Background
The perpetual bond market has yet to recover from a confidence crisis triggered by the collapse of Credit Suisse Group AG. That event led to the write-off of $17 billion of perpetual bonds, which are also called contingent convertible bonds or additional tier 1 bonds.
AT1 sales in Asia are down more than 70% this year, even with Sumitomo Mitsui Financial Group Inc.’s successful issuance in April. Globally, AT1 sales are down 37%, making the Asian slowdown more significant. Investors are cautious amid uncertainty over banks’ willingness to refinance AT1 notes at the first available date. There are 91 securities in the Asia Pacific region that face upcoming call dates in 2023.
AT1s are also known as contingent convertible capital instruments (CoCos) because they are treated in a similar way to equity, suffering losses before tier 2 bonds, in the event a bank’s capital falls beyond certain levels. There’s an assumption issuers will refinance CoCos at the first call option date, though that’s not always the case.
The issue
AT1 issuance in the Asia-Pacific region has slowed considerably since peaking at $51 billion in fourth-quarter 2021. There’s also been controversy over money UBS paid Credit Suisse shareholders in the takeover while excluding AT1 holders. Bondholders have argued that they were treated unfairly, leading to multiple court challenges.
“AT1 issuance by banks could slow in the near to medium term as the write-off of Credit Suisse’s AT1s questions the seniority of claims,” wrote Rena Kwok, a Bloomberg Intelligence credit analyst. “In the foreseeable future, banks’ funding via AT1s appears likely to be more expensive as investors price in such extra risks.”
Japanese financial institutions saw an average increase of 22 basis points in their AT1 bond yields over the past three months. Australian, Thai and Indonesian peers experienced much steeper increases — over 100 basis points — while South Korea, the second-largest issuer in the region, increased by 76 basis points on average.
Higher demand for SMFG’s AT1s and earlier call dates suggest investors prefer debt on a shorter timeline, avoiding potential credit events. In May, Busan Bank Co. and JB Financial Group Co. of South Korea, SMFG, Industrial & Commercial Bank of China Ltd. and dozens of Taiwanese banks have their next call dates for AT1 bonds.
Tracking
Use Bloomberg’s SRCH, LEAG, FIW and RV functions to analyze conditions for AT1 bond issuance in Asia. On the Terminal, run NSUB FFMSTORY to subscribe to functions-based articles.
For more information on this or other functionality on the Bloomberg Professional Service, click here to request a demo with a Bloomberg sales representative. Existing clients can press <HELP HELP> on their Bloomberg keyboard.
Bloomberg
Source link
