CoCos are back: European banks launch first AT1 bonds since Credit Suisse collapse
AT1 bonds made a roaring comeback as European banks issued the first euro-denominated CoCo bonds since the collapse of Credit Suisse back in March.
BBVA and Bank of Cyprus issued around €1.2bn (£1bn) bonds between them yesterday, and investors were only too happy to snap up the riskiest form of corporate debt.
An AT1 bond is a bond which is converted into equity if a bank falls below a certain, pre-decided strength or capital limit. They are also known as Contingent Convertibles, or CoCos.
In its first AT1 issuance since 2020, BBVA said it sold €1bn in AT1 bonds. Demand for the Spanish bank’s bonds was more than triple that at €3.1bn.
Bank of Cyprus meanwhile sold €220m with Reuters reporting that there was over €2.2bn worth of orders from investors.
David Everson, head of trading, fixed income EMEA at Liquidnet said: “The strength of investor sentiment in corporate bond markets is on show today, as we’re seeing the first euro-denominated AT1 deals come to market since the Credit Suisse crisis with Bank of Cyprus and BBVA both issuing.
“Early signs in the grey market indicate strong demand with the pair trading well above reoffer – defying predictions of a mass route predicted only a few months ago,” Everson said.
According to standards set in the wake of the 2008 financial crisis, holders of AT1 bonds rank above equity holders in the creditor hierarchy.
However, Credit Suisse’s AT1 bondholders were wiped out to the tune of $17bn when it was taken over by UBS. The controversial wipeout raised concerns that the AT1 market, which is an important source of funding for banks, would not recover.
Everson said that recent AT1 issuance reflects both “expectations of a persistently high rate environment” and the realisation there “there is no good time to raise” funding.
Higher rates meanwhile means that there is “a huge amount of value” in corporate bonds for investors seeking safe and steady returns.