AT1 remains an important part of a bank’s capital structure
The shock of the CS AT1 wipe-out was significant, but ultimately did not change the rationale of the AT1 market, both for investors, issuers and supervisors:
▪ For issuers, AT1s are a cheap source of regulatory capital, if only because of tax deductibility.
▪ For investors, the loss rate over the past ten years remains low (70bps) compared to a credit spread which is significantly above the spreads of corporate issuers with similar ratings. The 10- year historical return (in EUR) of the Markit Coco index has been 56% vs. 27% for the ICE BOFA BB non financials index.
▪ From the point of view of supervisors, AT1 bonds performed their “duty”, providing capital in a going concern situation, even if regulators worldwide were keen to distance themselves from the Swiss approach which blatantly inverted the hierarchy of losses: “Additional Tier 1 is and will remain an important component of the capital structure of European banks”.
For now, the primary market has not reopened, but, as in similar recent episodes of market stasis (Covid, Ukraine) we expect it to reopen soon, not necessarily with the strongest issuers (Bank of Ireland reopened the market after Covid.)
You can find more details in our analysis below.