AT1 is dead! Long live AT1!

Four years after a Spanish bank launched the first Additional Tier 1, another has brought the market full circle. While it may have been a surprise for BBVA to open the market in 2013, it is not wholly unexpected that the first write-down should come from a peripheral issuer.

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It is, however, something of a shock that Banco Popular hasn’t closed the market.

The write-down of the bank’s AT1 might have been expected to result in the kind of turmoil witnessed when rumours about Deutsche Bank and speculation about coupon deferrals roiled the market. But prices were largely steady in the face of the losses being imposed on Popular’s sub debt holders.

The most direct beneficiary of the episode is the taxpayer.

If there were ever a time for bankers to shout about the social value they can bring to society, then this is it. Politicians please take note of how such complicated financial instruments can help them avoid the dreaded “bail-out”.

Regulators can meanwhile draw satisfaction from the smooth resolution process. Anyone remember those maze-like flow charts casting doubt on the EU authorities’ ability to act quickly? They can be put in the circular filing cabinet.

Positives for debt holders are perhaps harder to find.

As feared, the point of non-viability (PoNV) has been shown to be the great unknown in the AT1 equation. Investors clearly miscalculated the likelihood of this point approaching given cash prices of around 50 immediately before the ECB/SRB acted.

Yet the resilience of other AT1 shows that investors still have faith in the product, or at least consider the risk-reward to be worth their while.

Will senior unsecured bondholders be so steadfast if the next resolution sees them bailed in, too? With any luck, better management and the rise of senior non-preferred will forever leave that question unanswered.

Neil Day, Managing Editor

Read more on Banco Popular here.