Corporate hybrid issuance surges: Report

Corporate hybrids are re-emerging as a significant segment of the Australian dollar credit market, with QIC saying the asset class is benefiting from regulatory reforms, growing investor demand and changing rating treatment.

In a new research paper, The Return of Corporate Hybrids and What it Means for AUD Credit, the Queensland-based investment manager said issuance of non-financial corporate hybrids reached approximately $7.5 billion in 2025, almost four times the previous year, with a further $5.4 billion issued in the first five months of 2026.

The resurgence follows APRA's decisions to phase out bank Additional Tier 1 (AT1) capital instruments from January 2027, prompting income focused investors to look for alternative sources of yield within investment-grade credit.

QIC said corporate hybrids allow investors to earn additional spread by moving lower in a company's capital structure rather than taking on lower quality issuers.

"Rather than reaching for lower quality credit, investors can stay with (mostly) investment-grade issuers and instead move down the capital structure, earning additional spread as compensation for subordination risk and potentially less liquidity, rather than for a deterioration in issuer credit quality," the report said.

The manager noted that unlike bank AT1 securities corporate hybrids do not include regulatory loss absorption features, meaning they cannot be written down or converted into equity by regulators.

Instead, they remain subordinated debt instruments that sit below senior bonds but above equity, typically offering higher yields in return for structural complexity, lower ranking and potentially reduced liquidity.

QIC also pointed to changes introduced by Moody's in 2024, which increased qualifying corporate hybrids to 50% equity credit under its ratings methodology, providing issuers with a more capital efficient funding source and encouraging greater issuance globally.

The report said the Australian hybrid market has evolved from an "occasional funding tool to a more established part of the AUD credit market", particularly among investment grade issuers in utilities, infrastructure and property.

While corporate hybrids offer investors an attractive income opportunity, QIC cautioned they carry higher volatility and greater sensitivity to credit markets than senior debt.

"It calls for an active management approach to structure, relative value and entry point to ensure the additional adequately compensates for the higher-beta, structurally subordinated nature of these instruments," the report concluded.