Fitch: Robust AT1 Issuance in 3Q15 Limited to Core Names

Fitch Ratings says in a new report that additional Tier 1 (AT1) issuance in 3Q15 recovered strongly after a slump in 2Q15. However, despite improved market conditions early on in the quarter, issuance was limited to established names (eg Barclays, Societe Generale and UBS) or banks with a strong local investor base (eg Japanese or Norwegian banks) and volumes have since been very weak.

In its AT1 Tracker 3Q15 Dashboard, Fitch says banks globally issued around USD24bn AT1 bonds, the fourth strongest quarter since the establishment of the asset class (after 2Q14, 4Q14 and 1Q15). At end-3Q15, capital instruments with numerical write-down or conversion triggers included in the Fitch AT1 Tracker exceeded USD200bn (USD176bn related to AT1 instruments and the remainder to Tier 2 write-down or conversion bonds).

For 9M15 AT1 issuance (USD67bn) exceeded 9M14 issuance by nearly USD4bn, but given that 4Q14 was exceptionally strong we expect 2015 volumes will now struggle to match 2014. October volumes (USD0.5bn) were poor, partly reflecting uncertainty about US interest rate developments. The asset class is supported by improved clarity on capital requirements in many jurisdictions and a broadening investor base, notably for investment-grade issues (about 25% of rated AT1s at end-3Q15).

Overall coupon omission and write-down/conversion risk in the AT1 market, as measured by our Trigger Distance Average (TDA), decreased marginally by 10bps to 677bps at end-3Q15. This was largely the result of strong issuance of 5.125% AT1 bonds by well-capitalised banks. In absolute terms (i.e. measured in US dollars), the Fitch TDA dropped by around USD0.9bn to USD37.9bn, indicating marginally higher write-down or conversion risk for the asset class as a whole.

The Banks AT1 Tracker Dashboard as well as the AT1 Tracker Tool can be found on the Banks AT1 Tracker Download Page on www.fitchratings.com.

The updated Tool includes rated and unrated AT1 and other capital-trigger bonds issued up to end-3Q15 as well as end-2Q15 financial data on AT1 issuers, which allows users to assess the absolute and relative coupon risk of AT1 instruments and the write-down/conversion risk of AT1 and Tier 2 contingent capital instruments. The Dashboard also includes country- or bank-specific commentary including on the recently revised capital rules for the largest Swiss banks.

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