First verse of Australia’s AT1 redemption song delivers a few key notes

There was an unusual degree of scrutiny on the call of ANZ’s Capital Notes 5 additional tier-one security on 20 March as the option to reinvest into a direct replacement is no longer available. There are early signs that – as bank issuers hoped – some funds are being redeployed into tier-two notes, but market sources say it is still too soon to know exactly how reallocation will play out.

 Joanna Tipler Staff Writer KANGANEWS

ANZ is the second Australian bank to call an additional tier-one (AT1) instrument since the Australian Prudential Regulation Authority (APRA) finalised its decision to remove this part of the capital stack from Australia’s banking regime, on 9 December 2024. With more than A$5 billion (US$3.1 billion) of bank AT1 instruments set for call this year (see table), how investors use the A$931 million returned from the ANZ notes is a subject of interest.

Australian bank AT1 call dates, 2025
Pricing dateIssuer Volume (A$M)Call date
23 Aug 17 ANZ Banking Group 931  20 Mar 25
9 Mar 18 Commonwealth Bank of Australia 1,365  15 Apr 25
10 Jul 20 National Australia Bank 600 17 Jul 25
9 Feb 18 Westpac Banking Corporation 1,690 22 Sep 25
 28 Nov 19 AMP 275 16 Dec 25
 13 May 20 Macquarie Bank 641 21 Dec 25

Source: KangaNews 21 March 2025

The big-four banks have expressed confidence that a significant chunk of AT1 redemption capital will find its way into the tier-two segment. While emphasising that it is very early days, sales desks report some reallocation of ANZ’s AT1 redemption have already taken place.

ANZ’s Sydney-based head of funding and middle market sales, Charles Evans, says there has been some buying of subordinated debt in the secondary market driven by the Capital Notes 5 redemption.

He adds that a couple of the advisory and wealth channel firms that have access to OTC products have indicated there will be an ongoing, gradual shift of some of the funds from Capital Notes 5 into tier-two and corporate subordinated deals. Evans comments: “I expect these firms will gradually reallocate funds via primary and secondary markets as the opportunities become available. It will not be one big injection, straight away.”

Adam Lord, Sydney-based director, institutional credit sales at Westpac Institutional Bank, tells KangaNews his desk also noted some bids for tier-two in the wake of ANZ’s Capital Notes 5 call, albeit it was not extensive – further supporting the idea of a gradual reallocation.

PREFERRED OPTIONS

Nick Chaplin, Sydney-based director and senior portfolio manager at Seed Fund Management, says his fund had held some of ANZ’s Capital Notes 5 AT1 but divested prior to the call date. Overall, he believes it is more likely that investors in AT1 instruments like this will redeploy into bank tier-two than into equity.

He tells KangaNews: “As bank hybrids are phased out investors might continue to hold insurance AT1s, but they certainly should not be going into equities – the risk is entirely different and they likely already have equity allocations in their portfolios. Investors are looking to stay in fixed income and tier-two is an appropriate alternative: it has a higher rating and slightly lower yield than AT1 but not too much lower, with a differential of approximately 50 basis points in comparable secondary spreads at present.”

I expect [advisory and wealth] firms will gradually reallocate funds via primary and secondary markets as the opportunities become available. It will not be one big injection, straight away.

CHARLES EVANS ANZ

Corporate hybrids are also likely to be an option for AT1 investors due to the similarities in yield offering and, to some extent, structures. This asset class – which is enjoying something of a renaissance, with more than A$4 billion issued in the past seven months – can also provide diversification for investors.

There are also reasons for AT1 investors to hold fire on redeploying their funds – assuming redemptions continue in line with call dates rather than being accelerated (see box). JBWere was one of the ANZ Capital Note investors, according to its Sydney-based head of markets group, Kim Pham – and she tells KangaNews recent market volatility means a cautious approach to new allocations.

Early call risk minimal but non-zero

There may be some incentive for banks to attempt to call additional tier-one (AT1) notes prior to their official first call dates. The regulator – which has to give permission for every call – is likely to frown on such a move, market sources say, and while there is some element of risk early divestment could entail missing out on returns.

There is a possibility that AT1 instruments could roll off quicker than their call dates imply. The Australian Prudential Regulation Authority (APRA) has said outstanding AT1 instruments will be reclassified as tier-two debt from 2027 onwards – which, in theory, gives banks an incentive to redeem before first call dates if possible to avoid carrying what would be expensive tier-two debt on their books.

Nick Chaplin, director and senior portfolio manager at Seed Fund Management, reveals that he has received queries about whether the most prudent approach would be to divest AT1 holdings now due to the possibility that banks may approach APRA to refinance the instruments before their official call dates.

Chaplin says it is important for investors to note that APRA clearly stated it wants the phase-out to happen in an “orderly” fashion. “On this basis, one could argue that it is not a risk as APRA has already stated it does not want banks to call the instruments earlier than their first optional redemption dates,” he comments. “On the other hand, this does not stop banks from approaching the regulator and requesting to refinance.”

“There needs to be a repositioning of market expectations on deal execution, pricing and new-issue concessions – to reward investors for pricing risk during periods of uncertainty,” she explains.

There is also a structural aspect. Pham continues: “Without the layer of AT1, there will be a larger layer of tier-two and this additional risk needs to be priced in. Recognition that the extra buffer is not going to be there has not quite been fully priced in yet. Over time, and when the phase out of AT1 is complete, we expect the tier-two product will be viewed as a higher-beta product and believe investors will need to be rewarded for this.”

“Without the layer of AT1, there will be a larger layer of tier-two and this additional risk needs to be priced in. Recognition that the extra buffer is not going to be there has not quite been fully priced in yet. Over time, and when the phase out of AT1 is complete, we expect the tier-two product will be viewed as a higher beta product, and believe investors will need to be rewarded for this.”

KIM PHAM JBWERE

JBWere is considering its options. These include Kangaroo tier-two issuance as well as corporate hybrids, according to Pham. Meanwhile, some investors – including JBWere – might also be holding out for new deals that could be around the corner. “We are keeping our eye out for primary opportunities and working closely with banks and issuers that have indicated in their updates of potential upcoming corporate hybrid issuance,” Pham says.

It is also possible that some of the funds from AT1 redemptions will find their way back into the fixed-income market indirectly. Evans says some of the smaller firms that held Capital Notes 5 do not tend to invest directly in OTC securities and have suggested some of their funds may end up in listed debt funds. Pham adds that JBWere is considering opportunities in listed securities including credit exchange-traded funds.