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AT1: Investors fill banks’ capital begging bowls

Overwhelming demand for a string of bank AT1 deals shows the extent of investors’ desperation for yield as much as their faith in the restored health of the banking sector. As more new investors accept these deals, hopes grow that a €150 billion AT1 market might emerge quickly now. But terms have tightened far and fast and AT1 can be volatile.

The primary market for European bank AT1 deals burst into life last month, with four new offerings coming in quick succession, attracting strong demand from yield-hungry investors despite offering coupons far below those on the first-generation contingent convertibles that banks sold in 2011 and 2012, and even on more recent AT1 deals launched late in 2013.

Nationwide Building Society came with a £1 billion ($1.65 billion) non-call five paying a 6.875% coupon that converts into core capital deferred shares – the closest building society equivalent to straight equity – if the issuer breaches a 7% common equity tier 1 (CET1) ratio. Santander sold a €1.5 billion non-call five paying 6.25% that converts into equity if the bank’s CET1 ratio falls below 5.125%. Danske Bank paid a 5.75% coupon on its high-trigger €750 million non-call six transaction that suffers temporary write-down if the bank breaches 7% on its CET1 ratio. KBC then drove down coupons to a new low with a €1.4

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