In the days after Credit Suisse Group AG’s AT1s were wiped out, speculation was rife that the market was broken.
The worry among investors was that banks, faced with soaring refinancing costs, would leave their additional tier 1 bonds outstanding beyond the first call date, causing prices to crater. However, as the last few months have shown, anyone who took a chance on buying the deeply discounted notes pocketed hefty returns.
Banks such as HSBC Holdings Plc and Barclays Plc have continued to repurchase their AT1 bonds this year, proving naysayers wrong and bringing calm to a market that was roiled by the downfall of Credit Suisse. European banks redeemed 75% of perpetual bonds in major currencies with a first call option in 2023, and traders price in all remaining calls this year to be exercised.
The average return since March 20 among the bonds recently called stands at about 13%, based on data compiled by Bloomberg. That’s an unusually big payout in the bond market and rivals the winnings investors hope to score from risky equities.
“Markets tend to assume that when market conditions are bad, no bank will refinance,” said Romain Miginiac, head of research at Atlanticomnium S.A. “Banks tend to be bondholder friendly and I don’t think that’s going to change.”
Worries about AT1s have circulated in the market since last year, when the sharp increase in borrowing costs forced some lenders to skip AT1 calls. And there’s been questions of whether regulators would even allow banks to replace a bond, if the cost would be too punitive.
Several AT1s with redemption dates in September and October has made it a high season for call announcements. HSBC, Barclays, Banco Bilbao Vizcaya Argentaria SA, CaixaBank SA and Abanca Corp Bancaria SA have decided to retire $5.5 billion of bonds between them recently.
To be sure, this year’s record hasn’t been unblemished. Deutsche Pfandbriefbank AG kept its notes outstanding, even though that decision had been widely expected.
Central banks have been instrumental in backstopping the market with assurances that they wouldn’t repeat the decision by Swiss authorities to force losses on AT1s ahead of shareholders. In fact, many analysts expect them to be lenient on future call and refinancing decisions.
“After the turmoil in US banks and Credit Suisse, European authorities delivered a confident message on European banks in order to reassure investors,” said Sebastien Barthelemi, head of credit research at Kepler Cheuvreux. “We guess that European authorities are more flexible” when it comes to the cost of replacing AT1s, he said.
