HSBC Holdings PLC is issuing the first major-currency Additional Tier 1 (AT1) bonds since the Middle East conflict erupted in late February, reopening a key segment of the high-risk credit market. According to informed sources, the bank plans to raise at least $1 billion through two perpetual bonds, with first call options set at 5.5 years and 10 years, respectively. Initial market pricing indicates yields of approximately 7.25% and 7.5%.
New AT1 bond issuance had nearly stalled in recent weeks as financial sector concerns mounted over the Middle East war and banks' exposure to private credit. While early 2024 saw strong issuance momentum, the last transaction occurred just before the conflict began. Despite AT1 bonds' inherent risk profile—which typically amplifies volatility during turbulent periods—they have avoided the worst of the credit market sell-off.
Investors are holding tightly to these bonds, fearing they may not be able to repurchase them at acceptable prices once markets stabilize. Historically, AT1 bonds were among the first assets fund managers sold during severe market stress. However, the $280 billion asset class has gained popularity in recent years, attracting new buyers with its high yields.
Richard Hodges, portfolio manager at Nomura Asset Management’s Global Dynamic Bond Fund, noted, "If you sell your AT1 bonds, you might not get them back." He holds AT1 bonds with higher reset spreads, which tend to have stronger demand and lower volatility. Fatima Louis, senior portfolio manager at Mirabaud Asset Management, also confirmed she is maintaining AT1 holdings, citing challenges in trading based on headlines related to Trump and confidence in long-term credit quality, alongside wide bid-ask spreads that complicate re-entry at fair prices.
Overall, AT1 bonds have experienced relatively contained selling pressure since the Middle East conflict began. Compiled data shows that bank-issued perpetual bonds have scarcely appeared among the top 1,000 most actively traded dollar bonds since the war started. Investor reluctance to sell stems from AT1 bonds emerging as one of credit markets' hottest segments, delivering double-digit returns over the past two years—a notable shift since the 2023 writedown of over $17 billion in Credit Suisse AT1 bonds.
Although the conflict has impacted returns—with a dollar-hedged multi-currency AT1 index down 1.6% this month—AT1 performance has still outpaced global investment-grade bond indices, with total return declines far milder than those seen last April when Trump announced global tariff policies.
Scarce supply has further supported the AT1 market amid reduced issuance. The last major-currency AT1 bond before the conflict was issued by Commercial Bank PSQC, while European banks have not issued AT1 debt in nearly a month. For yield-seeking funds, AT1 bonds remain attractive: risks such as skipped coupon payments and potential perpetual duration mean yields significantly exceed those of high-grade bonds, nearing junk bond levels. Investors deem these risks acceptable, particularly since AT1 bonds are issued by the world's largest, most well-capitalized banks, making defaults unlikely.
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