securities a hard choice for a common man.

An important clause which categorises the hybrid securities as the risky one is the non-viability clause; hybrid securities can be converted into shares if the issuing company faces any financial difficulty. It can be translated into the loss for the investors if the equity share is worth less than the hybrid.

Non-viability clause is exercised under certain events. These triggering events may include loss to the company causing deferral of return to the investors, changes in the tax structure, or change in regulations to pay the hybrid earlier or later than agreed.

Although the hybrid issuing company may have limited control over these events, but how the hybrid behaves, what payment you receive, how you receive or whether you receive any thing is largely dependent on these companies.

You need to understand that under which triggering events the non-viability clause will exercise. It is to remember that before the company becomes insolvent, non-viability event will take place.

The capital notes or bonds will be converted into the equity shares, and the worth of those shares might be quite low as compared to your original investment. An extreme case would be the cancellation of hybrid securities by APRA. Thus, the hybrid may be written off completely making you ended up with no money at all.