GC: Cecile, what have been the key dynamics in the AT1 market this year?
Bidet: The market is wide with around $700bn outstanding, and Europe is the number one region with $290bn. We’ve had a very active European bank AT1 market with just over $40bn of supply this year from European banks — double the previous year. Since September, we’ve had 25 tranches across euros, dollars and sterling. This increase in AT1 issuance is mainly down to refinancing. The overall net supply has been small. There’s a lot of calls coming in 2025 and we’ve seen banks take advantage of the very conducive market to refinance those calls this year.
With rates falling, investors have been extremely eager to load on duration, particularly in the dollar market, which made up roughly 60% of AT1s. In September there has been a surge in appetite for non-call 10s or at least products longer than five years. What has provided investors with confidence in the AT1 market is firstly the refinancing. There had been a lot of debate over extension risk and how to price it. We’ve seen very low reset AT1 being refinanced, and that has been reassuring for buyers. Secondly, the banking sector fundamentals are extremely strong across profitability, cost of ratio, asset quality and capital.
GC: Xavier, how has the corporate hybrid market behaved in 2024 and what do you expect for 2025?
Beurtheret: So far this has been the third most active year for corporate hybrids with $51.5bn already issued so far this year. Global supply has already more than doubled what we saw for the whole of last year. European hybrid supply has already reached €25.8bn with the bulk of that issued in euros. Interestingly, we have already seen five inaugural hybrids this year versus only three issued last year. Those inaugural hybrids were issued either in the context of M&A refi or to reinforce capital structures. In terms of recent market developments, we have seen Moody’s change its hybrid methodology, allowing dated corporate hybrids issued from the US to benefit from 50% equity content. This change led to a huge increase in corporate hybrids issued from the US.
Assuming investors are looking for a high beta product, the hybrid is the perfect instrument — providing both yield and ensuring a significant decompression of the subordination premium, with the default probability of an IG rated corporate. Depending on the rating category of the hybrid instrument, we’ve seen 65 bp-85 bp of tightening since the start of the year in the subordination premium that comes on top of the senior title. So when educating issuers on the M&A refi, we think it makes a lot of sense for them to use hybrid instruments for the capital structure instead of [only] an equity piece. Hybrids could also help in defending the credit rating and keep it in the investment grade spectrum.
GC: For financial institutions, will hybrid issuance be a key topic in 2025 or will issuers face more pressing questions?
Bidet: Issuers will still be refinancing AT1 and optimising their capital stock. But I think the big discussion at play for financial institution issuers in 2025 will be between issuing covered bonds or senior preferred. We’ve seen SSAs push spreads higher in longer duration, and so the market for long dated covered bonds is non-existent because it’s too expensive. Issuers looking at longer maturities need to decide whether to keep assets unencumbered and issue long term senior preferred, or crystallise a very high spread for covered bonds. The financial institution asset class overall has been very stable this year. We expect volumes for 2025 are going to be roughly the same — a little bit less hybrid capital and a little bit more covered bonds. What is not clear is whether it will still be an issuer’s market and to what extent spreads can compress further.
GC: Will 2025 be an issuers market for corporate hybrids, and what might determine supply?
Beurtheret: The subordinated premium has tightened consistently since Q4 2023. Although we have seen slight widening since the 2024 summer break, I think we have reached the point where there is not much more potential compression. The tone of the overall market, notably central policy on rates, will affect whether investors will still fight for yield.
The significant volume issued this year came mainly from replacement exercises for corporates managing their stock as well as from US issuers shifting from Preferred Shared to Corporate hybrids. The pickup in M&A activity in the US did not translate into major jumbo transactions in Europe. How to get more M&A transactions in order to bring some new names into the corporate hybrid space will be a key topic on the agenda next year.