BlueBay Asset Management and Invesco Ltd. are boosting holdings of the riskiest bank debt as sales by lenders from Barclays Plc to UBS Group AG surge.
BlueBay said it recently increased exposure to additional Tier 1 debt and will buy more, while Invesco doubled holdings of the bonds in a European fund this year. Aberdeen Asset Management said it bought notes sold by Barclays this week and may add more.
Investor demand for higher yielding bonds is allowing banks to raise capital that meets new regulations. Royal Bank of Scotland Group Plc, Barclays and UBS sold $6.25 billion of AT1s in the past week, the busiest period since February, according to data compiled by Bloomberg.
“When you compare them to other assets that are available in the senior space, the valuations are still attractive,” said Geraud Charpin, a portfolio manager at BlueBay, which oversees about $65.8 billion. “The more subordinated part of the capital structure is giving you more bang for your buck.”
High-yield contingent capital notes including AT1s yield an average 6.6 percent, according to Bank of America Merrill Lynch index data. That compares with 5.9 percent for ordinary contingent-capital securities, 5.07 percent for high-yield bonds sold by financial companies and 1.3 percent for investment-grade bonds sold by the institutions, the data show.
Additional Tier 1 notes are designed to shift losses to investors instead of taxpayers in a crisis. They have optional interest payments and convert to stock when equity falls below a set percentage of risk-weighted assets. European regulators require banks hold equity or AT1 notes worth at least 1.5 percent of risk-weighted assets.
“We only buy the national champions where we believe there is an improving balance sheet,” such as banks in Switzerland, the U.K., France and Scandinavia, said Steven Logan, the London-based head of European high yield at Aberdeen, which manages $483 billion. “We took some profit in some AT1s last month, so we’ve got room to add.”
RBS sold $3.15 billion of AT1 bonds on Wednesday, following deals by Barclays and UBS totaling $3.1 billion in the previous five days. Standard Chartered Plc said on Wednesday it could consider raising capital, while Societe Generale SA increased the target for its common equity Tier 1 ratio, a key measure of financial strength.
Further offers by more lenders will follow as the market grows, said Henrietta Pacquement, a London-based portfolio manager at ECM Asset Management, which oversees about $4.6 billion.
Invesco increased allocations of contingent capital notes in its 664.4 million-euro ($724 million) European Bond Fund to about 4 percent from 2 percent at the start of the year, according to Lyndon Man, a manager of the fund. Invesco has about $803.6 billion of assets under management
“Banks are doing the right thing in terms of balance sheet reduction,” Man said. “Together with the higher levels of capitalization, the short-term risk is quite remote.”