Stapled Securities

A stapled security is a composite instrument in which two or more securities—typically a share and a unit in a trust, or a preferred share and a bond—are permanently affixed together and cannot be traded separately. The arrangement is particularly favoured in Australia and some European markets, where it allows investors to gain exposure to both equity and debt returns (or operating company and property trust returns) through a single purchase.

Why staple securities together

The stapling structure emerged in Australia’s real-estate sector in the 1990s. Consider an Australian Real Estate Investment Trust (AREIT). The trust holds property; operational management and leasing sit in a separate company. Investors want exposure to both the property yield and the operating upside. Rather than forcing investors to buy trust units and company shares separately, regulators and sponsors allowed them to be “stapled” into a single security trading on the exchange.

The economic logic is powerful: stapling guarantees that ownership interests move together. A buyer of stapled securities always holds both pieces; there’s no scope for one to be held hostage or valued in isolation. This can reduce friction in refinancings, mergers, and corporate actions—all stapled holders move as a bloc.

The arrangement also suits businesses with natural structural separation. A toll road operator might issue stapled securities comprising a senior bond (funded by toll revenue) and equity units (receiving residual cash flow). An infrastructure trust might staple operating shares to property units. Each security reflects different risk and return profiles; stapling them ensures they trade as a coherent whole.

The Australian template

Australia’s tax system and corporate law permitted (and encouraged) stapled structures more openly than most jurisdictions. Australian tax law allows “interposed entities”—trusts and companies layered on top of each other—to distribute income while avoiding entity-level double taxation, provided the underlying economic interest flows through cleanly. Stapling was seen as a way to lock in this pass-through benefit.

By the early 2000s, stapled securities had become a major feature of the ASX (Australian Securities Exchange). Listed trusts managing infrastructure, real estate, and financial services often used the structure. Major examples included Macquarie Infrastructure Group (combining management company shares with infrastructure trust units) and various property trusts pairing operational companies with property-holding entities. The structure made sense in a low-interest-rate environment where income-hungry investors sought yield from both equity and debt-like components.

Mechanics and separation risk

Stapled securities are held in a custody arrangement; the underlying securities are registered separately in the trust’s books, but they cannot be separated or traded individually. A buyer of stapled securities owns both the share and the unit; a seller must sell both together. This indivisibility is the entire point: it prevents arbitrage trades that might sever the two pieces and undermines the composite economic logic.

However, stapling is not absolute. In rare corporate actions—a takeover of one component, a forced sale, or a regulatory intervention—the staple can unwind. If the company component is acquired and the trust remains independent, the remaining unitholders may face an unwanted choice: stay invested in the trust alone or sell out. Some Australian stapled securities have experienced separations due to mergers or regulatory changes, creating valuation mismatches and shareholder disputes.

Tax implications

Stapled securities in Australia are taxed on each component separately. An investor holding stapled securities receives distributions from both the company and the trust, each with its own tax treatment. Company distributions may carry franking credits (dividend tax offsets); trust distributions are typically unfranked. This tax blending was partly why the structure appealed to Australian investors—the franking credits reduced the effective tax rate, while the trust component offered access to capital structure deductions (depreciation, interest) that pure equity couldn’t match.

Outside Australia, tax treatment varies. In the United States, the IRS views stapled securities as two separate assets for tax purposes, despite their physical bundling. An investor must track basis and holding periods for each component separately. Some U.S.-listed structures (a few REITs paired with operating companies) have experimented with stapling, but the approach has not gained widespread traction, partly due to tax complexity and partly because U.S. investors prefer simple capital structures.

Valuation and market complications

Stapled securities trade at prices reflecting the sum of the two underlying components. In theory, the stapled security price should equal the share price plus the unit price, all else equal. In practice, the staple can create valuation complications.

If one component is more liquid or more volatile than the other, investors may be willing to pay a premium or discount to own them together rather than separately. If there’s concern that the staple might unwind (due to a potential takeover or regulatory change), the composite price may derate. Some investors dislike stapled structures because they’re forced to hold a component they wouldn’t otherwise buy—a drag on returns if that component underperforms.

Market makers and issuers have learned that stapled securities require patient trading and clear communication. Valuations can diverge from fundamentals if liquidity dries up in one component.

Decline and alternatives

Stapled securities peaked in Australia in the early-to-mid 2000s. As interest rates rose and yield-chasing became less acute, some issuers unwound staples and returned to simpler structures. Regulatory changes in Australia also made the tax advantages less compelling.

Today, stapled securities are less common globally, though they persist in Australian markets and a few other jurisdictions. When they are used, it’s usually in infrastructure and property contexts where there’s a clear operational-versus-asset separation. Some sponsors have moved to alternative structures—master limited partnerships in the U.S., or consolidated holding companies that achieve similar economic effects without the stapling mechanics.

See also