The market for Additional Tier 1 bonds is beginning to reopen just weeks after Credit Suisse Group AG’s collapse set off a global fire sale of the debt.
(Bloomberg) — The market for Additional Tier 1 bonds is beginning to reopen just weeks after Credit Suisse Group AG’s collapse set off a global fire sale of the debt.
Sumitomo Mitsui Financial Group Inc. sold 140 billion yen ($1 billion) of AT1 notes Wednesday, the first major global lender to tap the market since Swiss regulators wiped out more than $17 billion of the risky debt as part of Credit Suisse’s forced takeover by UBS Group AG.
The offering is one of the largest yen corporate-bond sales this year, and suggests yield-starved Japanese investors are willing to look beyond strains in the global banking sector in exchange for the promise of higher returns. But whether the market’s nascent reopening will extend beyond Japan, and how soon, remains an open question.
“The global AT1s market is somewhat siloed along geographic lines. Yet, this is a step in the right direction for the sector,” said Pri de Silva, senior analyst for Bloomberg Intelligence. “This deal indicated that the Japanese AT1 market is very much open and the megabanks are still able to issue junior capital securities at relative low spreads.”
AT1 notes, also known as contingent convertible or CoCo bonds, are considered the riskiest debt sold by banks. That’s because they are designed to impose losses on bondholders or be converted into equity if a lender’s capital ratios fall below a predetermined level. Regulators can write them down as well if a bank starts to fail.
The securities have rebounded since the writedown, with the exception of those in Switzerland and Brazil, the latter having followed the Swiss model on AT1 regulation.
SMFG priced both 89 billion yen of perpetual notes that can’t be called for five years and two months, and 51 billion yen of similar non-call 10-year, two-month debt at spreads of 171 basis points, according to sole underwriter SMBC Nikko Securities Inc. Another of the country’s megabanks, Mitsubishi UFJ Financial Group Inc., is planning a two-part AT1 bond sale as soon as mid-May.
It’s no surprise that Japan’s major banks can issue AT1s at these types of risk premiums in their home market, said Nicholas Elfner, co-head of research at Breckinridge Capital Advisors. The country’s corporate bond market has been remarkably stable, with tight spreads and low yields for several years, he said.
Still, the fact that there was more demand for the SMFG’s AT1s with the earlier call date suggests that even in Japan, investors prefer safer debt after the recent market turbulence, said Kazuma Ogino, a senior credit analyst at Nomura Securities Co.
In the US, investors have largely been shielded from the writedown pain because the big banks generally sell preferred equity, which counts as additional tier-one capital but doesn’t have writedown or conversion-to-equity clauses, Arnold Kakuda, a bank analyst at Bloomberg Intelligence.
But the wipeout, while unmatched in Europe’s $275 billion CoCo bond market, has created opportunities for some investors to load up on the riskiest bonds. Mark Lieb, the founder of Spectrum Asset Management, recently bought AT1s of Europe’s highest-quality banks, wagering the recent selloff is overdone.
Financial authorities regard SMFG as one of around 30 global systemically important banks, and no lender of that rank had sold an AT1 bond since Credit Suisse’s collapse, Bloomberg-compiled data show.
–With assistance from Finbarr Flynn, Rie Morita, Kevin Kingsbury and Boris Korby.
(Updates throughout.)
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