Once Booming AT1 Market Is Down to Just One Bond in Brazil

Brazil's Additional Tier 1 (AT1) bond market, once a $10 billion segment second only to China in the developing world, is rapidly contracting as local lenders increasingly favor domestic financing over international hard-currency issuance. This shift, occurring despite a global uptick in foreign demand for AT1s, will leave Brazil with only one remaining hard-currency AT1 bond from state-controlled Banco do Brasil SA after Itau Unibanco Holding SA redeems its two perpetual notes in the coming weeks, significantly reducing the supply of these high-risk bank securities for international investors.

Analysis

The Brazilian hard-currency Additional Tier 1 (AT1) bond market is experiencing a severe contraction, effectively evaporating from its former status as a $10 billion segment, which was second only to China's in the developing world. The impending redemption of two perpetual notes by Itau Unibanco Holding SA will leave just a single remaining hard-currency AT1 bond from Banco do Brasil SA. This decline is not driven by a lack of international demand, which is reportedly increasing for such securities globally, but rather by a strategic pivot from Brazilian lenders towards local financing options. This trend has resulted in a complete halt of new international issuances for over four years, signaling a fundamental shift in the funding strategy of Brazil's major banks and significantly reducing the available supply for global investors seeking exposure to this specific asset class.

Key Decisions for Investors

• Investors holding the single remaining Banco do Brasil SA AT1 note should monitor its liquidity closely, as the scarcity of comparable Brazilian issues could lead to price volatility and valuation challenges.
• Portfolio managers seeking high-yield exposure to Brazilian financials must now look beyond the nearly defunct international AT1 market, considering local currency debt or alternative credit instruments, which carry different risk profiles.
• For investors in Itau Unibanco, the redemption of its AT1 bonds should be viewed as a neutral credit event, potentially indicating a strong capital position or access to more cost-effective domestic funding rather than a sign of distress.