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Macquarie Asset Management Event
11 March 2025
At a Macquarie Asset Management adviser event, the focus was firmly on fixed income investments, and how Australia’s banking sector is responding to APRA’s recent decision to phase out hybrid securities. A lively panel discussion between key decision makers from three of Australia’s major hybrid security issuers gave participants an inside look into the views and thoughts of their treasury teams.
With each participant individually responsible for around $7-11 billion in hybrid allocations, the panel discussed the impact of APRA’s decision to wind up hybrid securities.
“The removal of hybrid securities, or AT1, from the capital stack is quite a significant shift to the overall capital stack that we run as banks,” said Jo Dawson, Group Treasurer, Westpac. “It was a bit of a surprise to the market in some ways.”
However, the major banks expect this to be a smooth transition.
“We plan [our funding] ahead three to five years, [...] and we recalibrate that on a very regular basis,” noted Fergus Blackstock, General Manager, Funding, Liquidity and Collateral, Commonwealth Bank (CBA). “I think all the banks are in a very strong capital position, and that clearly goes into our thinking.”
It's important to note this change will be a carefully managed transition. From January 1 2027 hybrid securities will be treated as Tier 2 debt, with 2032 the final deadline for implementation of the new capital framework.
While Macquarie Group is in the same position as any other major bank, it also has a significant amount of non-bank business supported by hybrid capital. Francisco Sarmiento, Head of Funding, Liquidity and Markets, Macquarie Group, said there may be some precedence in the treatment of insurance companies. These entities also issue hybrids, and are not currently banned from issuing hybrids going forward.
“[Hybrids] are still a possibility for us at Macquarie Group going forward, but we’ll have to wait and see what APRA decides,” he said.
Following APRA’s decision, $43 billion in hybrid investments will need to be redeployed. APRA is requiring the major banks replace the majority of the hybrid exposure within their capital structure with subordinated debt or Tier 2 securities, accordingly, it is expected that investors with hybrid exposure may also look to subordinated debt as a replacement.
Effectively, this simplifies the Australian bank capital structure to equities, subordinated debt (or Tier 2), and senior debt.
“There’s a huge amount of demand for subordinated debt across the globe,” said Blackstock. “The feedback we get from investors often is, as they’re comfortable with credit, they would like to buy what gives them the greatest yield or return.
“I think Tier 2 will become the highest yielding instrument that investors can get access to the credit on.”
He believes subordinated debt is an attractive proposition for international investors as well.
“The market offshore has had a lot of liquidity,” he says. “There’s a huge amount of money out there looking for the right opportunity to invest, [...] and it doesn’t feel that is necessary temporary.”
Add to this the current returns on fixed income, the growing demand for capital preservation and income from aging demographics, and Australia’s compounding superannuation pool, it’s no surprise the banks feel confident they’ll experience solid demand when they do need to issue subordinated debt – from fund managers and institutions alike.
“We’re continually surprised at the strength of the Aussie dollar market, and right across the spectrum of our issuance, whether it be sub debt, or senior issuance or other securities we issue,” said Dawson. “Increasing super balances and growing allocations to fixed income are contributing to the ticket sizes that we’re seeing from some investors and we’re also continuing to see our Asian investor base increase as well.”
Fully franked distributions received from exposure to Australia’s resilient banking sector had made hybrid securities a popular choice for investors seeking a defensive fixed income position, however tier 2/subordinated debt does not carry franking credits.
Hence amidst an investment landscape of market volatility, they will be looking for alternative strategies to meet those goals.
Until recently, it was challenging for Australian investors to build out the fixed income component of their portfolios.
“The parcel size [for bonds] was prohibitive” for many investors says Brett Lewthwaite, Macquarie Asset Management’s CIO and Global Head of Fixed Income. He says that unit trusts emerged as the next best option, but many investors prefer to be a lot faster and more active. And now, ETFs are opening the door to a genuine fixed income solution, and they can be traded actively on the ASX.
Two significant changes in Australia’s fixed income market are aligning simultaneously. Actively managed ETFs have emerged just as more investors start looking for an alternative for their hybrid allocations.
Macquarie now offers four fixed income strategies as active ETFs, including the Macquarie Subordinated Debt Active ETF (ASX:MQSD). This yield focused strategy is actively managed, and provides exposure to major Australian banks and other financial institutions with a focus on subordinated debt.
“We’re not doing this because there’s been a change in the hybrid market: we’re seeing a change in accessibility and asking ourselves the question, how do we best serve client needs,” Lewthwaite added.
Before rushing to replace hybrid security investments when their call date arrives, it’s important to consider the role they play in an investment portfolio. Is it defensive, is it for yield or retirement income, or is it a bond replacement?
Subordinated debt might be one alternative. But other fixed income strategies – including global bonds, income or yield-focused global fixed income ETFs – could also be worth weighing up.
While one door may be closing on the hybrid landscape, many more are now opening. And that’s providing a broader base of Australian investors with more options which aim to generate returns above the cash rate and preserve their capital.
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