European banks have slashed the amount of special "bail-in-able" bonds they issue annually by about two thirds over the past three years.
S&P Global Market Intelligence data shows that banks have scaled back on issuing the Additional Tier 1 bonds, also known as CoCos, with just 26 such issuances, totaling €21.61 billion, in 2018, compared with 44 worth €34.59 billion in 2015.
AT1 bonds can convert into ordinary shares if a trigger event occurs, like a fall in a bank's capitalization. The bonds provide banks with debt that can be bailed in, which is regarded as crucial by regulators to avoid taxpayer-funded bank bailouts of the kind that occurred during the financial crisis.
The bonds ensure that bond investors as well as shareholders bear losses if a bank runs into trouble before any taxpayer cash is used. Regulators can force banks to stop paying interest on the bonds if they think their capital buffer is insufficient.
Under the Basel III banking regulations, the minimum Tier 1 capital requirement is 6% of risk-weighted assets. This 6% is composed of 4.5% of common equity Tier 1 and 1.5% of AT1 bonds. After five years, the issuer can redeem the bonds early if they wish.
Axiom Alternative Investments has said investors holding CoCo bonds are "extremely well compensated for the risk they are taking" and said the coupon risk was "frankly very low" on large, listed, investment-grade issuers.
"Contrary to what many commentators like to say (probably still influenced by what happened in 2008), the AT1 market is both extremely conscious of extension risk and very well paid for that risk," said Axiom.
Axiom's comments followed a decision by Spain's Banco Santander SA not to call a €1.7 billion AT1 bond after the deadline expired.
In doing so, it became the first European bank not to redeem this kind of debt. Banks can redeem AT1 bonds at their face value or at a premium before they have matured if they can refinance the issue at a better rate in order to save money.
Santander said: "When making call judgments we have an obligation to assess the economics and balance the interests of all investors. We will continue to monitor the market closely and will seek to exercise call options where we believe it is right to do so."
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