The request came from a very experienced investment professional at a major investment bank. It came about after discussions with some of Australia’s leading family offices:
“Show me a hybrid alternative that is not private credit.”
It is a revealing brief. An investor can want more income and still have no appetite for another private credit allocation. The existing allocation might be perfectly good. The portfolio may simply have enough exposure to that source of return.
For advisers, that should open a wider conversation. Fixed coupon notes are worth examining because they can generate income from a different set of exposures.
What Income Are We Replacing
Hybrids
APRA has finalised the removal of Additional Tier 1 capital (commonly referred to as “Hybrids”) from Australia’s bank prudential framework, with new standards commencing on 1 January 2027. Existing instruments have transitional arrangements.1
At 30 September 2026, the Betashares Australian Major Bank Hybrids Index ETF reported a portfolio net running yield of 5.31% and gross running yield of 7.39%. The latter includes the full benefit of franking credits.2
Private Credit
Private credit has a legitimate role in an income portfolio. Good managers can provide access to lending opportunities that investors would struggle to source themselves. But even a good investment can become too large an allocation.
For investors already well allocated, the next dollar deserves a fresh assessment. Does another fund introduce different borrowers and sectors, or add to exposures they already hold? How might higher inflation and interest rates affect borrowers’ costs, cash flows and ability to service their debt? How do the fund’s redemption terms fit their need to access capital? And where else could they source income?
These are portfolio-construction questions, rather than a verdict on private credit. Investors do not need to predict a downturn or question their existing managers to consider alternatives. They may simply want more choice over the risks that generate their income.
That is where fixed coupon notes enter the conversation. Their coupons compensate investors for accepting specified market exposures alongside issuer credit risk. The task is to understand those risks and decide how they fit alongside the rest of the portfolio.
Where Fixed Coupon Notes Fit In
A fixed coupon note (FCN) turns a market view into regular income. Rather than owning the referenced shares, you hold a note issued by a bank, with an agreed coupon and a downside protection feature designed to preserve capital.
Example: FCN with Downside Barrier
Take an illustrative three-year note linked to Commonwealth Bank, Westpac, NAB and Macquarie. It pays 8% p.a. in quarterly coupons.
The issuing bank is an investment grade issuer, usually a global bank, and is identified in the term sheet.
The barrier is tested only at maturity. If all four shares finish at or above 50% of their starting prices, principal is returned. Below that level, repayment follows the worst-performing bank’s full decline.
The key terms are visible upfront: who owes you the money, which shares determine the outcome, the coupon, and when capital is at risk. At Stropro, we price structures across a panel of 12 banks, comparing those terms alongside issuer exposure.
Two other unique attributes worth noting are:
- Currency hedging: often advisers/investors opt for international reference assets despite investing in AUD. This provides an efficient and convenient way to diversify without adding currency exposure to the client's return.
- Liquidity: FCNs and other structured products are usually as liquid as their reference assets. So sticking to large cap references assets usually means strong liquidity relative to hybrids and private markets.
A Popular Variation: FCN with Smart Entry
Income investments can sometimes leave investors holding equity. Bank hybrids can convert into ordinary shares, while private-credit lenders may become shareholders through a debt restructuring. The circumstances differ, but they raise a familiar question: what might I end up owning?
For investors open to owning shares, an FCN with Smart Entry makes that possibility part of the decision upfront. The mindset shifts from seeking income alone to earning income while accepting the obligation to acquire shares at a pre-agreed price if the delivery conditions are met.
Consider a one-year note linked to Microsoft, Alphabet (Google) and Amazon. Pricing obtained on 3 November 2026 indicated a coupon of 15% p.a., paid quarterly while the note remains outstanding. On a $100,000 investment, that is $3,750 each quarter.
The entry price is set at 80% of each share’s starting price. If any share finishes below that level at maturity, the investor receives the worst-performing share at that agreed entry price. For a share initially worth $100, the entry price would be $80.
That is a discount to the starting price, not necessarily a bargain at delivery. If the share has fallen to $70, the investor still acquires it at the agreed $80 entry price and bears that loss, with coupons received offsetting some of the decline.
This variation is suited to investors comfortable owning any of the referenced companies at the agreed entry levels, including after a significant fall. For investors who want income but do not want to become shareholders, it is a different proposition to consider, rather than an automatic next step.
Pricing is indicative and can change. Payments depend on the issuer meeting its obligations, and early repayment ends future coupons. Delivery and any cash-settlement alternative depend on the final terms.
More Choice for Income Investors
Investors replacing hybrid income have more than one option. For those already well allocated to private credit, FCNs offer another way to generate income, with the underlying exposures, coupons and repayment terms set out before they invest.
The two examples reflect different intentions: earning income with a maturity barrier, or earning income while being willing to acquire shares at an agreed entry price. Neither captures the full upside of owning the shares directly. The right fit depends on the investor’s existing holdings, investment horizon and capacity to absorb losses.
That brings us back to the original request: “Show me a hybrid alternative that is not private credit.” For advisers, FCNs broaden the conversation and give clients more choice over the risks that generate their income.
If you are evaluating hybrid replacements, book a consultation with our investment desk.
Ben Streater, COO, Stropro
Important Information
Wholesale investors only. Subject to credit risk of the issuer. Investments made available on the Stropro platform are only available to wholesale, sophisticated or professional investors and their financial advisers. Information is general in nature. Please consider whether the information and investments are suitable for you and your personal circumstances. Stropro Operations Pty Ltd (ABN 28 633 603 399) (Stropro) is a Corporate Authorised Representative (CAR No. 1293257) of Stropro Compliance Pty Ltd (ABN 74 640 214 740, AFSL No. 533443). Stropro Operations Pty Ltd and Stropro Compliance Pty Ltd are subsidiaries of Stropro Technologies Pty Ltd (ABN 80 619 399 932).
Sources
- APRA. Finalising the removal of Additional Tier 1 capital. 4 December 2025.
- Betashares. Australian Major Bank Hybrids Index ETF factsheet. 30 September 2026.
.png)
