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Near-death experience: when AT1 went to hell and back

AT1 contingent capital bonds are entering their second generation; issuers have begun refinancing the $200 billion asset class, but just two years ago the market looked close to collapse. What took it to near disaster? And how did it escape?

Illustration: Justin Metz


It is early February 2016 when Larissa Knepper, a fixed income trader at Nomura, takes a call from a client asking her to bid on a €5 million piece of Rabobank additional tier-1 (AT1) paper. 

It’s a jittery time. Deutsche Bank’s AT1s are down to the high 80s. But this is an important real money account – the kind of name any trader would like to be doing more with. Unlike many of her peers, Knepper has gone into February with a short AT1 position. And this is Rabo, the strongest of the strong, so no problem.

Knepper quotes where she thinks the market is and the block trades. In the usual way, her next call is to find out from her client what the cover bid was. They can’t tell her, because there was no cover. For €5 million of Rabo? That wasn’t normal.

And it carried on. Other rarely-seen clients started to come out of the woodwork, struggling to find bids.

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Mark Baker is Deputy Editor. Prior to joining Euromoney magazine he was based in Hong Kong as managing editor, Asia, for the Capital Markets Group. He previously edited EuroWeek magazine and was also deputy editor at International Financing Review.
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