AT1 issuance has been strong since the start of the year, propelled by the market rally over the first quarter and ahead of call dates this year. There has been a renewed focus on call risk as the 2014 AT1 wave approaches first call dates, particularly following Santander’s decision not to call an AT1 security on the first call date in March 2019. In addition to regulatory approval, banks are considering the economics of call decisions.

“Regarding the CRR/CRD and BRRD amendments that the EU Council and Parliament agreed to in February, AT1 investors should take note that the risk-reduction package contains measures that may limit a bank’s ability to make payments on AT1 securities,” said Pauline Lambert, executive director in the banks team of Scope Ratings and author of Scope’s latest quarterly AT1 update.

Global systemically important institutions (G-SIIs) will be subject to a leverage ratio buffer requirement equal to 50% of their respective G-SII buffer, which must be met with Tier 1 capital from 2022. Banks that undershoot their leverage ratio buffer requirements will have to calculate a leverage ratio-related MDA (L-MDA).

“Until they do this, they will not be able to pay dividends, bonuses or coupons on AT1 securities. Depending on the magnitude of the breach, the amount of distributable profits will be limited to 0%, 20%, 40% or 60%,” said Lambert. “Our initial analysis indicates that major European AT1 issuers would not have problems meeting the additional leverage ratio buffer requirement, although the headroom to the requirement varies bank by bank.”

When a bank breaches its MREL requirement, the resolution authority would also have the power to prohibit distributions in excess of the MREL-related MDA (M-MDA), including payments on AT1 securities. After a grace period of nine months, the resolution authority will exercise this power, under certain conditions.

“The additional M-MDA is unlikely to represent a major hurdle for large systemic banks as they mostly meet expected requirements already and have market access to non-preferred senior and subordinated debt. The M-MDA is less rigid than the other MDA limits on CET1 and leverage ratios,” Lambert noted. “But the additional M-MDA requirement could make it more difficult for small and medium-sized banks to access AT1 funding as they may already be struggling to build-up MREL debt.

The full AT1 update can be downloaded here.