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Terminology question

Discussion in 'Shares' started by mumeco, 2nd Jul, 2008.

  1. mumeco

    mumeco Active Member

    Joined:
    2nd Apr, 2008
    Posts:
    31
    Location:
    NSW
    Could I ask anyone some terminology please

    What, in plain language, is a "subordinated note"?, and what is a "Stapled preferred security?"
    (We received an invitation to register in the westpac SPS) but I am a little uncertain about some of the terms. Are they fundraising?
     
  2. Nigel Ward

    Nigel Ward Team InvestEd

    Joined:
    10th Jun, 2005
    Posts:
    1,172
    Hi Mumeco

    You need to read the PDS, seek your own financial advise from a suitably qualified adviser and then make an informed decision...BUT

    Generically:

    - a subordinated note is an "IOU" written by a company which says they have borrowed money from someone - for example you and others who subscribe. The "subordinated" bit means that repayment of the principal amount you have loaned them (i.e. the subscription price or face value of the note) is delayed or postponed to some or all of the other debts the company owes (e.g. to their bank). Depending upon whether it's a full or partial subordination interest payments (or "coupon") on the note may be subordinated (and perhaps capitalised) so that you don't get repaid until the other financiers get paid.

    Critical point of distinction to understand is that you're lending to the note issuer, you're not buying shares or "ownership" interests in the company when you invest in a note. (Just to confuse things some notes are "convertible" in that there is a right to convert into ordinary equity i.e. shares in the company).

    I'm not going to try to explan what the Westpac SPS is as I'd need to read the PDS first!!!

    Good luck and remember - basic rule of investing - if you don't understand it don't invest in it! :D

    Cheers
    N.
     
  3. mumeco

    mumeco Active Member

    Joined:
    2nd Apr, 2008
    Posts:
    31
    Location:
    NSW
    Thanks Nigel
    I don't quite understand it and wasn't planning on investing in it, but alas...I'd better start understanding more soon otherwise I'll never end up investing in anything!:eek:

    I just thought I would ask here to increase my knowledge.

    The "invite" says "each Westpac SPS is a stapled security consisting of a subordinated note and a preference share issued by Westpac."

    Umm...what is a preference share?
     
  4. Nigel Ward

    Nigel Ward Team InvestEd

    Joined:
    10th Jun, 2005
    Posts:
    1,172
    Preference shares are basically a type of hybrid security in that they have characteristics of both debt and equity.

    Prefs usually pay a fixed dividend and it is paid before any ordinary shareholders get a dividend. Generally no voting rights.

    Just to complicate things further there are numerous variations on the theme...

    • cumulative (unpaid divs accumulate for future payment) or non-cumulative
    • convertible (option to convert to ordinary shares perhaps at fixed points in time)
    • participating (may get additional dividend above the base fixed amount)
    • perpetual (which have no set redemption date) or redeemable (where the issuing company may buy them back from you).
    Does that help?

    Cheers
    N.