What are AT1 Bonds?
AT1 bonds, also known as Additional Tier 1 bonds, are a type of hybrid capital instrument that combines features of both debt and equity. They are a form of perpetual debt, meaning they have no maturity date and can be held indefinitely. AT1 bonds are issued by banks and other financial institutions to raise capital and are generally considered to be a higher-risk investment than other types of debt.
AT1 bonds are typically issued with a coupon rate, which is the interest rate paid to the bondholder. The coupon rate is usually higher than other types of debt, such as corporate bonds, to compensate for the higher risk associated with the investment. AT1 bonds also have a “trigger”, which is a predetermined event that can cause the bond to be written down or converted into equity.
Credit Suisse Writedown
In April 2023, Credit Suisse announced that it would be writing down its AT1 bonds by $1.2 billion. This was the first time a major bank had taken such a drastic step, and it sent shockwaves through the financial markets.
The writedown was a result of the bank’s deteriorating financial position, which had been exacerbated by the COVID-19 pandemic. Credit Suisse had been struggling with high levels of debt and had been forced to raise capital in order to remain solvent. The writedown was seen as a sign that the bank was in serious trouble and that it was taking drastic measures to stay afloat.
Who is Buying AT1 Bonds?
Despite the writedown, there are still investors who are willing to buy AT1 bonds. These investors are typically institutional investors, such as hedge funds and private equity firms, who are looking for higher-yielding investments.
The investors who are buying AT1 bonds are typically those who are willing to take on higher levels of risk in exchange for higher returns. They are also typically those who have a long-term investment horizon and are not concerned about short-term volatility.
Risks of Investing in AT1 Bonds
Investing in AT1 bonds is not without its risks. As mentioned earlier, these bonds have a “trigger”, which can cause them to be written down or converted into equity. This means that the bondholder could potentially lose their entire investment if the trigger is activated.
In addition, AT1 bonds are typically issued with a coupon rate that is higher than other types of debt. This means that the bondholder is taking on additional risk in exchange for the higher return.
Conclusion
AT1 bonds are a type of hybrid capital instrument that combines features of both debt and equity. They are typically issued with a coupon rate that is higher than other types of debt, and they have a “trigger” that can cause them to be written down or converted into equity. Despite the recent writedown by Credit Suisse, there are still investors who are willing to buy AT1 bonds, typically those who are willing to take on higher levels of risk in exchange for higher returns. However, investing in AT1 bonds is not without its risks, and the bondholder could potentially lose their entire investment if the trigger is activated.