From AT1 to Hybrid: Subordinated Solutions for Public Sector Capital

Feb. 08, 2024 - 2 minutes
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In 2022, a published report titled "Boosting MDBs' investing capacity" discussed the unique position that multilateral development banks (MDB) are in to respond to the challenges facing our world right now, thrusting hybrid capital into the spotlight for MDBs. Now, with AfDB's announcement of an inaugural USD Global Sustainable Hybrid transaction, interest around subordinated solutions has reached a fever pitch, with other MDBs stating they too are looking into the possibility of hybrid capital.

TD Securities hosted a roundtable discussion focused on how the public sector is thinking about these developments with representatives from across the industry.

Key takeaways from our panelists

  • While the approaches used by Moody's and S&P's to assigning equity content contain some similarities — helping to underpin some consistency in MDB hybrid structures — there are also differences to navigate for issuers.
  • Relative value of MDB hybrids remains a debating point as the lack of sector-level comps invites a myriad of approaches and differing views.
  • Different investor types (traditional AT1 vs. traditional SSA buyers) will likely value MDB hybrids through different lenses.
  • There is arguably much less pressure for MDB issuers to make uneconomic hybrid calls, compared with banks, given the stronger focus on costs.
  • From a market perspective, the base case remains that the majority of bank hybrids will continue to be called, assisted by a recent technical bid for short-call paper.
  • From a rating agency perspective, permanence in the capital structure needs to be demonstrated, and ideally, the agencies want to see the replacement of a called hybrid.

For more in-depth coverage of the recent roundtable discussion, read our full takeaways from Subordinated Solutions for Public Sector Capital: From AT1 to Hybrid.

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