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European AT1 Market Resilient to Losses, Volumes Increase in 2Q17

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Wednesday, July 05, 2017 10:53 AM /Fitch Ratings 

Investors in European Additional Tier 1 (AT1) securities were confronted with the first write-down and the first coupon omission in June, says Fitch Ratings. However, despite a slowdown in issuance since then, the USD30 billion Basel III AT1 and T2 CoCos issued in 2017 to date were up slightly compared with the previous year. Volumes of USD15.9 billion in 2Q17 were underpinned by large UK, Spanish and Italian bank issuances in EMEA and by Indian banks in APAC. 

The decision to put Banco Popular Espanol S.A. into resolution due to acute liquidity problems in early June resulted in the full write-down of the bank's outstanding EUR1.25 billion high trigger and low-trigger AT1 instruments, the first application of these instruments' loss absorbing mechanism. Bremer Landesbank's decision to omit coupon payments on its EUR50 million externally issued AT1 was also a first for the Basel III AT1 asset class.

Prices of eurozone AT1 instruments proved resilient to these events, confirming a more stable and mature market than in 1H16, aided in part by regulatory developments since, and adequate common equity Tier 1 (CET1) ratios at most issuing banks in Europe. 

Southern European banks have been the largest issuers this year to date, with Spanish, Italian and Portuguese banks together raising USD7.4 billion. UK banks remain strong issuers given their relatively high Pillar 2A and MREL requirements. 

Heightened investor interest for Russia-related risk and for AT1 instruments have resulted in manageable funding costs for the three privately owned Russian banks that placed Basel III perpetual debt in 2H16-1H17. Indian banks' local currency issuance benefited from liquidity generated by the demonetisation process. 

Fitch expects healthy banks in Europe and established issuers to remain active throughout the year, although issuance of AT1 and Tier 2 instruments may become more challenging for lower-rated banks. In Germany, in addition to Bremer Landesbank's precedent generally restrictive rules on AT1 coupon and other distributions will make it more difficult for other Landesbanken to issue AT1 instruments. 

Fitch's updated AT1 Tracker includes 304 capital instruments with numerical write-down or conversion triggers, totalling USD296 billion, half of which are rated by Fitch. The accompanying Dashboard also includes country- and bank-specific commentary including on regulatory developments such as the European Banking Authority's opinion on the prioritisation of AT1 coupons over other discretionary payments. 

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