• lower average equity dividends: Australian equities dividends have fallen in recent years with the current ASX dividend yield meaningfully below its 10-year average (Morningstar, 2026).
• limited appeal of term deposits: although cash rates have risen from historic lows, term deposit returns have often struggled to keep pace with investors’ income and liquidity needs.
• higher inflation: inflation reduces the real value of income over time, underscoring the importance of income streams that can adjust as interest rates change. 
  
• phasing out of bank hybrids: a significant structural shift for income investors, discussed below.

Changes to bank hybrids 

Bank hybrids have been a source of income for Australian investors for many years. With characteristics of debt and equity, they sit between debt and equity in a bank’s capital structure. They have traditionally appealed to income-focused investors because they:

• are listed on the ASX, offering daily liquidity
  
• typically pay regular income distributions, often higher than senior bonds
  
• may include franking credits
  
• have historically been issued by large, well-known banks which are regulated by the Australian Prudential Regulation Authority (APRA).

Bank hybrids are designed to absorb losses during periods of financial stress. Therefore, they carry meaningful risk – higher than a bank’s traditional debt. 

While bank hybrids pay regular income (typically quarterly), distributions are not guaranteed and can be withheld. 

In certain circumstances, hybrids can be converted into equity or written off entirely, meaning investors may face outcomes more akin to shareholders than bondholders.

What changed

In 2024, APRA announced that listed bank hybrids would be gradually phased out as part of broader changes to how banks meet regulatory capital requirements. 

Existing hybrids will continue to trade until they are redeemed or mature, but the once $40-billion-plus market is expected to be closed by 2032.

From a regulatory perspective, bank hybrids were designed to protect the stability of the banking system. APRA has stated that overseas experience has shown bank hybrids do not operate as intended during crisis periods due to their complexity and contagion risk (the likelihood of a financial crisis spreading).

As a result, the regulator has increasingly pushed for capital instruments that provide clearer and more effective loss-absorbing capacity in stressed scenarios. 

As hybrid securities are redeemed, investors relying on them as a source of income may need viable alternatives that meet their needs regarding liquidity, risk and structural characteristics.
 

Listed Retail Notes 

In September 2025, Challenger IM Capital Ltd, a non-bank entity, issued retail notes listed on the ASX, known as Challenger IM LiFTS 1 Notes (Listed Floating rate Term Securities). 

The notes generate their income from a diversified portfolio of public and private credit assets. 

A form of debt, these new listed retail notes have a fixed maturity date and aim to pay regular interest linked to a short-term floating reference rate, such as the Bank Bill Swap Rate, plus a fixed margin. 

Being listed, investors benefit from price transparency and daily liquidity. Unlike hybrids, there is no option for the debt to convert to equity.

The corporate issuer will usually appoint a professional investment manager to manage a portfolio of income-generating assets which fund interest payments to investors. Investors are entitled to receive interest) and the return of their capital at maturity, provided the issuer meets its obligations. 
 

Benefits of Listed Retail Notes

• Return structure: interest payments are typically linked to a floating reference rate plus a margin. Income levels will vary with interest rates and issuer performance, and are not guaranteed.
  
• First loss buffer: note structures may include junior layers of capital that sit below senior noteholders which are designed to absorb losses first. This aims to protect senior noteholders and reduce downside risk and the likelihood of losses during periods of portfolio stress. 
  
• Pull to par: as a note approaches maturity, its traded price typically moves closer to its face value, or 'par'. This is because investors expect to be repaid the face value at maturity. This feature may help reduce price volatility over time compared with perpetual or equity‑style investments such as listed investment companies or trusts.
  
• Transparency: regular reporting to investors provides transparency on the nature of the underlying portfolio. 

Key risks

• Credit and default risk: investors rely on the issuer’s ability to meet its obligations and the performance of the underlying credit portfolios which can be affected by defaults or economic downturns.
  
• Market risk: prices can fluctuate based on credit spreads and investor sentiment, and the price at which investors are able to buy or sell the notes may be higher or lower than face value.
  
• Liquidity risk: although listed, trading volumes may vary and investors needing to exit quickly may have to accept a lower price. 
  
• Interest rate risk: a decline in interest rates would lead to a lower level of income generated from the investment.

Listed retail notes versus bank hybrids

Source: Fidante

Conclusion

Listed notes may differ in structure, risk profile and underlying assets. Returns, liquidity and capital outcomes will vary between products. Risk levels across the Listed Notes product offering will differ across both the risk of the portfolio of assets held and the materiality of any first loss buffer. 

Investors should always read the Prospectus or consult their financial adviser when comparing investment options to determine which investments meet their risk and return objectives. See disclaimer below.