The hottest slice of bank capital is cooling. Investors in US preferreds and overseas Additional Tier 1 bonds are pushing back on price, and issuers are paying up. Bank of New York Mellon's latest preferred shares came this week at a premium to benchmarks that was more than one sixth larger than the summer's post-crisis trough. In the US, that reset was clear on BNY's dollar deal, which offered an extra 32.4 basis points for virtually the same fixed to reset structure that three months earlier was labeled "ridiculously tight" and had set that post-crisis low.
Europe showed similar strain. On Friday, Belgium's Belfius saw its new AT1 change hands near 99 cents per euro, about one cent below where it was sold earlier in the week. Italy's Banco BPM printed a €400 million AT1 that initially drew roughly €1.5 billion of interest, but the book shrank by half during marketing as indicative levels were cut.
Some banks are dangling new issue concessions to entice buyers, while others are accepting thinner order books to hold the line on aggressive pricing. Spokespeople for BNY and BPM would not provide comment. A Belfius representative did not respond to a request for comment.
The turn in primary markets follows warning signs in secondary trading. Bloomberg's cross currency Global CoCo Tier 1 index shows the average spread at 253 basis points, following a dip below 200 basis points in August and September that happened for the first time. With broader bond volatility back, investors are rechecking whether they are being paid for risks like a bond not being called at the first opportunity - the extension risk that can sting when coupons reset.
"I'm not surprised that there is more discipline on new issues as your new issue premium becomes an extra layer of protection," said Romain Miginiac, who serves as a fund manager and heads research at Atlanticomnium SA.
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AT1s can be whipsaw instruments - deeply subordinated and complex, they can climb fast and drop just as quickly. According to Bloomberg indexes, they have delivered double digit returns on a dollar hedged basis in 2024 and 2025. But performance has cooled, with year to date gains at 1.6% versus 3.6% in late August as global bonds contend with higher energy prices, revived inflation concerns and expectations of tighter monetary policy, alongside added pressure from turmoil in France's debt markets.
Even so, banks are not shut out of funding and are far from having to consider skipping call options on older paper. CoCo risk premiums remain about 160 basis points below their long run average since the asset class emerged after the financial crisis. There is room to recover if curves steepen and banks deliver on net interest income while sticking to earlier guidance, said Shanawaz Bhimji, who heads credit strategy at ABN Amro Bank.
Just do not expect a full rewind to early summer pricing. "We are probably not going back to the pre-summer days," said Charles-Antoine Dozin, who leads EMEA FIG debt capital markets at Morgan Stanley. "Current levels are still attractive in a historical context and pragmatic issuers can get good transactions done." Preferred shares in the US and AT1s abroad remain tools for banks to raise regulatory capital without leaning only on pricier common equity.
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