Introduction
Since their introduction under Basel III following the 2007-2008 Global Financial Crisis, Additional Tier 1 (AT1) instruments have become an integral part of European bank capital structures. Over time, the market has evolved through multiple issuance cycles and regulatory refinements, resulting in stronger documentation standards, clearer regulatory frameworks and materially higher bank capital buffers. After a period of intense scrutiny following the Credit Suisse AT1 write-down in March 2023, the market has regained strong momentum, supported by robust CET1 capital positions, resilient funding conditions reflected in tighter spreads and renewed investor confidence evidenced by well-subscribed AT1 issuances. As issuance volumes have normalized and pricing has stabilized, interest in EUR-denominated AT1s has broadened to a wider set of investors seeking higher yield within regulated bank capital. With the segment continuing to mature, market participants are placing greater emphasis on transparent market representation and robust benchmarking across the AT1 universe.
S&P Dow Jones Indices (S&P DJI) has launched a new EUR AT1 index to reflect the increasing depth and importance of the EUR AT1 market, the iBoxx EUR Contingent Convertible Liquid Developed Markets AT1 (8% Issuer Cap) Index, with the following metrics.
- Weight: Comprehensive coverage of EUR AT1s issued by banks from developed countries, with European issuers representing the majority of the universe, reflecting a segment that has historically delivered higher coupons and yield levels than traditional bank debt.
- Diversification: An 8% issuer cap is implemented to help mitigate concentration risk in a market historically dominated by a small number of large issuers.
- Sustainability: Exclusion criteria are applied based on Sustainalytics data to exclude issuers involved in activities such as controversial weapons, military contracting, thermal coal, tobacco, cannabis and predatory lending, as well as securities that do not comply with the UN Global Compact principles.
As interest in AT1s continues to grow, we take a closer look at the structure of AT1 instruments, the methodology behind the new index and how it compares with other parts of the bank capital structure.
AT1s in a Nutshell
AT1s are hybrid bank capital instruments issued by large banks and are designed to provide income streams. European issuers represent the largest share of global AT1 issuance and lead the EUR-denominated AT1 market. Introduced under Basel III to strengthen bank balance sheets, AT1s have become a core component of the modern bank capital structure and a well-established source of steady and coupon-driven returns for investors. While AT1s are issued by banks with generally solid issuer credit ratings, the instruments themselves are rated significantly lower than senior and Tier 2 debt due to their subordinated position and loss-absorption features. As a result, AT1s typically carry high yield ratings at the instrument level, even though they are issued by investment grade banks.
AT1s may convert into equity or be written down if the bank’s regulatory capital falls below predefined regulatory thresholds. This mechanism helps to support financial system stability while allowing investors to benefit from higher coupons relative to conventional bank debt and broader corporate credit. The result has been a historically compelling profile for market participants seeking the possibility of enhanced yield within a regulated, transparent and increasingly accessible asset class.
