Institutional investors are being offered a fixed income security that contains a level of complexity and risk that in the past has been reserved for international bond markets. The assumption has been that either institutional investment mandates would prohibit buying such an instrument or alternatively domestic investors would lack the sophistication to evaluate and price such an instrument.Insurance Australia Group advised the ASX yesterday it planned to raise a minimum of A$200 million from the sale of subordinated debt to institutional investors. The issue follows Westpac's oversubscribed A$1 billion Basel III compliant Tier 2 subordinated debt issue priced on Friday and a similar issue from Bendigo and Adelaide Bank a month earlier. The subordinated bond sales by Bendigo and Westpac tested the willingness of institutional investors to accept the deferrable coupons and bail-in provisions required under Basel III rules for Tier 2 capital. Bendigo showed sub-institutional investors were more than willing to accept and price these risks and Westpac found that many larger institutions were willing to do the same.All such issuance last year was restricted to bonds listed on the ASX and primarily sold to retail investors. The IAG issue is another step up in complexity for institutional investors. The notes will have deferrable coupons and a non-viability clause that will force the bail-in of note holders should IAG be deemed non-viable by APRA. This will qualify the notes as Tier 2 capital.However, rather than having the normal 10-year term to maturity callable by the issuer after five years, subject to APRA's approval, the notes have a 26-year term to maturity, with the first call date being five to six years after the issue date.Perhaps in compensation for the much longer than usual term to maturity, investors are being offered a conversion option into IAG ordinary shares that they can exercise from the eighth year.This is a rare opportunity for some equity-upside, although just where this would fit in a fixed income portfolio is likely to be a conundrum for institutional investors. IAG has offered the notes in both a fixed and floating rate format and the proportions of each and the credit margin to be paid would be determined in a book-build. The credit margin has been rumoured to be 280 to 300 basis points over swap/bank bills.With similar credit ratings, Westpac paid 205 bps over for its 10-year subordinated debt last week.The response from investors will be an indication of how much the depth and sophistication of Australia's debt capital markets have improved.