{"id":19514,"date":"2023-04-07T14:22:14","date_gmt":"2023-04-07T13:22:14","guid":{"rendered":"https:\/\/latribune.lazardfreresgestion.fr\/?p=19514"},"modified":"2023-04-07T14:22:14","modified_gmt":"2023-04-07T13:22:14","slug":"at1-hybrid-debt-improving-risk-return-profile","status":"publish","type":"post","link":"https:\/\/latribune.lazardfreresgestion.fr\/en\/at1-hybrid-debt-improving-risk-return-profile\/","title":{"rendered":"AT1 hybrid debt: an improving risk-return profile?"},"content":{"rendered":"<h2>Chart of the Week<\/h2>\n<p>Market volatility in the banking sector has been high in recent weeks, notably for Additional Tier 1 hybrid debt, also known as AT1 or contingent convertible (CoCo) bonds. Since 2013, European banks have been issuing AT1 bonds for regulatory reasons and these securities are the most junior form of debt that banks can issue. The decision to write-off Credit Suisse&#8217;s AT1 bonds on 19\u00a0March deeply unsettled Europe\u2019s AT1 market.<\/p>\n<p>Against this backdrop, March saw the risk premium on AT1 bonds jump from 500\u00a0bps (5.00% at call) on 6\u00a0March to over 750\u00a0bps (7.5% at perpetuity) on 20\u00a0March. While spreads have eased since that peak, they remain volatile. Worth noting is that these spreads are now effectively perpetual spreads rather than call spreads.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone  wp-image-19515\" src=\"https:\/\/latribune.lazardfreresgestion.fr\/wp-content\/uploads\/2023\/04\/Chart-of-the-week-0704-300x129.png\" alt=\"\" width=\"865\" height=\"372\" srcset=\"https:\/\/latribune.lazardfreresgestion.fr\/wp-content\/uploads\/2023\/04\/Chart-of-the-week-0704-300x129.png 300w, https:\/\/latribune.lazardfreresgestion.fr\/wp-content\/uploads\/2023\/04\/Chart-of-the-week-0704-1024x440.png 1024w, https:\/\/latribune.lazardfreresgestion.fr\/wp-content\/uploads\/2023\/04\/Chart-of-the-week-0704-768x330.png 768w, https:\/\/latribune.lazardfreresgestion.fr\/wp-content\/uploads\/2023\/04\/Chart-of-the-week-0704-1536x660.png 1536w, https:\/\/latribune.lazardfreresgestion.fr\/wp-content\/uploads\/2023\/04\/Chart-of-the-week-0704-2048x880.png 2048w\" sizes=\"auto, (max-width: 865px) 100vw, 865px\" \/><\/p>\n<h3><b>OUR <\/b><b>ANALYSIS<\/b><\/h3>\n<p>While spreads widened to a lesser extent than in March 2020 when Covid-19 wreaked havoc markets, the level reached on 20\u00a0March\u00a02023 sits near all-time highs. Only ten occurrences of higher spreads have been recorded since the AT1 market was created (0.5% of all trading days). At the end of March 2023, only 6.4% of the sessions since 2013 have had a higher spread.<\/p>\n<p>With the immediate and very negative impact on AT1 valuations behind us, the higher spreads are now translating into higher yields for the segment. Yields to call (the call date is a security\u2019s first possible redemption date) stand at 10\u201311% while perpetual yields stand at 8.0\u20139.5%. We believe that these yields provide a buffer large enough to absorb, from a medium- to long-term perspective, the high risk that comes with this market segment.<\/p>\n<p>***<\/p>\n<p>The opinion expressed above is dated April 7, 2023 and is subject to change.<\/p>\n<p>See also: <a href=\"https:\/\/latribune.lazardfreresgestion.fr\/en\/exceptional-volatility-short-term-rates\/\">https:\/\/latribune.lazardfreresgestion.fr\/en\/exceptional-volatility-short-term-rates\/<\/a><\/p>\n<p>***<\/p>\n<p>This document is not pre-contractual or contractual in nature. It is provided for information purposes. The analyses and descriptions contained in this document shall not be interpreted as being advice or recommendations on the part of Lazard Fr\u00e8res Gestion SAS. This document does not constitute an offer or invitation to purchase or sell, nor an encouragement to invest. This document is the intellectual property of Lazard Fr\u00e8res Gestion SAS. LAZARD FRERES GESTION \u2013 a simplified joint stock company with share capital of \u20ac14,487,500 \u2013 Paris Trade and Companies Registry No. 352 213 599. 25, RUE DE COURCELLES \u2013 75008 PARIS, FRANCE<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Chart of the Week Market volatility in the banking sector has been high in recent weeks, notably for Additional Tier&hellip; <\/p>\n","protected":false},"author":101016,"featured_media":19512,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[98,148,99],"tags":[2107,1971],"class_list":["post-19514","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-analysis","category-chart-of-the-week","category-expertise-en","tag-interest-rates","tag-usa-en"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.2 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>AT1 hybrid debt: an 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