According to Fitch, nearly 90% of additional Tier 1 (AT1) instruments issued by banks globally in 4Q14 were issued by large Chinese banks. This resulted in Chinese banks, which were not present in the growing AT1 market before 4Q14 becoming the third-largest issuers of AT1 instruments behind UK and Swiss banks and accounting for around 20% of the USD131bn AT1 and other capital-trigger instruments.
Overall, banks issued around USD29bn in AT1 bonds in 4Q14, the second-strongest quarter after 2Q14. Fitch expects issuance volumes in 1H15 to remain dominated by Chinese banks which are likely to issue around USD50bn AT1 instruments in the short-term, mostly in local currency in their domestic market.
However, with the year-end results season under way and following tax status clarifications of AT1 instruments in several European countries, issuance from European banks will also likely remain solid, provided market conditions are conducive. This was evidenced by a EUR1.5bn issue by Netherlands-based Rabobank Group in January 2015.
Overall coupon omission and write-down/conversion risk in the AT1 market remained broadly stable in 4Q14. The write-down/conversion TDA (the issue size-weighted distance between the applicable common equity Tier 1 ratio of the issuer and the contractual write-down or conversion trigger) increased by a negligible 14bps to 679bps at end-4Q14, indicating marginally lower average write-down/conversion risk. In absolute terms, the write-down/conversion TDA widened to USD39.2bn at end-4Q14 from USD26.5bn at end-3Q14 largely as a result of the above-average size (in absolute terms) of the new Chinese issuers.
