- Extension risk was one of the key themes in subordinated financial debt markets for 2018, particularly in Additional Tier 1 (AT1) contingent convertible bonds (CoCos)
- Instruments re-pricing to perpetuity has exacerbated weak performance due to a general risk-off tone in markets
- With all eyes on AT1 CoCos, little attention has been paid to legacy bank capital and the insurance subordinated market
- Looking beyond AT1 CoCos, we maintain our view that extension risk is limited and see value in investing across the capital structure to mitigate risk
Extension risk – the basics
We believe the performance of AT1 CoCos in 2018 is a good example of the reassessment of non-call risks. As global AT1 CoCo spreads widened, by circa 160 bps, over the year1 there was a negative feedback loop (wider spreads led to increased pricing to perpetuity, which in turn pushed spreads wider) and this disproportionally impacted bonds with lower reset spreads.
All eyes on AT1 CoCos in 2018
Heading into 2019, we believe extension risk will likely remain in focus as there is a wave of instruments up for call currently