The sale by Saudi Arabia’s biggest bank of a high-risk type of bond -- at better rates than larger international peers -- is spurring concerns that investors are mispricing risk amid booming global valuations.
National Commercial Bank last month issued Additional Tier 1 notes at 3.5%, the lowest yield yet for the instrument from the region. That’s also cheaper than issuances over the past six months by higher-rated firms including HSBC Holdings Plc, UBS Group AG and Standard Chartered Plc. Also known as AT1, the notes are the first type of bank debt to suffer losses in a crisis.
Jeddah-based NCB, which is in the middle of a $15 billion takeover of a local rival, saw demand for four times the amount of the securities on offer at the Jan. 21 sale. The clamor defied the fallout from the global pandemic, a 14% drop in oil since the start of 2020 and a warning by Fitch Ratings in November that a jump in impairment charges may pressure banks’ creditworthiness.
Introduced after the global financial crisis, AT1s are typically repaid by banks before call options expire to display their financial strength. Banks in the Middle East have issued $17.9 billion of AT1 securities, according to data compiled by Bloomberg.
There have been instances where AT1 bonds have blown up. India last year banned individual investors from buying the securities after seizing one of the nation’s lenders.
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