Investors Return to AT1 Bonds as UBS’s Sale Inspires Confidence

livemint.com:

UBS’s issuance of $3.5 billion in Additional Tier 1 bonds last week attracted strong demand, providing support to a market which is still recovering from the effects of the complete write-down of Credit Suisse’s AT1 bonds in March, analysts said. “The AT1 bond market is recovering and credit spreads are almost at the same level they were before the Credit Suisse event," said ABN Amro analyst Marta Ferro Teixeira.

AT1 bonds are risky debt created after the global financial crisis which act as safety buffers if a bank’s capital levels fall below a certain threshold. They can be converted into equity or written down, but were assumed to rank higher than equities.

This assumption was thrown into doubt during Credit Suisse’s collapse when AT1 bondholders got nothing while shareholders received UBS’s takeover offer. This angered investors and made them nervous of the AT1 market.

With this latest AT1 bond sale, investors were reassured as UBS confirmed the bonds would be converted into equity under any “trigger event", subject to shareholder approval, and demand was strong as a result. “We believe that the execution of this transaction has addressed a lot of these uncertainties and, in a way, represents a cathartic event for AT1s," said Jakub Lichwa, portfolio manager at TwentyFour Asset Management in a note.

“The book size of $36 billion is unheard of, not only in the AT1 space, but more broadly in general credit markets, and we struggled to think of a more successful deal." The AT1 bonds were originally marketed at an initial price talk of 10% for the five-year call bonds and 10.125% for the 10-year call bonds on Wednesday, but strong demand pushed the final pricing down to 9.25% for both trades. “The final pricing still