Beyond the headlines

Bombshells! Death spirals! Meltdown!

Events in the Additional Tier 1 market made for a perfect storm of journalistic clichés in the opening months of the year, and for once their use was justified.

Maybe prices didn’t literally fall off a cliff, but AT1 were left in a critical condition.

At the turn of the year few would have predicted the horrendous collection of factors that afflicted markets barely a week into 2016: negative news on oil, China and bank earnings — combined with bewildering regulatory pointers from the “competent” authorities.

AT1 found itself centre stage for all the wrong reasons, with issuers’ earnings falling short of expectations just as the bar for distributions was being bumped up — while a lack of understanding of the instruments amplified the negative sentiment being fed back into the broader markets.

Value hunters put a bottom under the market after others had capitulated, but a substantial recovery in the sector had to await the latest instalment of Mario magic — leading to round two of cliché bingo: bazookas, game-changers, etc.

Again, these did not overstate the impact of the ECB’s actions; after disappointing at its December meeting, the Governing Council overdelivered in March, paving the way for UBS to reopen AT1 issuance.

However, while the cutting of rates and boosting of QE undoubtedly stole the headlines, it was Draghi’s footnote regarding Pillar 2 that could ultimately prove the most important for the AT1 market, drawing attention to a European Commission review of the aspects of the instrument that had been the most contentious during the volatility.

The ECB has arguably bought time for the authorities to sort things out and provide the clarity the market desperately needs.

Will they get it right? No comment.