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AT1s: waiting could be worth it

By Tyler Davies
06 Feb 2020

Conditions for issuance in the additional tier one market may be more attractive than ever, but there’s still good reason for some bank treasury teams to bide their time.

Capital markets have started 2020 in incredible form. Investors have brushed aside concerns about a new coronavirus epidemic and supported record volumes of new bond issuance at phenomenally tight pricing levels.

DCM officials are urging their bank clients to go out and make the most of this backdrop after earnings season.

Conditions are particularly ripe for AT1s, they say — the very riskiest subordinated bonds.

But there is a good reason why it might not make sense for all financial institutions to go out and complete their capital raising plans as quickly as possible.

Some of them would do well to wait for Fitch Ratings to finish putting together its new bank rating criteria, which is expected to be finalised at any moment.

Fitch is likely to give a one-notch upgrade to the ratings of many AT1 securities.

That is very significant for the likes of ABN Amro, Barclays, Danske Bank, Lloyds, Royal Bank of Scotland, Société Genérale and Standard Chartered: their AT1s all carry BB+ ratings and would therefore be lifted into investment grade territory.

This could open up a huge new source of demand for the issuers, because IG investors are likely to be very keen to add exposure to an asset class that still packs a bit of yield.

There are seven BB+ rated deals arriving at call dates this year, and another three in 2021.

While it might seem like there has never been a better time to get into the AT1 market, banks in Fitch’s good books have enough of a reason to hold back for now.

By Tyler Davies
06 Feb 2020