Key points
- With banks facing call dates in the coming months, we expect that AT1 issuance will return. When it does, this will be an important test of confidence in this market.
- Given the significant rise in rates this past year, there is a risk of bond extension by some issuers, however, underscoring the importance of detailed research on a name‑by‑name basis.
- There is potential for some future regulatory adjustments in Europe, but this is likely a number of years away.
The niche market for additional tier one (AT1) bonds was thrust into the spotlight in March when Swiss regulator Finma ordered the write‑down to zero of Credit Suisse's AT1 bonds as part of the company's sale to UBS. This inflicted the largest loss in the history of AT1 bonds, which are a form of contingent convertible security (CoCo) that can be converted into equity if a bank falls below a certain capital limit or is deemed "not viable" by the regulator. The move was particularly controversial because equity holders received some compensation while AT1 bondholders were wiped out.
This decision to upend the traditional capital structure of bondholders ranking above shareholders left the AT1 market reeling and raised concerns that there might be permanent damage. Although it is still too early to say what the full impact will be for AT1 bonds, we believe the market is still viable but faces important tests ahead.
New Issuance Will Likely Test Market Confidence
It should become clearer whether the market has suffered reputational damage when new issuance returns. According to T. Rowe Price estimates, there are more than EUR 10 billion worth of AT1 bonds with call dates over the remaining three quarters of 2023, and we expect some of these bonds to be called and reissued, particularly those of larger banks. The first few new deals will be closely watched to gauge both the level of demand and the pricing. It is certainly possible that because of Finma's action, AT1 bonds—already regarded as higher risk than other debt—will be considered even risker and that the cost of issuing may therefore rise.
This post was funded by T. Rowe Price
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