Untested Banks Find Demand for Risky AT1 Bonds

Demand for Additional Tier 1 (AT1) bonds is so strong that even relatively untested financial institutions are finding eager buyers. UK bank rescued from collapse less than two years ago, a lender to small businesses and an online loan provider are among the firms issuing their first AT1 bonds this year, indicating a high investor appetite for riskier bank debt despite potential uncertainties.

Analysis

Investor appetite for Additional Tier 1 (AT1) bonds remains robust, evidenced by the successful issuance of these securities by several unproven borrowers, including a UK bank rescued less than two years prior, a lender to small businesses, and an online loan provider, all venturing into the AT1 market for the first time this year. This trend highlights a significant willingness among investors to embrace higher-risk bank debt in pursuit of yield, despite the inherent vulnerabilities associated with less established or recently troubled financial institutions. The market's current speculative tone for these instruments, coupled with a mixed sentiment signal (0.0), suggests that while demand is strong, underlying concerns about the credit quality of these newer issuers may temper unbridled optimism. The ability of such 'untested' entities to tap the AT1 market underscores a broader search for yield within credit and bond markets, potentially stretching risk tolerance levels among participants in the banking and liquidity space.

Key Decisions for Investors

• Investors should conduct rigorous due diligence on first-time AT1 issuers, particularly those with recent histories of financial distress or limited operating track records, given the heightened risk profile.
• While the current market offers opportunities in higher-yielding AT1 bonds from new issuers, participants must carefully weigh the increased credit risk against potential returns, especially in what is described as a speculative environment for these specific instruments.
• Monitor for any shifts in broader market risk appetite or changes in the perceived creditworthiness of these newer AT1 issuers, as this could significantly impact the liquidity and valuation of these bonds.