With A$43 billion rolling off, early movers in private and bank credit are already capturing flows, led by ETFs packaging bank paper and managers scaling origination. The strategic question for CIOs and treasurers is not whether to rotate, but how to price liquidity, structure, and governance in the post-hybrid regime.

Key implication: APRA’s hybrid phase-out is accelerating a structural handover from retail-heavy AT1 exposures to institutionally packaged bank credit and private credit. Expect higher issuance of senior and Tier 2 from banks, faster fundraising cycles for private credit managers, and a rewiring of retail income portfolios via ETFs and listed trusts. The winners will be the platforms that can deliver yield with clarity of covenants, transparent loss mechanics and reliable liquidity.

Market context: forced rotation, real flows

APRA’s decision to phase out bank hybrids removes a complex, retail-owned layer of capital after the global rethink triggered by Credit Suisse’s AT1 wipe-out. The immediate arithmetic is stark: roughly A$43 billion of hybrids will mature or be redeemed over the coming years, forcing investors to choose between bank credit (senior/Tier 2) and private credit (secured corporate lending and specialty finance).

The flow is already visible. Global X’s Australia Bank Credit ETF (ASX: BANK) amassed about A$95 million in assets within a year of launch, a notable ramp for a niche exposure—an early proof point that investors are swapping hybrid risk for senior bank paper. At the same time, debt managers report pipeline strength for private credit mandates as income-seeking investors look for floating-rate, covenant-heavy structures.

Scenario test: if just 30 per cent of the A$43 billion migrates to private credit, that’s nearly A$13 billion of fresh capacity into a market the Reserve Bank of Australia has previously sized at roughly A$40 billion—an expansion that would change competitive dynamics overnight. If 50 per cent moves to bank credit, that’s around A$21.5 billion of incremental demand for senior and subordinated bank issuance, supporting tighter spreads and deeper secondary liquidity.

Technical deep dive: what’s being replaced?

Hybrids (AT1) were perpetual, subordinated instruments with discretionary distributions and bail-in mechanics—difficult for retail to price under stress. The replacement stack is simpler for investors and regulators:

• Bank credit: Senior unsecured and Tier 2 subordinated bonds with clearer hierarchy and established resolution treatment. Yields are typically mid-single digits, with duration and spread risk the main variables.
• Private credit: Predominantly floating-rate, senior secured or unitranche loans to mid-market borrowers, often with covenants, security and cash yields in the high single to low double digits depending on risk and structure.

Regulators prefer instruments with predictable loss absorption. Legal analyses globally have noted a move toward greater transparency and resolvability, and APRA’s stance aligns with that thrust.

Business impact: banks, managers and platforms

For banks, the funding mix shifts. Retiring AT1 implies a greater reliance on common equity, Tier 2 and senior issuance. That nudges the weighted average cost of capital, but diversified investor demand—especially from ETFs and credit funds—should contain pricing. Issuance calendars are likely to be heavier and more regular, which improves liquidity in Aussie bank paper.

For asset managers, the opportunity is operational. Private credit managers with mature origination, disciplined underwriting and workout capability can convert hybrid outflows into committed funds—provided they can prove governance, data transparency and risk-adjusted performance through the cycle. Industry leaders have flagged this shift for months; local managers and global alternatives firms alike are building capacity, underwriting teams and warehouse lines to shorten time-to-deploy.

Fintech platforms sit in the slipstream. Expect more digital distribution of bank credit exposures via ETFs and SMAs, and more institutional-grade access to private credit through listed vehicles and feeder funds. On the origination side, technology-led lenders and specialty finance platforms will leverage data, APIs and alternative collateral analytics to widen the investable universe—under the watchful eye of trustees and auditors.

Competitive advantage: speed, structure, and governance

In a flow-driven market, speed-to-mandate matters. Early adopters are winning by pre-positioning products that map directly to hybrid use-cases: floating-rate income, low equity beta, and clear downside protections. BANK’s traction shows that simple, transparent bank credit wrappers resonate. On the private side, managers offering institutional-grade covenant packages, independent valuations, and robust reporting get the nod from investment committees wary of headline risk.

Expect consolidation around platforms with three traits: deep origination networks, cycle-tested loss outcomes, and scalable operations (risk systems, data pipelines, third-party administration). Those that simply “rent” product without underwriting edge will struggle as spreads normalise.

Implementation reality: what CIOs should do now

• Segment the replacement budget: separate near-cash income needs (bank credit ETFs, short-duration funds) from higher-yield allocations (private credit with quarterly or semi-annual liquidity).
• Interrogate documentation: focus on covenants, security, information rights, and default remedies. Private credit is won or lost in the term sheet, not the pitch deck.
• Price liquidity honestly: a 200–300 bps yield pick-up may be fair compensation for quarterly gates, but only with transparent NAV controls and independent oversight.
• Diversify by borrower and sponsor: avoid single-sector concentration (e.g., construction or consumer finance) and favour managers with multi-asset origination.
• Operational due diligence: verify data lineage, valuation policies, trustee arrangements and audit history. Platform risk is as material as credit risk.

Risks and contrarian watch-outs

Not all hybrid money will go straight into risk assets. A portion will park in cash and term deposits while committees recalibrate mandates and liquidity tolerances. If growth slows and defaults tick up, private credit loss rates could compress the headline yield advantage. For banks, a crowded issuance window could create temporary spread indigestion—particularly if offshore events lift global credit premia.

There’s also regulatory path dependency: if international standard-setters tweak loss-absorbing capital again, local issuance strategies may need rework. Retail communication risk is non-trivial—misunderstanding the transition from AT1 to other instruments could invite conduct scrutiny.

Outlook: a cleaner capital stack and a bigger private market

The direction of travel is clear: simpler bank capital, a larger private credit ecosystem, and more institutional packaging for retail income. Industry estimates already place Australian private credit at roughly A$40 billion; a hybrid-driven influx could push that materially higher over the medium term, aligning Australia with the global trend toward private lending as a core income sleeve. Expect more ETFs targeting bank credit, more listed private credit vehicles, and stronger secondary markets for corporate loans.

What to watch: banks’ Tier 2 calendars, the pace of inflows into credit ETFs, private credit fundraising velocity, and default/arrears metrics across mid-market borrowers. The endgame is stability with choice—if managers and product sponsors uphold the governance and transparency that APRA’s move implicitly demands.