hard · Debt Capital Markets bond-instruments-structures
A perpetual additional-tier-1 (AT1) contingent-convertible bond converts to equity if the issuer's CET1 ratio falls below 7%. The bond trades at a yield well above the issuer's senior debt. A strong analyst argues the conversion trigger makes the AT1 'equity-like on the downside, bond-like on the upside.'
What is the most precise refinement of this characterization?
- The AT1 is genuinely symmetric: holders share both downside (conversion) and upside (conversion into appreciating equity), so it behaves like a balanced convertible across the cycle.
- The AT1 gives holders bond-like fixed upside but converts at the worst time into equity that is itself impaired, so the payoff is short a put on the issuer's equity struck near distress — concentrated, negatively-convex downside.
- The conversion feature is a holder option, so it adds value on the downside by letting holders capture equity upside precisely when the issuer recovers from distress.
- Because conversion is at a fixed ratio set at issuance, the AT1's downside is fully hedged once CET1 breaches 7%, making it effectively senior to common equity in a recovery.
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