Investors in Erste Group Bank's largest legacy tier one bond were told on Tuesday that the troubled Austrian lender doesn’t have enough distributable funds to pay its yearly coupon. The bond has fallen more than 10 points in price since.
It shouldn’t have come as much of a surprise. In the autumn, during a tender offer on its upper tier two bonds, Erste explicitly warned investors that the group may not make enough profit to pay on some sub debt. The bank had also issued a profit warning in the summer.
Somehow, the more deeply subordinated tier one investors didn’t take the hint.
It is a clear case of mispricing of risk, and investors in the newer additional tier one sector need to take heed. AT1 coupons are fully discretionary, and they include other risks that Erste’s bond did not, including conversion to equity or write-down, and course, perpetuity.
Erste’s bond is small, with most of the original €400m having been called in 2012. It is also a far cry in quality from most banks in the AT1 space, which are mostly upper tier global banks. But given the low interest rate dynamic that has doubtless helped to fuel the growth of the market, it is not clear at all that the asset class is being priced correctly. Even a number of sellsiders have acknowledged: at some point, a coupon will be deferred, and the whole market is likely to reprice.
The skipping of coupons will surely waylay Erste’s announced plans to issue AT1, or cause it to have to pay up to get a deal done, potentially dearly. But no one can say that they haven't been warned.