easy · Debt Capital Markets bond-instruments-structures

In the context of bank regulatory capital, what is the primary purpose of the 'trigger' mechanism in an Additional Tier 1 (AT1) contingent convertible bond?

1. To swap the bond from a fixed coupon to a floating coupon once it is reclassified into the Tier 2 capital bucket.
2. To grant the bank discretion to defer or skip coupon payments during periods of weak earnings and low profitability.
3. To automatically recapitalize the bank by converting debt to equity when capital ratios fall below a certain threshold.
4. To give the issuer a call right to redeem the bond early if prevailing market interest rates decline materially.

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