Alpstein

Classical AT-1 instruments, despite being listed on the stock exchange, typically exhibit low liquidity on the secondary market and are mostly held as buy-and-hold investments. During turbulent market phases, even this already limited liquidity can evaporate, leading to significant price fluctuations. Investors cannot be fully protected from the credit risks of bank AT-1 instruments nor isolated from liquidity risks in market stress scenarios. What ACM’s fund structure is offering, however, is not only a deeply diversified credit risk proposition of German regional banks but also a sensible approach to liquidity provisions in case of redemption requests.

As per circular dated 9 May 2023 the FMA financial supervisory body in Liechtenstein granted ACM SICAV a distribution license for its AT-1 Regional Banks Germany Fund. CAIAC Fund management AG and ZEUS Anstalt für Vermögensverwaltung act as fund administrator and manager, Liechtensteinische Landesbank AG as depositary bank, and Grant Thornton AG as auditor. By initiation of fund promotor ACM Alpstein Capital Management AG, the AT-1 Regional Banks Germany Fund has become the first fund of its kind in Europe that focusses on AT-1 issues of German regional banks (Sparkassen and Cooperative Volksbanken). Investors are for the first time being given structural access to this asset class.

On 19 April 2023 an online seminar was held in conjunction with FCH Group, to present a backdrop to market and instruments, as well as models on how to proceed.

A total write-down of Credit Suisse’s outstanding AT-1 notional on the occasion of the emergency merger with UBS had a detrimental impact on secondary markets in AT-1 instruments and caused for bond prices to be tumble. On closer look, it was revealed that Swiss regulator FINMA’s decision was based on a particular clause in trigger- and write-down documentation language applicable to Swiss issuers, conditions that generally do not apply to financial institutions within the EU. It demonstrates that AT-1 funding instruments of Sparkassen and Volksbanken are a valid alternative and a means to diversify away from larger commercial banks.

The collapse of SVB Silicon Valley Bank sent tremors through the financial world and raised memories of the Global Financial Crisis in 2008. Investment- and balance sheet losses, deposit flight, and funding volatility have been scrutinized again. Our analysis, however, points to a robust business model of the Sparkassen and Volksbanken sector that is capable of weathering even the dislocations of a rapid change in the interest rate cycle.

On 12 October an online seminar was held in conjunction with FCH Group and over 70 representatives of banks and related associations, to discuss the backdrop of the asset class and how to proceed going forward.

BAFIN announced to re-introduce the anti-cyclical capital buffer of 0.75% from 2022. In addition to that, a sectoral systemic risk buffer for construction-related and mortgage financings will be inaugurated. On average, this will account for 2% of RWAs on secured residential property loans. As per ACM’s calculation, Sparkassen’s and Volksbanken’s additional charge on such exposure amounts to more than 1% of total RWA’s. We estimate that the demand for AT-1 capital will be on the rise.

The introduction of the new asset class has been met with brisk investor interest, and initial soft commitments have been made. Upon closure of the seed investor class limited to EUR 100 million the fund will commence with purchases of newly issued instruments. Subscriptions will be allocated sequentially in line with capital commitments.

Several legal questions have been raised during consultations with potential issuers, which are being examined. According to the appraisal by our legal advisor gk-law Dr. Gündel, there are no obstacles to account the funding instruments as AT-1 capital.

ACM Alpstein Capital Management AG has launched consultations with potential issuers. In a first round, the proposal was made to approx. 30 German Volks- and Raiffeisenbanken. Reception and feedback were promising, and bank internal discussions have commenced. Indicative issuing volumes are beyond expectations.