Investors should exercise vigilance around AT1 calls

AT1 securities issued in 2013/2014 by European banks such as BBVA, Barclays, and SG will hit their first call dates in coming months. The number of calls increases steadily in 2019 and will reach over 20 the year after. Investors should pay attention.

The market used to price legacy hybrid Tier 1 securities on the basis that they would be called on their first call date. But in a report just published Scope says to call or not to call has become a more nuanced discussion. “The possibility that AT1s will not be called means that investors need to be comfortable with issuer fundamentals or at least be appropriately compensated for the risks,” said Pauline Lambert, bank analyst and author of the report.

One of the first AT1 issues likely to be called this year was issued by BBVA in 2013. The bank issued a statement in March announcing its intention to call USD 1.5bn in AT1 securities in May 2018, once consent has been obtained from the regulator.

The European Commission wants more oversight regarding calls and redemptions. Under the proposed amendments to the Capital Requirements Regulation that the EC put forward in November 2016, banks will need prior permission to reduce, redeem or repurchase CET1 instruments; or to call, redeem or repurchase AT1, Tier 2 and eligible liabilities before their contractual maturity.

Under the proposals, permission will be granted if instruments are replaced by own funds or eligible liabilities at a sustainable cost considering the bank’s income capacity; and if the bank can demonstrate its ability to meet requirements by a margin that the competent authority deems necessary.

There are also provisions for a bank to obtain general prior permission for a certain period of time (no more than a year) and for pre-determined amounts. The proposals are still moving through the legislative process.

“While there appears to be a substantial increase in supervisory oversight regarding calls and redemptions which may limit issuers from calling AT1 securities, we would expect competent authorities to consider the potential impact on a bank’s future funding costs and market access when making such decisions,” said Lambert.

“At the same time, large European issuers of AT1 securities generally maintain solid capital positions which should not be materially weakened by redeeming outstanding capital securities – a key consideration for supervisors.”

To read the full report click here.

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