New Year sales?

A year ago, deeply subordinated debt markets and the nascent bank AT1 asset class were looking forward to an exciting year ahead. Twelve months later, a sense of foreboding is more appropriate.

On the supply side, forecasts are only increasing. While the AT1 market may be off its highs, hybrid issuance remains economically efficient for financial institutions seeking to optimise their capital structure. 2014 may have seen several jurisdictions opening up and many issuers debuting, but there is much more to come.

On top of this, the launch of the Financial Stability Board’s Total Loss Absorbing Capital (TLAC) consultation on 10 November raised the prospect of multiple billions more of subordinated instruments hitting the market over the coming months. Already, issuers are gearing up to hit the market with Tier 2 deals in January.

They will be joining the most active issuers in the year-end market: insurers. Having avoided the worst of the volatility suffered by banks, insurance companies have taken advantage of market windows to launch deals designed to optimise capital structures ahead of and going into the implementation of Solvency II — while next year will see the first hybrids purely based on the new framework.

Meanwhile on the demand side it is clear that the investor base for AT1 is thinning. Many private bank and hedge fund accounts have either exited the market or cut down their tickets, while those remaining committed to the asset class can afford to be selective — and are taking advantage of that.

Tier 2 investors also suffered a knock in December when Erste Group announced that — as it had warned it might — it would be skipping coupons on outstanding Upper Tier 2 and Tier 1 instruments. And all that goes without mentioning the slew of postponements of senior unsecured and covered bonds in late November.

Yet the market does not appear to have priced in these ominous trends, let alone some potentially unpleasant negative macro headlines. When it begins to — as it surely must when supply resumes in January — the last thing issuers should expect is a happy New Year.