Nobody said it was easy

Nobody said it was easy, as Coldplay’s Chris Martin sang. And he should know.

Almost as quickly as the love affair with new-style bank capital blossomed, it hit a rough patch in mid-March when a Eu1.4bn AT1 debut from Belgium’s KBC caught the market in a contrary mood and sentiment soured.

Only days earlier activity had reached a peak, with two deals hitting the market on the same day for the first time — inaugural trades for Danske and Santander — and those only a day after the first sterling AT1, for Nationwide Building Society, had been executed. But just a few weeks later all but one of the recent euro AT1s were trading below par.

This reality check could be seen as a healthy growing-up lesson for the young asset class. Indeed, when UniCredit reopened the market two weeks after KBC, albeit in dollars, the quality rather than the quantity of orders was highlighted. The $24.5bn order book of Crédit Agricole’s January AT1 may be a thing of the past, but no-one will be too concerned if better performance is a corollary.

Only time will tell if issuers have learned their lesson and behave less greedily in the face of heaving order books and tempting low yields, but investors have certainly sobered up, promising more balanced supply and demand. Meanwhile, a hiatus going into the Easter break has further supported spreads.

Will the next move be up or down?

One thing is a near certainty: supply will be boosted by the arrival of German issuers on the scene, following confirmation of the tax-deductibility of certain AT1 structures by the Federal Ministry of Finance. While Deutsche Bank’s capital plans have been splashed across the front pages of the financial press, its name has been whispered incessantly in relation to an inaugural AT1 from the country.

Longer term, the ECB’s Asset Quality Review will be an increasingly important consideration. But with market participants trying to second guess issuers and regulators, only time will tell what its ultimate consequences are in an asset class that already has enough devilish variables and calculations.

As the Coldplay frontman said: “I was just guessing at numbers and figures.”