IAM AT1 Capital (Hybrids) Redemption Options

Following APRA’s confirmation last year that the current AU $44 billion bank hybrid market will be phased out over the next 7 years, IAM has been fielding incoming queries regarding where best to reallocate funds. As the phase-out period of these hybrid instruments draws nearer to the 2032 deadline, we expect the market to shrink at roughly 10% per annum. Over the next month, there are two upcoming hybrid redemptions which will require investors to begin making alternative reinvestment decisions; on the 20th of March, AU $931 million of AN3PH falls due, and on the 15th of April, AU $1.365 billion of CBAPG redeems.

IAM believe that for investors seeking to retain beneficial ownership of their fixed-income portfolios (unlike alternatives such as fixed-income funds and ETFs), the Tier 2 (subordinate bonds) market provides a logical reinvestment solution. The Australian Tier 2 market is currently three times the outstanding volume of the AT1 (hybrid) market, so from a liquidity standpoint, investors are already better off. Whilst Term deposits have also been touted as a potential option, looking across the bank capital stack, IAM sees the best relative value in the Tier 2 market, where yields are ~1.25% higher than term deposit rates, and liquidity is available within two business days.

Please see below a list of eligible Tier 2/Subordinate bond reinvestment options for the upcoming redemptions: