At AlbaCore, we focus on the long-term. As one of Europe’s leading alternative credit specialists, we invest in private capital solutions, opportunistic and dislocated credit, and structured products. 

Discover more

Specialist in Asia Pacific, Japan, China, India and South East Asia and Global Emerging Market equities.

Discover more

Our philosophy is very simple. We are constantly searching for high quality businesses and when we acquire them, we will work relentlessly with them to create long-term sustainable value through innovation, ESG-led and proactive asset management.

Discover more

formerly Realindex Investments

Leader in active quantitative equities across Australian equities, global equities, emerging markets and global small companies.

Backed by a unique blend of research, portfolio construction and risk management, focused on uncovering original insights and translating them into investment strategies that are active and systematic, aiming to generate alpha.

Discover more

At Stewart Investors, we believe in putting people first. Our investment world-view is of a series of partnerships – with each other, with our clients, with the companies we invest in, the people who buy their goods and services, and with the wider society in which we all live and work.

Discover more

Market adjusts as APRA makes capital call expectation known

Australian Prudential Regulation Authority (APRA) market communication on capital call expectations – 1 November, 2022

  • On 1 November 2022, APRA issued a clarification letter to banks and insurance companies, to ‘reinforce existing prudential requirements for Additional Tier 1 Capital or Tier 2 Capital instruments’. These capital instruments are widely held by market participants such as asset managers, superannuation funds, banks, and retail investors.   
  • These instruments are typically issued in both fixed and floating rate format, with a longer-term maturity (often 10 years or more) and with an issuer option to call the security well prior to maturity (often 5 years prior to maturity for fixed term securities).
  • Historically, the market has typically assessed the call likelihood of these instruments as a near certainty. In contrast to this, APRA’s communication yesterday emphasised that it needs to be satisfied of the economic and prudential rationale before approving requests to call and replace existing capital instruments with more expensive funding.
  • Following this, we now see a greater likelihood that APRA may not approve requests to call, where this is deemed to be uneconomic and without sufficient prudential rationale. 
In line with the existing prudential standards, ADIs, general insurers and life companies generally should not call an Additional Tier 1 Capital or Tier 2 Capital instrument and replace it with an instrument with a higher credit spread or one that is otherwise more expensive, as it may create the expectation that the issuer will exercise a call option on other outstanding Additional Tier 1 Capital and Tier 2 Capital instruments with call options. An exception would be where the issuer can (i) satisfy APRA as to the economic and prudential rationale of the call; and (ii) satisfy APRA that such action will not create an expectation that other instruments will be called in similar circumstances.

APRA 1 November 2022

  • This clarification is likely to have wide-ranging impacts on the Australian subordinated debt market moving forward. This may manifest in a number of ways:
    • The call option will now need to be priced for existing and new issuance, in contrast to the automatic call assumption that has been market consensus. In general, this will lead to more volatile prices and risk profiles for these securities, and likely higher funding costs for issuers.
    • Individual security features will have an important bearing in pricing this call value. Bullet structures and instruments with high coupons will fare better, while low coupon, floating-rate instruments close to their call date are likely to be the worst affected.
    • For example. Westpac’s 16/02/2028 Tier 2 security has an upcoming call in 3 months 02/2023. Pre-APRA communication, this security was trading close to par at ~$100. Should this security reprice to maturity, in line with CBA’s recent 5-year issuance at a 2.70% trading margin, this would see a price closer to $94.25. This is clearly a significant adjustment.

  • As it stands, sale liquidity for these securities is extremely challenged, with very little activity. Time will tell where pricing settles, though clear risks to the downside are apparent.
  • With a pool of issuance from solely the Major Banks in Australia currently standing at $26b, this recent clarification by APRA is likely to see considerable pressure on the pricing on some of these securities going forward.  Our flagship Global Credit Income strategy holds less than 5% in affected securities, far lower than many peers. Credit markets can be fickle and tumultuous, but our long-standing focus on diversifying well continues to protect client assets in more difficult market conditions.


This material has been prepared and issued by First Sentier Investors (Australia) IM Ltd (ABN 89 114 194 311, AFSL 289017) (FSI AIM), which forms part of First Sentier Investors, a global asset management business. First Sentier Investors is ultimately owned by Mitsubishi UFJ Financial Group, Inc (MUFG), a global financial group.

This material is directed at persons who are ‘wholesale clients’ (as defined under the Corporations Act 2001 (Cth) (Corporations Act)) and has not been prepared for and is not intended for persons who are ‘retail clients’ (as defined under the Corporations Act). This material contains general information only. It is not intended to provide you with financial product advice and does not take into account your objectives, financial situation or needs. Before making an investment decision you should consider, with a financial advisor, whether this information is appropriate in light of your investment needs, objectives and financial situation.

Any opinions expressed in this material are the opinions of the individual author at the time of publication only and are subject to change without notice. Such opinions: (i) are not a recommendation to hold, purchase or sell a particular financial product; (ii) may not include all of the information needed to make an investment decision in relation to such a financial product; and (iii) may substantially differ from other individual authors within First Sentier Investors.

To the extent permitted by law, no liability is accepted by MUFG, FSI AIM nor their affiliates for any loss or damage as a result of any reliance on this material. This material contains, or is based upon, information that FSI AIM believes to be accurate and reliable, however neither MUFG, FSI AIM nor their respective affiliates offer any warranty that it contains no factual errors. No part of this material may be reproduced or transmitted in any form or by any means without the prior written consent of FSI AIM.

Any performance information is gross performance and does not take into account any ongoing fees. No allowance has been made for taxation. Past performance is not indicative of future performance.

Copyright © First Sentier Investors

All rights reserved.