Untested Banks Find Demand for Risky AT1 Bonds

(Bloomberg) — Investors are so eager to buy the riskiest bank debt that they’re snatching up securities even from unproven borrowers.   

A UK bank rescued from collapse less than two years ago, a lender to small businesses and an online loan provider are among a swathe of firms selling their first Additional Tier 1 bonds this year.

Overall, 2025 is shaping up as the busiest year for debuts in a long time, with eight new issuers so far. The biggest and safest deal by a newcomer, from Greek lender Eurobank Ergasias Services and Holdings SA, drew orders of €4 billion ($4.5 billion) for a €500 million sale.

New entrants, including Metro Bank Holdings Plc, UTB Partners Plc and Zopa Group Ltd., are flocking to AT1s because they are a cheaper way to raise capital than equity, given a backdrop of tight spreads and the stock-market volatility unleashed by US President Donald Trump. And investors are keen to put cash to work in higher-yielding debt that is seen as relatively insulated from tariff turmoil. 

A spokesperson for Metro Bank said the company’s issuance of AT1 securities supports its growth strategy by facilitating more lending. Representatives for UTB and Eurobank didn’t respond to requests for comment. 

“Tighter spreads and a still relatively high cost of equity is why AT1s are preferred,” said Luca Evangelisti, investment manager and head of credit research at Jupiter Asset Management. Smaller banks may also be making the most of the current window in case spreads widen again, he said.

AT1s were created after the financial crisis to provide a capital buffer if banks run into trouble. Lenders aren’t obliged to include this layer, and can just use equity to meet going-concern capital requirements. But this can be much more expensive: The average cost of equity among the top five AT1 issuers is currently around 13%, based on data compiled by Bloomberg. Average AT1 yields are around 6.5%.

The market has now matured, and the number of debut issuers has steadily declined for several years. But both established and new borrowers have been ramping up sales lately. Gross supply of AT1s by European lenders in major currencies is running at the fastest pace since 2014, based on data compiled by Bloomberg. 

It’s been a good time to take the plunge, even as a new name.

“The primary market is very hectic and it seems like everybody wants to take part in anything,” said Jeremie Boudinet, head of financial and subordinated debt at Credit Mutuel Asset Management. “Demand is very strong, because liquidity is somewhat patchy on secondary markets.”

To be sure, investors want compensation for the higher risk compared to established AT1 issuers. Metro Bank, UTB and Zopa paid coupons of at least 12.8%, while the average coupon this year is around 7.6%.

Zopa’s chief financial officer Steve Hulme said that the bank’s oversubscribed sale shows “growing investor interest” as well as Zopa’s “evolution into a mature and trusted financial institution.” 

For Jupiter’s Evangelisti, some of the smaller deals are more of a hedge fund play. “You don’t want to take excessive risk on small names to get that extra yield. Some could be especially at risk if there was a slowdown.”

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