Corporate organisations typically require capital on a recurring basis for the purpose of financing their business objectives and projects, and one of the ways by which such organisations raise funding is through the issuance of financial instruments. Companies may choose, subject to applicable laws and regulations, to issue equity instruments (e.g., shares and stocks), debt instruments such as bonds and notes, and money market instruments such as commercial papers. This flash note, however, focuses on a distinct form of a financial instrument known as Additional Tier-1 instruments (“AT-1 Instruments“).
AT-1 Instruments are capital-qualifying instruments which constitute part of a company’s regulatory capital. They are issued as debt securities, usually with a convertible feature triggered upon the occurrence of a contingent event. AT-1 Instruments are also perpetual in nature and have no fixed maturity period.
AT-1 Instruments have been described as crucial gadgets in regulators’ toolkits in the post-crisis bail-in regime, as principal losses are imposed on creditors outside the normal bankruptcy process. Furthermore, hybrid securities such as AT-1 Instruments provide an avenue for regulated companies to ensure orderly re-capitalisation or liquidation without triggering market-wide distress. Needless to say, the issuance of AT-1 Instruments is a highly regulated process.