Hybrid securities are a way for banks and other companies to borrow funds from investors at (generally) floating interest rates. Before investing in Hybrid securities, you must do research on the risks involved since they have characteristics of both debt and equity. In certain circumstances (ie bad circumstances), the security can be converted into shares if the share price falls by a pre-determined percentage or if other events are triggered.
Because the banks get to treat the securities as part of their capital structure, they are prepared to pay a higher rate of interest and the payments can be in the form of cash and/or cash and franking credits.
The price of the security is no indication of what return (yield) you will get because of the various coupons, margins and maturities available. As an active Hybrid trader, I convert the prices quoted in the market to their respective yields, to get a sense of what is offering value at the time.
The longer the maturity, the greater the interest rate you would expect to be offered. For example, 5.50% for a 4-year Major Bank maturity is better than 5.50 % for a 6-year maturity.
Take CBAPD for example, which looks to be offering a reasonable relative return at 5.54% for a December 2022 first call date maturity. CBA announced 2 week ago that they plan to issue $1 billion in a new hybrid (https://www.afr.com/business/banking-and-finance/commonwealth-bank-plots-1b-hybrid-issue-as-banks-assess-law-changes-20181009-h16fj0), which may be the reason CBA securities are trading a bit higher in yield than other banks.
CBAPD was issued paying a fixed 2.80% margin over the 90-day bank bill rate (currently 1.93%) – for a total coupon of 4.73%. The first call date is 15th December 2022. Because the market wants a higher yield than the current coupon of 4.73%, the security trades at a discount to the $100 issue price (ie $97.34).
The stock traded at a high of $98.00 today but pulled back to $97.20 on the back of a large sell order. A lot of value buying came in quickly at $97.30 and has recovered slightly back to $97.50.
Hybrids tend not to be a day trading security because of the much lower volatility and the costs that are incurred in placing the trade. I find that if you are looking for a higher rate of return on your funds invested and are prepared to hold the security for at least 1 to 3 months and longer and only switch when the security you are holding becomes expensive and another security offers better value.
The holding period to qualify for the franking credits attached to the coupon payment of Hybrid securities is 90 days. Again, you must do your research to understand the various risks involved before you trade Hybrid securities.