$10.9 billion of bank hybrids are expected to be called over the next 18 months, with over $2 billion maturing in September and October 2026.
This reflects APRA’s decision to phase out Additional Tier 1 (AT1) capital instruments, commonly known as bank hybrids, from banks’ regulatory capital framework from 1 January 2027. APRA concluded that AT1 instruments are complex, can create contagion risk, and may not absorb losses as effectively as intended during periods of financial stress.
APRA’s review was influenced by overseas banking events in 2023, including the write-down of Credit Suisse AT1 securities. These events raised questions about the effectiveness of AT1 instruments as loss absorbing capital during periods of financial stress. With hybrids no longer recognised as eligible regulatory capital, banks are expected to progressively redeem outstanding issues and replace them with alternative forms of capital.
For investors who have historically relied on hybrids for floating-rate income, this creates an increasing
need to identify alternative sources of yield and diversification.
The Aquasia Enhanced Credit Fund (AECF) has returned 4.45% p.a. above the RBA Cash Rate since inception in October 2011, with 3 negative months in 178 of operation:
Portfolio information as of 31 July 2026
Aquasia Enhanced Credit Fund Key Portfolio Information:
- Asset class: Fixed income / asset-backed securities
- Target: 1M Bank Bill Index +3% (net of fees)
- Composition: ~75% publicly traded securities, balance is warehouse facilities and cash
- Credit quality: ~73% rated by Fitch, S&P or Moody’s
- Returns: 6.71% p.a. (net of fees) since inception in October 2011
- Excess over cash: 4.45% over the RBA Cash Rate since inception
- Investor type: Wholesale only
- Applications & redemptions: Monthly
- Distributions: Quarterly
- Leverage: Nil
Portfolio information as of 31 July 2026
Diversified, short duration and low volatility:
The AECF investment pool is well diversified backed by hundreds of securities and thousands of loans, compared to bank hybrid exposure which raises single name risk.
Through it’s low market risk investment strategy, the Aquasia Enhanced Credit fund has outperformed bank hybrids, bank tier 2, and senior bank paper on both a total return and volatility of returns basis.
AECF’s comparatively low volatility of returns is achieved through short credit duration and minimal interest rate exposure, helping shield investor capital during periods of market disruption:
Note: All figures are as at 31 July 2026. Past performance is not a reliable indicator of future performance. Bank Hybrids is the Solactive Australian Banking Preferred Shares Index (SAUBPFRG). Bank Tier 2 is the iBoxx AUD Investment Grade Subordinated Debt Index (IBXXAIS1). Bank Senior FRN is the Solactive Australian Bank Senior Floating Rate Bond Index (SOLAUSFR).
Aquasia’s income-focused products offer compelling risk-return outcomes, combining income potential comparable to bank hybrids with the diversification benefits of exposure across a broad range of issuers.
Aquasia Short-Term Income Fund (ASTIF)
Asset Class: Fixed Income – Investment Grade Credit
Description: 100% public investment grade alternative to cash and term deposit assets.
Target Return: RBA Cash + 1.50% p.a. (net of fees)
Redemptions: Daily
Aquasia Enhanced Credit Fund (AECF)
Asset Class: Fixed Income – Diversified Credit
Description: Diversified credit fund delivering consistent quarterly income.
Target Return: AusBond Bank Bill Index + 3.00% p.a. (net of fees)
Redemptions: Monthly
Aquasia Residual Stock Fund
Asset Class: Alternatives – Private Credit
Description: Sub-private credit strategy targeting residual stock loans
Target Return: 7-9% (net of fees)
Redemptions: Quarterly
Disclaimer
This commentary is prepared by Aquasia Pty Ltd ABN 20 136 522 051, AFSL 337872 (Aquasia) as trustee and investment manager of the Aquasia Residual Stock Fund (Fund) for information purposes to wholesale clients (as defined in the Corporations Act 2001). It contains general information and does not constitute personal financial or investment advice or recommendation or an offer to buy or sell any financial product. It does not take into consideration any person’s objectives, financial situation or needs and should not be used as the basis for any investment or financial decision.
Past performance is not reliable indicator of future performance. Aquasia does not guarantee repayment of capital or any particular rate of return from the Fund. Recipients should refer to the Fund’s IM and seek independent financial advice and input from accounting, tax, legal and other professional advisors. Any opinions and estimates included in this commentary constitute judgments of Aquasia as at the date of this document. While Aquasia believes the content is based on reliable information, no warranty is given to its accuracy and persons relying on this information do so at their own risk. To the extent permitted by law, no liability is accepted by any of Aquasia or its directors, officers, employees, contractors, agents or associates (Aquasia Parties) for any loss, damage or liability (including for negligence) suffered or incurred in connection with this document or its contents. Aquasia Parties and their clients may trade in or hold some of the financial products mentioned in this commentary. The contents of this document are confidential and subject to copyright.
