As we approach September 22, 2025, Westpac is set to redeem all $1.7 billion of its Westpac Capital Notes 5 (WCN 5, ASX code: WBCPH). It’s the beginning of an avalanche of cash to be returned to investors – mostly Boomers – that will need to find a home elsewhere. Why? Because the Hybrid market is being closed down, shuttered or phased out.

Westpac Capital Notes 5 holders will receive $100 per note, along with a final fully franked distribution of $1.211. This follows the initial terms of the notes, with the last day of trading having passed on September 10, 2025, and the record date for payment being September 12, 2025.

The background

While this might seem like a routine event for some, it’s actually a harbinger of much larger shifts in the Australian investment landscape.

This redemption is just one piece of a massive $42 billion wave of hybrid securities being called back over the next six years. The Australian hybrid market, long a staple for income-seeking investors, is effectively winding down due to regulatory changes from the Australian Prudential Regulation Authority (APRA).

APRA has mandated the phase-out of these Additional Tier 1 (AT1) hybrid securities, with new issuance ceasing by January 1, 2027, and the full transition to a new capital framework completed by 2032.

The move aims to replace hybrids with more robust forms of capital for banks, but it leaves a significant void for investors – particularly hybrid holders, many of whom are baby boomers, and their financial advisers who are now scrambling for suitable alternatives to provide steady and reliable income.

Where will $42 billion go?

Hybrids have been popular for their higher yields and equity-like features, including franking credits in some cases, wrapped in debt-like security, but with their extinction on the horizon, where will this $42 billion flow?

If you haven’t already, it’s time to consider private credit as a compelling replacement seriously.

Private credit can offer attractive income potential in a low-interest-rate environment, but here’s the crucial caveat: not just any private credit will do.

I am in possession of an established Australian broker report on listed private credit securities. The schedule outlines 12 Private Credit Listed Investment Trusts (LITs) with a combined market capitalisation of A$8.2 billion. And while the comparison highlights market cap, year-to-date performance, NTA per unit, last 12 month yield and target return, it falls short in several critical areas, saying nothing about what investors need to know to compare offerings in the private credit space appropriately. Indeed, superficial comparisons based solely on target returns or implied distribution yields can lead investors astray. Instead, a deeper dive into safety, quality, and structural protections is essential.

What should investors know before reinvesting?

Current Hybrid investors and their advisers will be forced to reallocate the proceeds of Hybrid sales over the next six years, beginning next month. 

Private Credit Funds will be important, there is as much variety in terms of risk and suitability as there is in the Hybrid market. When times are good, most will perform well. But if economic conditions deteriorate, the outcomes for investors will vary.

Here’s a useful list of factors essential to better understanding the differences in private credit alternatives.

1. Examine whether funds are internally or externally rated. Funds that are internally rated are marking their own homework. Seek funds that offer independent external ratings of their portfolios/loan books
2. What are those ratings? A-rated is the highest investment-grade rating, then AAA, AA, A, BBB, BB and B. Anything below BBB- is considered sub-investment-grade.
3. Consider whether the loan book underlying the fund has exposure to higher-risk sectors, such as property development. Investors should look beyond the returns and ask whether riskier property development loans have helped generate those returns.
4. Examine the average ‘duration’ of the loan book. If the average duration is, say, two years, it could take that long to be paid back if, for example, all investors wanted to redeem and the manager ‘gated’ the fund. Gating is a step to restrict redemptions such that investors receive their money as the underlying loans are repaid. Look for funds with shorter average durations, perhaps less than six months.
5. Consider the protections available to investors. Are all the loans secured? What security is provided? What about warehouse structures, credit insurance, personal property security registrations (PPSR), general security agreements, or directors’ guarantees? Are these protections securing your investment? Do they exist on all loans, or just some of them?
6. Finally, examine the concentration of the loan book underlying the fund. A few very large loans might be deemed riskier than thousands of smaller loans. If, for example, a fund has just three very large loans, any one of them defaulting could have a large impact on the investors’ capital. If a loan book has many thousands of small loans, any one of them defaulting will have limited impact to returns and capital.