[New post] Convertible or not: making sense of stresses in AT1 bonds market

BankUnderground posted: " Mahmoud Fatouh and Ioana Neamțu Similar to the Deutsche Bank's episode in 2016 and the Covid stress in 2020, AT1 spreads over subordinated debt rose rapidly and sharply following the Credit Swiss rescue deal. Beyond these three cases, AT1 spreads " Bank Underground Convertible or not: making sense of stresses in AT1 bonds market BankUnderground Jul 27 Mahmoud Fatouh and Ioana Neamțu Similar to the Deutsche Bank's episode in 2016 and the Covid stress in 2020, AT1 spreads over subordinated debt rose rapidly and sharply following the Credit Swiss rescue deal. Beyond these three cases, AT1 spreads have been stable. In this post, we focus on conversion risk of AT1 bonds (also known as contingent convertible, CoCo, bonds) to explain the sharp rise in AT1 spreads in these three cases. Conversion risk is the main additional risk of AT1 bonds, compared to subordinated debt. It arises from the potential wealth transfer from AT1 bondholders to existing shareholders when AT1 conversion is triggered, conditional on the solvency of the issuer. We show that, in normal times, investors believe conversion risk is very low, but major events can change this significantly, largely due to higher uncertainty. Continue reading Convertible or not: making sense of stresses in AT1 bonds market Comment Unsubscribe to no longer receive posts from Bank Underground. Change your email settings at manage subscriptions. Trouble clicking? Copy and paste this URL into your browser: https://bankunderground.co.uk/2023/07/27/convertible-or-not-making-sense-of-stresses-in-at1-bonds-market/

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