Yield-hungry investors pile into AT1 pack at tight levels as Fed ignites FIG fireworks

With a first US rate cut now nailed-on, European banks this week lapped up demand from investors seeking high beta products in dollars and euros, and nowhere more so than in the AT1 market, while insurance and emerging names also joined the party. Neil Day reports, with insights from Crédit Agricole CIB syndicate, trading and advisory in London, New York and Paris.

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The stars aligned for Additional Tier 1 issuance across US dollars and euros this week, as surging demand from investors seeking yield and duration post-Jackson Hole enabled financial institutions to achieve size, duration and price on subordinated offerings.

The momentum across bank asset classes witnessed in the last week of August only grew into the first week of September, with AT1 joining the menu alongside Tier 2 and senior unsecured debt to tap into a wall of buying.

“Credit markets are super-strong,” said Vincent Hoarau, head of FIG syndicate at Crédit Agricole CIB. “Central banks are aligned and moving in the right direction, and we continue to have the combination of excess liquidity and carry, so conditions are extremely favourable.

“This amount of new AT1 issuance in a given week is unprecedented.”

The supply onslaught came just over a week after Federal Reserve chair Jerome Powell primed the market at Jackson Hole (pictured above) on 23 August by declaring: “The time has come for policy to adjust.”

Daniel Kim, director, US syndicate, at Crédit Agricole CIB (pictured), said that while several factors are supportive of the strong market, the Fed’s pivot was the catalyst for conditions becoming quite so conducive.

“Whether it’s a 25bp or 50bp cut on 18 September, investors know which direction yields are going in,” he said. “And when you are speaking about the global economy, and especially the US, we’re not in a recession and overall there are no real credit concerns at play.

“It’s what bondholders wanted to see,” he added, “and they are now looking to put dollars to work and add duration. That drive to be invested is what has made for such a positive environment.”

Investment grade inflows in both dollars and euros have surged of late, while the macro news triggered the release of pent-up demand.

The exuberant conditions were most evident in the dollar market, where $5bn of AT1 issuance from four issuers attracted an aggregate $50bn of orders amid more than 50 financial trades in the post-Labor Day window from Tuesday onward.

“It’s maybe only a handful of deals that were AT1s,” said Kim, “but that’s a lot in such a concentrated timeframe. The pipeline had been growing for some time and, being a high beta instrument with typically the highest yield available, in such a bond-bullish, credit positive market, it’s the product that is probably going to get the highest subscription globally.”

BNP Paribas opened the deeply subordinated issuance on Tuesday with the first AT1 for a Yankee bank since July, going out with initial price thoughts of the 8% area for a perpetual non-call 10 transaction. Peak demand of some $10bn allowed a $1bn (€900m) trade to be priced at 7.375%, implying zero new issue premium, while the reset spread was 353.3bp.

A $2.5bn dual-tranche, perp non-call 5.5 and perp non-call 10 AT1 for HSBC on Wednesday then attracted combined orders above $20bn, allowing the bank to tighten pricing from IPTs of the 7.625% for both tranches inside 7%, with pricing of 6.875% and 6.950%, respectively, for $1.35bn and $1.15bn tranches. Again, no new issue premiums were apparent on the hybrid offerings.

“The new issue concessions were typically negligible,” said Kim. “It’s almost as if secondaries weren’t a concern to investors, with the outright demand for a 7% or higher yield — albeit ultimately in the 6s for HSBC — being all they were focused on. That was reflected in the order books, and enabled issuers to go long, with the flatness of the credit curve meaning that reset spreads were tighter than expected.

“So while we had expected strong issuance, the moves they were able to make from IPTs to final pricing surprised to the upside. And when those deals came out and went so well, we saw further issues hot on their heels — demand begat more demand, with investors going aggressively into subsequent issues after missing out on the allocations they wanted.”

Indeed, ING and UBS hit the market on Thursday, the Dutch group tightening pricing from 7.785% to 7.250% on a $1bn perp non-call 10 that attracted some $8.4bn of orders, and the Swiss bank issuing a $1.5bn perp non-call 5.5 on the back of some $13bn of demand and tightening pricing from 7.50% to 6.85%.

Contributing to the dollar market’s strength and volume outperformance versus euros were economics continuing to favour the US market: BNP Paribas’s 7.375% perp non-call 10 issue was equivalent to around 6% in euros, some 40bp inside what it could have paid in its home currency.

The euro market nevertheless enjoyed its own landmarks.

ABN Amro on Monday reopened the euro AT1 market with a €750m perp non-call 10 issue priced at 6.375%, the lowest coupon on an AT1 in any currency since March 2022. The Dutch bank tightened pricing from IPTs of the 7% area and attracted a book of some €4.75bn, with the reset spread ultimately 390.2bp.

“Issuers are happy to tap the AT1 market given the attractive reset spreads,” said Hoarau (pictured), “which are much lower compared on an historical basis. Most core European issuers could issue in euros well inside the critical 400bp mark.”

The euro AT1 market proved interesting to a wider range of issuers, with Bank of Ireland and Greece’s Alpha Bank on Tuesday printing €600m and €300m perp non-call six deals, respectively.

The Irish bank tightened from 7% to 6.375% — matching ABN Amro but with a shorter duration — on the back of some €2.85bn of demand to achieve pricing some 12.5bp inside fair value. The new issue was launched in conjunction with a tender for up to €600m of its outstanding €675m 7.5% perp non-call 2025 issue.

Alpha Services & Holdings attracted some €2.7bn of orders to its €300m perpetual non-call six AT1, allowing it to tighten pricing from IPTs of the 8% area to 7.5%. The outcome compares with 11.875% on its last AT1, a €400m perp non-call 5.5 sold in February 2023, reflecting sharp improvements in the Greek bank’s profile.

“In terms of jurisdictions, the market has fully reopened,” said Hoarau. “In the first post-summer days, it was only about core markets, core issuers and national champions, but now we are seeing almost everything working well.

“Demand is sticky in bookbuilding and book attrition limited.”

Indeed, as in the dollar market, primary market execution has often exceeded expectations, whether in AT1 or the accompanying flurry of Tier 2 and slew of senior non-preferred issuance.

“It was quite clear to us that there was ample cash stored on the sidelines ready to go to work,” said William Rabicano, director, credit trading at Crédit Agricole CIB, “and that has certainly been the case — the deals we’ve seen so far have been very well received, books have been pretty good and new issue concessions have been all but zero. So in that respect, the market has panned out like we imagined.

“But I don’t think many people anticipated the sort of outright strength that we’ve seen,” he added, “such as going straight back to 52 on main, 285 on crossover, and equity markets being back to year-to-date highs. So valuations have maybe caught people off guard.”

Secondary levels have also held up well in the face of the fresh supply.

“In spite of the deals that we’ve seen pricing at almost fair value in the last two weeks, we’ve not seen clients selling paper in secondary — they’ve just been adding more risk in the primary market,” said Neel Shah, financial credit analyst at Crédit Agricole CIB. “That’s another signal that client cash balances remain very strong and that they are still determined to participate in primary, despite valuations not offering very much by way of new issue premium.

“And investors are clearly quite comfortable owning financials despite the market volatility that we’ve experienced over the last few months.”

The current lure of AT1s helped them outperform the latest senior non-preferred issuance this week when a sell-off in US equities led by chipmaker Nvidia led to weakness on Wednesday, which was quickly overcome by another wave of supply.

The incident was just the latest example of the credit market’s ability to withstand bouts of macro volatility, most starkly exemplified by the rapidity with which it recovered from the 5 August equity sell-off sparked by a Bank of Japan rate hike and signs of a US economic slowdown. After VIX peaked at levels higher than those witnessed upon the collapse of Lehman Brothers, the market soon returned to business as usual.

“It’s all about liquidity,” said Hoarau. “That’s why any phases of correction are short-lived. After a couple of days, everyone realises that it doesn’t make sense to buy protection; you’d rather be invested until things really crack, plus the carry is a very strong protection in case of spread widening.

“And people remind themselves that, if something really bad would happen, central banks would step in.”

However, he suggests the episode shows an underlying nervousness in markets, and Rabicano (pictured) agrees that, with valuations optically very tight, vulnerabilities exist.

“If we were to see any shocks to the system, we could see a decent repricing wider, and I don’t think many people would stand in the way of that straight away,” he said. “And although technicals remain supportive, we’ve had a fair amount of issuance so far at the start of September, so cash balances will start to diminish.

“That would be my only concern, because, as we all know, that cash usually gets fully put to work just as the market decides to turn around completely so those technicals can evaporate very quickly.”