AT-1 Instrument: Addressing Investors Concerns

AT1 Instrument: Addressing Investors Concerns

Additional Tier 1 instruments or AT-1 for short, are part of a family of bank capital securities known as Contingent Convertibles or “Cocos.” They are issued as debt securities, usually with a convertible feature triggered upon the occurrence of a contingent event.

Tier 1 capital describes the capital adequacy of a Bank and is the core capital that includes equity capital and disclosed reserves. It is the primary funding source a Bank holds to keep it functioning through all the risky transactions it performs, including trading, investing, and lending. Therefore, it is the primary indicator in measuring a bank’s financial health. 

In addition to a Bank’s Tier 1 or core capital, it may also use other additional forms of capital to ensure its capital adequacy. Therefore, equity capital is inclusive of (AT-1) instruments that cannot be redeemed at the option of the holder. 

AT-1 Instruments are perpetual securities with no fixed maturity or redemption amount. Access Bank Plc in 2021, became the first Nigerian corporate organisation and Deposit Money Bank (DMB) to issue AT-1 Instruments in line with the CBN guidelines. 

The Central Bank of Nigeria (CBN) is responsible for regulating banks and other financial institutions in Nigeria. The CBN does this by issuing regulations and guidelines from time to time to govern the affairs of its regulated entities. The current ones are the Basel III Guidelines on Regulatory Capital issued in September 2021.

Since AT-1 Instruments are capital-qualifying instruments, they constitute part of a bank’s regulatory capital. Therefore, the issuance of AT-1 instruments is subject to Capital Regulation by the CBN. 

According to Basel III guidelines, AT-1 capital consists of the sum of three elements. Firstly, instruments issued by DMBs that meet the criteria for inclusion in AT-1 capital but are not included in Common Equity Tier 1 (CET1) capital

Secondly, the stock surplus or share premium resulting from the issuance of AT-1 capital instruments 

Thirdly, instruments issued by consolidated subsidiaries of the bank and held by third parties that meet the criteria for inclusion in AT-1 capital but are not included in CET-1 capital

This guideline provides, in respect of AT-1, the following criteria, among others:

  • the instrument may be callable at the initiative of the issuer only after a minimum of five years;
  • it cannot have a credit-sensitive dividend feature;
  • it must be perpetual (there is no maturity date and there are no incentives to redeem).

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