AT1’s big break
Recent signals from European regulators over the treatment of additional tier one coupons are great for bank debt investors, but a softer approach may also open up the market to unfamiliar faces.
A leaked discussion paper suggesting the European Commission is looking to protect AT1 coupons over dividend payments is just the latest in a series of positive developments for the product’s investors, stretching back to when the asset class sold off heavily in February.
With good reason, AT1 investors have always been more concerned about their coupons being switched off than being converted to equity or having their bonds written down.
If banks were to give dividends priority, there would be a real danger AT1 could become the real first loss layer of capital.
Tightening spreads and mammoth books for last week’s new AT1 issues have shown investors are starting to recognise the benefits of regulators’ increasing protection.
The upshot of growing enthusiasm is that demand for these high-yielding instruments could far outstrip supply, helping the €102bn market further expand.
Smaller banks, which have thus far largely been excluded from the market, may even be able to add to their AT1 buckets — helping them raise capital more cheaply than they could with equity.
Investors would be advised to avoid complacency, of course.
A new look AT1 instrument from a second tier bank would offer a juicy yield and some reassurances on interest payments, but it would not take away the risk the lender could be forced to maintain capital levels by stopping AT1 coupons as well as bonuses and dividends.
But alongside other recent supportive measures, greater comfort over coupon payments may well be crucial in spreading AT1 to the masses.