Additional Tier 1 or AT1 consists of capital instruments that are continuous, in that there is no fixed maturity including:
Preferred shares
High contingent convertible securities
These perpetual instruments must contain no incentive for the issuer to redeem them. Contingent convertible securities (often referred to as CoCos) are a major component of AT1 and their structure is shaped by their primary purpose as a readily available source of capital for a firm in times of crisis.
As such, they characteristically absorb losses prior to, or at, the point of insolvency and the activation of this absorption must be a function of the capitalisation levels of the issuing firm.
CoCos can absorb losses either by:
Converting into common equity; or
Suffering a principal write-down.
The Capital Requirements Directive (CRD IV) sets a minimum loss absorption trigger of 5.125% Common Equity Tier 1 (CET1), meaning that all AT1 capital instruments must either convert into ordinary shares or have their principal amount written down (on either a permanent or temporary basis) if the ratio of the firm’s CET1 to it’s total risk weighted- assets falls below 5.125%
In the event of a firm winding-up, the claims of AT1 instruments will rank above ordinary shareholders but will be subordinated to the claims of holders of Tier 2 instruments, senior creditors and depositors.
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