Gain the AT1 Edge
Why it makes sense to access AT1s via a fund
How a fund helps you: Should you always own AT1s, which AT1s do you select and diversification
04 June 2025
European financial credit is regaining investor attention as the region navigates a fragile but improving growth outlook amid rising global uncertainty. While inflation in the Eurozone is easing, unlike in the US, this has opened the door to potential rate cuts from the European Central Bank (ECB), offering a supportive backdrop for credit markets. At the same time, fiscal policy is becoming more expansionary, with governments like Germany stepping up spending after years of restraint.
Against this backdrop, subordinated debt, particularly Additional Tier 1 (AT1) bonds, can offer an attractive yield premium. But with that yield comes complexity and volatility. A diversified, actively managed subordinated debt fund can help investors access the income potential of AT1s while managing the risks through dynamic allocation, security selection, and disciplined diversification.
How a fund helps you #1: Should you always own AT1s?
- AT1s is a great asset class to enhance income; currently you get approximately 1-1.5% extra yield on the AT1s of BNP Paribas (BNP) compared to Tier 2 capital bonds (Tier 2s) or senior bonds (seniors).
- However, while AT1s give the highest yield within the capital structure, they also have the most price volatility. For example, AT1s were down around 30% during Covid-19, compared to a circa 10% decline for Tier 2s and seniors.
- A very good proxy for the attractiveness of AT1s (ie how much upside or downside there is) is extension risk. This looks at the percentage of AT1s that are priced to perpetuity (where the market thinks that these will not be called). When the percentage is high, there is high upside potential as markets are pricing a very pessimistic scenario (historically over 95% of AT1s have been called). When the percentage is low, it means that markets are priced to perfection, and upside is more limited.
- Solution: Our team uses an active approach to allocate across the capital structure depending on extension risk and market conditions. When valuations are attractive, we will position more aggressively (high allocation to AT1 CoCos). When valuations are unattractive, we will position more defensively (with higher allocation to Tier 2s or seniors).
- The goal is to capture the majority of the upside of the AT1 market while mitigating the downside risk through dynamic positioning.
Chart 1: Moving up the capital structure impacts the carry (coupon income) that can be captured
Source: Atlanticomnium, Bloomberg and GAM, as at May 2025. The views are those of the manager and are subject to change.
The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice.
Past performance is not a reliable indicator of future results. There are no guarantees that the objectives of the investment strategy will be realised/achieved.
Past performance is not a reliable indicator of future results. There are no guarantees that the objectives of the investment strategy will be realised/achieved.
Chart 2: Moving up the capital structure also reduces downside risks materially
Source: Atlanticomnium, Bloomberg and GAM, as at December 2024. The views are those of the manager and are subject to change. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice.
Past performance is not a reliable indicator of future results. There are no guarantees that the objectives of the investment strategy will be realised/achieved.
Past performance is not a reliable indicator of future results. There are no guarantees that the objectives of the investment strategy will be realised/achieved.
Chart 3: Active management across the capital structure
Source: Atlanticomnium, Bloomberg and GAM, as at 31 Mar 2025. The views are those of the manager and are subject to change. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice.
Past performance is not a reliable indicator of future results. There are no guarantees that the objectives of the investment strategy will be realised/achieved.
Past performance is not a reliable indicator of future results. There are no guarantees that the objectives of the investment strategy will be realised/achieved.
How a fund helps you #2: Which AT1s do you select?
- All AT1s are not born equal, and security selection can have a strong impact on performance. A large number of specific factors will influence performance, for example the reset spread (level at which the coupon resets if not called, the higher the number is, the more defensive the bond), the call date (longer-dated calls typically have more volatility) and the credit quality of the issuer.
- As an example: In 2022, Banco Bilbao Vizcaya Argentaria’s (BBVA) high-reset 6.5% USD AT1s callable in 2025 (if not called coupon would reset to the 5-year US treasury + 5.192%) were down 3.4%, while low-reset 6.125% USD AT1s callable in 2027 (if not called coupon resets to 5-year USD swaps + 3.87%) were down 13% - a circa 10% underperformance.
- Same issuer, but very different performance, highlighting why security selection is essential in the AT1 market.
- Depending on where we are in the market cycle, it may be more appropriate to own defensive AT1s (high reset, short call) or aggressive AT1s (low reset, long call).
- Solution: Our team selects the more appropriate AT1s depending on the market conditions to optimise the risk-return profile.
Chart 4: BBVA AT1s: High reset 2025 vs low reset 2027
Source: Atlanticomnium, Bloomberg and GAM, as at 31 December 2022. The views are those of the manager and are subject to change. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice.
Past performance is not a reliable indicator of future results. There are no guarantees that the objectives of the investment strategy will be realised/achieved.
Past performance is not a reliable indicator of future results. There are no guarantees that the objectives of the investment strategy will be realised/achieved.
How a fund helps you #3: Diversification
- AT1s are the most junior bonds in the capital structure. In case of default the expectation is zero recovery as we have seen with Banco Popular in 2017 and Credit Suisse in 2023.
- High diversification and disciplined issuer selection is highly important in this context.
- Solution: We focus on high-quality issuers (often rated AA or A), typically global systemic banks or national champions, with limited exposure to peripheral banks. Moreover, we have strict diversification rules, to limit the exposure to any single issuer – ensuring disciplined risk management.
AT1 bonds can be a powerful tool for enhancing portfolio income, but their complexity and volatility require careful management. A diversified subordinated debt fund offers investors the ability to capture the upside of the AT1 market while mitigating downside risks through active allocation, rigorous security selection and disciplined diversification. We believe this approach can not only help navigate market dislocations but also positions investors to potentially benefit from evolving opportunities across the capital structure.
Romain Miginiac is a Fund Manager and Head of Research at Atlanticomnium SA, where he co-manages the Credit Opportunities and Sustainable Climate Bond strategies for GAM Investments.
Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. Specific investments described herein do not represent all investment decisions made by the manager. The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future. No guarantee or representation is made that investment objectives will be achieved. The value of investments may go down as well as up. Investors could lose some or all of their investments.
Certain information provided herein is based on third-party sources, which information, although believed to be accurate, has not been independently verified. GAM assumes no liability for errors and omissions in the information contained herein. This article is for informational purposes only and may not be reproduced or distributed without the prior consent of GAM.
The foregoing views contains forward-looking statements relating to the objectives, opportunities, and the future performance of the markets generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. Specific investments described herein do not represent all investment decisions made by the manager. The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future. No guarantee or representation is made that investment objectives will be achieved. The value of investments may go down as well as up. Investors could lose some or all of their investments.
Certain information provided herein is based on third-party sources, which information, although believed to be accurate, has not been independently verified. GAM assumes no liability for errors and omissions in the information contained herein. This article is for informational purposes only and may not be reproduced or distributed without the prior consent of GAM.
The foregoing views contains forward-looking statements relating to the objectives, opportunities, and the future performance of the markets generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.