ASIC warns on hybrids

Twitter: @PaperlinXsuX
ASIC Chairman Greg Medcraft said: "Retail investors may be attracted by the interest rates offered by household name companies and trusted brands, but hybrid securities should not be confused with government bonds or 'vanilla' corporate debt. In some cases investors are taking on equity-like risks but only receiving bond-like returns".

Read Greg Medcraft’s official bio here  If you wonder if this is worth reading, click here first

Mr Medcraft, what do you say about equity-like risks and nil returns from the unscrupulous issuers of PXUPA?

Hybrid issuers like to hide behind ‘black letter’ law but fortunately ASIC reads the mood of the markets. As previously mentioned, hybrids and other forms of corporate debt have recently received a boost in popularity as companies look to direct fundraising instead of being over reliant on the banking system. More details at In The Press, particularly by Jonathan Shapiro at the AFR.

We suspect ASIC’s cautionary notice published on November 24, refer table below for eight references, has resulted from a number of factors, not limited to:

1.      Christopher Joye’s critical article re-published here under Attack of the Hybrids on 23 November. Thankfully, Joye is highly regarded in government circles;

2.      The well publicised shenanigans of CMI Ltd (CMI) in its dealings with shareholders, Class A preference holders (CMIPC) and conflicts with ASIC;

3.      Increased negative press about hybrids at credible subscriber sites such as Eureka Report. When people like Robert Gottliebsen write about PaperlinX and PXUPA, people in authority take notice;

4.      ASIC’s recent seven day extension of the Origin Energy exposure period for its hybrid Prospectus. The extension was for ASIC to consider further the terms in the Prospectus, including aspects relating to the mandatory deferral of interest payments. The Origin issue has been very heavily subscribed because of the effective yield of about 9 per cent a year;

5.      Adverse press about PaperlinX in the AFR, Sydney Morning Herald and The Age. This started on 10 November with PaperlinX transparency absent as a letter to the editor of the AFR, submitted by your editor; and

6.      Publicity given to www.paperlinX-suX.com by the AFR and The Age. The financial press must think this case has merit.

Where to from here?

I’m encouraged by the support, and tactical intelligence, given by seriously committed PXUPA investors.

As previously reported, PaperlinX served a Concerns Notice pursuant to the Defamation Act 2005 (VIC) on late Friday, 25 November. I’m prohibited from publishing its contents.

My responses to date have been conciliatory; however PaperlinX apparently isn’t interested in identifying its specific concerns about this site. I submit that its demands are so broad as to be unenforceable. Time will tell.

I’ve served deadlines on PaperlinX all of which have now expired. The parties I’m dealing with at PaperlinX understand my sole objective is restitution of distributions for PXUPA. In the absence of ready cash, which I genuinely don’t believe and neither does anyone else including experts in this field of corporate debt, I’ve proposed a Compromise Offer here.

It appears that ASIC, the financial press and industry experts all disagree with PaperlinX to varying degrees. All that needs to happen is for PaperlinX to reverse its decision.

Here is the sad joke

At MoneySmart, a consumer advisory arm of ASIC, there is a list of Questions to Ask before investing in hybrids.

Question 1 is “What are the risks of investing in this hybrid security, now and in the future?” Helpful but unanswerable.

Perhaps a more relevant question for investors in hybrids would be:

“Have you taken steps to determine the financial morality of the directors of the issuer, in perpetuity?” 

This question is equally unanswerable, but it’s what now confronts investors in PXUPA and CMIPC.

Everyone knows that

·         The hybrid structure of interchangeable debt/equity only works for investors when the issuer acts ethically; otherwise hybrids would be subject to abuse by unscrupulous issuers; and

·         PaperlinX can afford to pay the Dec 2011 distribution, but it refuses to do so.

Conclusion: PaperlinX is unscrupulous.

Here is a list of publications that have commented upon the ASIC hybrid notice in the past few days.

Source	URL
ASIC	ASIC
MoneySmart - by ASIC	MoneySmart
Christopher Joye	Christopher Joye says
AFR	AFR says ...
The Australian	The Australian
Insto Australian Financial Markets	Insto says ...
Professional Planner	Professional Planner advises ...
Money Management	Money Management.com