INVESTOR confidence in Additional Tier-1 (AT1) bonds was wiped out in the aftermath of the Credit Suisse collapse in March last year, but market watchers said the investment instrument has made a comeback and is expected to experience an increase in supply this year.

Brandon Huang, LGT Private Banking Asia’s head of fixed income, noted that the price of AT1 bonds has increased by 15 per cent since April 2023 – a month after Credit Suisse’s collapse – and has outperformed global high-yield bonds and global investment-grade bonds over the same period.

The prices of two tranches of AT1 bonds issued by UBS in November last year have increased by 6.9 per cent and 8.1 per cent, respectively, reflecting investor enthusiasm for this asset class, he said.

AT1 bonds are debt issued by banks to investors, but are regarded as a riskier investment as they rank lower in the order of claims than ordinary bonds when a financial institution fails.

Bondholders typically rank above shareholders in terms of getting their money back when a bank runs into trouble. In the case of Credit Suisse, however, AT1 bondholders received nothing under the rescue deal, while shareholders will receive over US$3 billion.

Investors, understandably, fled from AT1s amid the fallout, leading to a slump in the bond prices. Almost all of the AT1 bonds issued by the trio of local banks traded below par in the immediate aftermath of the event.

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Across the region, financial institutions shelved plans to issue AT1s, while others involved in selling the bonds faced lawsuits from angry investors who stood to lose all their investments.

However, Willie Tanoto, a director in Fitch Ratings’ Asia-Pacific banking team, noted that the “bit of anxiety globally” when the Credit Suisse saga broke out was “not widespread” and “not long-lasting” in Asia-Pacific.

“Concerns over AT1 probably dissipated within weeks after the bonds got written down,” he said.

At present, investor demand for AT1 bonds issued by banks globally remains robust, noted Todd Schubert, senior fixed-income strategist at the Bank of Singapore.

This is evident both in the size of the books for new issues and the performance of the asset class in the secondary market in recent weeks and months, he added.

Most market watchers also expect more issuances to come this year, given that the bonds are part of banks’ capital adequacy requirements.

Among the trio of local banks, OCBC was the first to issue AT1 bonds after the Credit Suisse wipedown last year.

The appetite for its latest issue this month was comparable to the last of the bonds it issued in August 2023, at around 1.6 times subscription.

Koh Li-San, head of funding and capital management at OCBC, said the bank decided to issue the notes as it believes that investors’ appetite for the Tier-1 bonds has returned.

“Given the lack of SGD supply and a strong market backdrop, the team decided to launch the transaction to capture investors’ demand,” she said.

Demand for these bonds is likely to remain.

This comes as the broader sector continues to benefit from strong initial conditions in credit fundamentals, said Koh Siong Qun, head of investment advisory at Wrise Wealth Management Singapore.

Banks’ asset quality has also been stable, and capital buffers are at or close to record highs, he noted.

“The yields of AT1s are higher than conventional bonds and can add to returns over the longer term,” said LGT’s Huang.

But that’s not to say that these bonds will be suitable for everyone.

“AT1s are complex instruments with structures that can differ across issuers and tranches, and it is often difficult for investors to evaluate,” Huang noted.

He added that conservative fixed-income investors can give this asset class a miss if they are not comfortable with the volatility, and look towards Tier-2 bonds, which often have compulsory coupons and fixed maturity dates.