Creating a niche for themselves in the AT1 market, smaller banks have been gaining attention from investors in recent years. The entrance of these institutions into the market has been a significant trend, with several smaller names issuing their first AT1 bonds in February. This trend is not only interesting for investors but also offers a unique opportunity to diversify portfolios. The AT1 market was created by Basel III in 2008, in response to the global financial crisis. The market is dominated by large banks, which account for over 90% of the EUR 210 billion market. However, the remaining 8% of the market is made up of smaller banks that have started to issue AT1s. These smaller banks are far from being riskier, and in many cases, they have strong capital ratios, stable business models, and consistent earnings. They are also less prone to market volatility due to their local investor base. In contrast, large banks are more vulnerable to market fluctuations, as they are owned by a wide range of investors who buy and sell AT1s as part of their portfolio management strategies. The AT1 market is attractive to yield-oriented long-term investors who are willing to accept the risks associated with these instruments. The AT1s issued by smaller banks offer an illiquidity premium in the range of 50-100 basis points, which is a valuable extra carry for investors who are willing to hold onto these bonds for a long time. Smaller banks are also more likely to be potential acquisition targets for larger banks. This is because they have strong financial positions and are less vulnerable to market fluctuations. The AT1s issued by smaller banks are less prone to market volatility, and they offer a more stable source of returns for investors. They are also less susceptible to the vicious cycle of derivatives trading and leverage that often affects large banks. Several of these smaller banks are unlisted, which means they do not have an equity market to protect them from the risks associated with derivatives trading and leverage. This also means that they are not subject to the same regulatory requirements as large banks, which can make them more attractive to investors who are looking for a more stable source of returns. In contrast, large banks are subject to the same regulatory requirements as other financial institutions, which can make them more vulnerable to market fluctuations. They are also more likely to be involved in derivatives trading and leverage, which can increase their risk profile. The AT1 market is a complex instrument, and investors need to be aware of the risks associated with these instruments. These risks include the potential conversion of AT1s at times of market instability, which can impact their value, as well as their subordinated structure in the repayment order behind other creditors. The AT1s issued by smaller banks are also perpetual bonds, which means they do not have a fixed maturity date. This can make it difficult for investors to redeem the bond at its convenience. For investors who are willing to accept the risks, building some exposure to the AT1 market can be a good idea. It offers higher yields, lower volatility, and higher average Common Equity Tier 1 (CET1) ratios compared to large banks. However, investors need to be aware of the risks associated with these instruments and ensure that they have a solid understanding of the AT1 market before investing.
The AT1 market is not suitable for all investors, and it is not a suitable investment for those who are looking for flexibility or liquidity. The AT1s issued by smaller banks are typically smaller in size, with a bond size typically below 300 million. This can make it more difficult for investors to exit the market quickly, and it may not be suitable for investors who need to access their funds frequently. In contrast, the AT1s issued by large banks are typically larger in size, with a bond size typically above 1.5 billion. This can make it easier for investors to exit the market quickly, and it may be more suitable for investors who need to access their funds frequently. However, the AT1s issued by smaller banks offer a more attractive yield premium, which can make them more attractive to investors who are willing to hold onto these bonds for a long time. In conclusion, the AT1 market is a niche market that is gaining attention from investors. Smaller banks are entering the market, and they are offering a unique opportunity for investors to diversify their portfolios. The AT1s issued by smaller banks offer a higher yield, lower volatility, and higher average Common Equity Tier 1 (CET1) ratios compared to large banks. Investors who are willing to accept the risks associated with these instruments can benefit from the AT1 market. They offer a more stable source of returns, a higher yield premium, and a lower risk profile compared to large banks.
**Key Features of AT1 Bonds Issued by Smaller Banks**
* Illiquidity premium: 50-100 basis points
* Lower market volatility
* Perpetual bonds: no fixed maturity date
* Smaller bond size: typically below 300 million
* Unlisted: not subject to the same regulatory requirements as large banks
* Lower risk profile: less susceptible to market fluctuations and derivatives trading and leverage

**Benefits of Investing in AT1 Bonds Issued by Smaller Banks**
* Higher yield premium
* Lower volatility
* Higher average Common Equity Tier 1 (CET1) ratios
* More stable source of returns
* Potential for higher price upside from potential acquisition targets

**Risks Associated with AT1 Bonds Issued by Smaller Banks**
* Potential conversion of AT1s at times of market instability
* Subordinated structure in the repayment order behind other creditors
* Illiquidity premium can be affected by market conditions
* Potential for lower yields in the event of a market downturn

**Conclusion**
The AT1 market is a niche market that is gaining attention from investors.